Client Monetary Safety Bureau proposes bank card price regulation

Signage at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, DC

Andrew Kelly | Reuters

WASHINGTON — The federal government’s Consumer Protection Agency on Wednesday proposed a new rule to ban excessive credit card late fees, potentially reducing them by as much as $9 billion a year.

Congress banned exorbitant credit card fees under the Credit CARD Act in 2009, but an immunity provision introduced by the Federal Reserve Board of Governors allowed card companies to circumvent enforcement standards, said Rohit Chopra, director of the Consumer Financial Protection Bureau.

“More than a decade ago, Congress banned excessive fees for late credit card payments, but companies have exploited a regulatory loophole that has allowed them to avoid scrutiny for charging an otherwise illegal junk fee,” Chopra said. “Today’s proposed rule is designed to save families billions of dollars and ensure the credit card market is fair and competitive.”

The proposal follows a March 2022 report showing that credit card issuers billed consumers $12 billion in late fees in 2020. Many issuers charge the maximum late fee set by the Fed Board in 2010: $30 for the first late payment and $41 for subsequent late payments within six billing cycles. Card issuers that increase fees with inflation are also protected by immunity clauses, according to Chopra.

The CFPB rule proposed on Wednesday would reduce the amount consumers may owe for late payments from as much as $41 to $8, end automatic annual inflation adjustment for provision, and late fees to 25% of cardholder’s limit the minimum payment owed.

Chopra said credit card issuers have made late penalty fees a “core part of their profit model” and that the protections afforded by the credit card law have effectively reduced the overall cost of credit for consumers. The fees disproportionately affect households living paycheck to paycheck, borrowers living in America’s poorest areas, areas where the population is mostly black, and subprime and private label cardholders.

“Markets work best when companies compete on price and services, rather than relying on back-end fees that mask true costs,” Chopra said. “Given their current practices, we expect credit card issuers to increase fees based on inflation as limits continue to rise.”

The CFPB will seek public comments on other possible changes, including whether the proposed rule should apply to all credit card penalties, eliminating the immunity provision altogether, introducing a 15-day courtesy period for credit card holders before assessing late fees, and requiring credit card companies to autopay services as a condition for immunity determinations.

The rule change also follows a request for comment on the Biden administration’s initiative to reduce certain “garbage fees” weighing on American consumers.

Late fees cost American families about $12 billion a year in addition to billions in interest, the CFPB said.

The Fed Board did not immediately respond to a request for comment from CNBC.