The Consumer Financial Protection Bureau plans to issue a rule next year to address whether credit card late fees are set at reasonable levels and if they should continue to be pegged to inflation.
CFPB Director Rohit Chopra for the first time has set a framework for the bureau to issue a rule that could potentially unwind a set of provisions created by the Federal Reserve Board in 2010 that have allowed credit card issuers to raise late fees annually due to inflation.
Under the current rules, credit card late fees could jump by 9% next year, tracking the rise of the Consumer Price Index, experts
Some advocates had hoped Chopra would use his authority by issuing guidance that would quickly lower the maximum allowable amounts for late fees and avert any increases next year pegged to inflation. A formal rule suggests that the 9% jump in late fees could still occur next year before the formal rulemaking process is complete.
"The Fed created a set of immunity provisions that has been going up by inflation every year and so we are going to be reviewing whether that number makes sense or whether there needs to be a new framework on it," Chopra said last week during a discussion with Dan Berger, the president and CEO of the National Association of Federally-Insured Credit Unions, at the trade group's congressional caucus.
"We are hoping to be able to complete that process by next year," Chopra said, adding that "it would go through a rulemaking process."
A formal rulemaking can take a year or longer, but a rule cannot be quickly reversed by a subsequent CFPB director, which often happens with guidance documents.
"It appears that he's going for a long-term fix," said Robert Maddox, a partner at the law firm Bradley Arant Boult Cummings LLP. "If the next administration comes in [they] could just transfer all of the advisory opinions to something else and do away with it."
Chopra had been signaling
"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," Chopra said Wednesday at the NAFCU event.
Of the 20 largest card issuers, 18 of them charge late fees at or near the maximum level allowed by the Credit Card Accountability Responsibility and Disclosure Act, known as the CARD Act. Chopra reiterated key terms in the law that he appears fixated on, notably that any fees or penalties be "reasonable and proportional" to the violation. The safe harbor does not require a cost-benefit analysis to determine if the fees are reasonable.
Still, banks, credit unions and their trade groups have
"Credit card late fees serve 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," said Greg Mesack, NAFCU's senior vice president of government affairs. "Those late fees don't cover the costs we incur when we're trying to deal with a member that is delinquent on their credit card."
The Consumer Financial Protection Bureau's review of credit card late fees has ignited pushback from industry that supports an expected 9% jump in fees next year pegged to inflation.
Card card companies this year have reported their
"Rather than [late fees] being a simple deterrent, are some credit card companies building that in as a core revenue driver?" Chopra said at the NAFCU event.
Chopra also had harsh words for the Federal Reserve, claiming the safe harbor provision in Regulation Z — the implementing regulation for the CARD Act and the Truth in Lending Act — allows credit card companies to escape enforcement scrutiny, another area the CFPB is expected to focus on in its rulemaking.
"We inherited a system from the Federal Reserve Board of very, very complicated regulations that really in many ways seem designed to fit the business models of the largest institutions rather than having clear, bright lines," Chopra said Wednesday in
"The Fed, when it put these rules in place to restrict and implement a requirement that fees be reasonable and proportional, they put in an immunity clause and there was full immunity from enforcement," he added.
Some experts suggest that the CFPB faces challenges getting a rulemaking completed by the end of 2023, given that the bureau is required to convene a small-business review panel, which can extend the time frame for completing a rule. The CFPB is one of a few agencies that must adhere to the Small Business Regulatory Enforcement Fairness Act to ensure regulations do not overly hurt small businesses, which can tack months onto the already lengthy rulemaking process.
While consumers may not get a reprieve from higher late fees next year, lawyers note that Chopra is focused on lowering fees over the long haul.
"This is a good indication of the director's view of what is really impacting the American household," Maddox said.
