The Consumer Financial Protection Bureau (CFPB) has finalised a rule to cut excessive credit card late fees. In particular, the CFPB aims to close a loophole exploited by large card issuers. The CFPB estimates that the rule will curb fees that cost American families more than $14bn a year. It says that American families will save more than $10bn in late fees annually. Specifically, the rule will reduce the typical fee from $32 to $8. This represents an average saving of $220 per year for more than 45 million people who are charged late fees.

“For over a decade, credit card giants have been exploiting a loophole. It harvests billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.

The CFPB argues that credit card companies build their business model on penalties, fee harvesting, and bait-and-switch tactics. In turn, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The law banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.

CARD Act immunity provision

In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act. This made clear that banks could only charge fees that recover the bank’s costs associated with late payment. However, the rule included an immunity provision that allowed credit card companies to sidestep accountability if they charged no more than $25 for the first late payment, and $35 for subsequent late payments. Both amounts can be adjusted for inflation each year. Those amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes. Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.

After reviewing market data related to the 2010 immunity provision, the CFPB rule adopts a lower threshold of $8. It ends automatic inflation adjustments for that amount for issuers that have 1 million or more open accounts.

Credit card late fees total $14bn in 2022

The CFPB has found that since 2010, issuers have been charging consumers more in credit card late fees each year. The total hit $14bn in 2022, representing more than 10% of the $130bn issuers charged consumers in interest and fees. Late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments. These include extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. The average late fee for major issuers has steadily ticked up since the passage of the CARD Act. The CFPB says that it has risen from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver of their profit model.

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Credit card issuers with more than 1m open accounts impacted

The CFPB’s final rule applies to the largest credit card issuers, those with more than 1 million open accounts. These companies account for more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers. But the vast majority of the largest issuers charge close to the maximum allowable late fee amount.

The rule does not change the credit card issuer’s ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late. In fact, the rule would increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees.

CFPB’s credit card efforts

This rule change is part of a continued CFPB effort to foster competition in the $1trn credit card market. The CFPB is working to help consumers find lower interest rates. Consumers paid a record-high $130BN in credit card interest and fees in 2022. The average cardholder carries a balance of over $5,000.