CFPB to Toughen Caps on Credit Card Late Fees

Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra has set a framework for the CFPB to issue a rule next year to determine if credit card late fees are set at reasonable levels, and whether they should continue to be pegged for inflation, which could undo provisions from the Federal Reserve (Fed) Board in 2010 that permitted credit card issuers to raise late fees annually due to inflation.

“When a business model is heavily dependent on penalty fees, I think that’s where you have to question if that’s distortionary to the competitive process,” said Chopra, according to American Banker, in criticizing federal rules that he said let card issuers overcharge consumers.

Credit card late fees could rise to 9 percent next year under the current rules. Issuers are set to raise late fees to $33 for the first late payment, and $45 for any following late payments. Advocates hoped that Chopra would issue guidance to quickly lower the maximum allowable amounts for fees, but a formal rule suggests that the 9 percent jump could still happen.

Although the formal rulemaking could take more than a year, a rule cannot be quickly reversed by another CFPB Director, which has happened frequently with guidance documents. Chopra has hinted at slashing the $12 billion in annual late fees for months.

18 of the 20 biggest card issuers charge late fees at or near the maximum level permitted by the Credit Card Accountability Responsibility and Disclosure (CARD) Act. The law notes that any fees or penalties be “reasonable and proportional” to the violation, and banks and credit unions have pushed back against the CFPB’s efforts to change the immunity provisions.

Greg Mesack, senior vice president of government affairs at the National Association of Federally-Insured Credit Unions, said the late fees “serve as a purpose both to ensure that [borrowers] pay their bills on time and when someone is delinquent on a credit card, there are a lot of costs associated with that.”

Some experts expect the CFPB to face obstacles in completing a rulemaking by the end of 2023, as it is required to convene a small-business review panel per the Small Business Regulatory Enforcement Fairness Act, to ensure regulations do not harm small businesses. Still, lawyers noted that Chopra is determined to lower the late fees over the next few years.