CFPB to cap credit card late fees at $8 and increase accountability among issuers
The Consumer Financial Protection Bureau (CFPB) has finalised a new ruling that prevents credit card issuers with more than one million open accounts in the US from charging more than $8 in late fees.
The ruling has lowered the charge from its previous figure of $32, in a move that the regulator hopes will save account holders more than $14 billion a year while axing what it describes as business models founded on “penalties, fee harvesting, and bait-and-switch tactics”.
It is a direct response to the realised flaws of the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which was initially passed by the US Congress in 2009 to prevent issuers from charging more than the associated cost of covering a late payment.
Despite this, some issuers began to exploit a discrepancy in the act which states that accountability can be sidestepped if no more than $25 is charged for the first late payments and $35 for subsequent late payments.
Rising with the natural course of inflation, these charges have ballooned to $30 and $41, respectively, since the act was first implemented 14 years ago, with the average late fee now totalling $32, according to CFPB data from 2022.
The regulator claims that issuers have added insult to injury by accompanying these charges with additional fees on interest, foregone grace periods, reduced credit limits, higher interest rates and negative impacts on credit reporting, which together enabled issuers to accumulate $130 billion in additional revenue, per latest figures.
In addition to the $8 cap, the CFPB’s new ruling will require issuers to “show their math” if they exceed this limit, and will end the charge’s ties with inflation, instead placing it at a flat rate which will only be subject to charge via the regulator’s monitoring of market conditions alone.
However, the ruling does not affect issuers’ ability to raise interest rates, reduce credit lines, or induce additional measures to deter late payments.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” comments Rohit Chopra, director of the CFPB.
“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.”
It is not the first time the regulator has put its foot down on charges placed on consumers. Back in January, it proposed a similar ruling against banks, credit unions and certain peer-to-peer (P2P) payment companies charging fees for non-sufficient funds.