CFPB Wants to Use Banks’ Revenue Data to Change Card Late Fees

The Consumer Financial Protection Bureau (CFPB) took its first step yesterday, June 22, to change the regulation affecting credit card late fees. The Bureau published an Advance Notice of Proposed Rulemaking (ANPR) seeking data about credit card late fees and late payments to assess whether those fees are “reasonable and proportional.”

Additionally, the CFPB is also asking card issuers about their revenue and expense, the potential deterrent effect of late fees and the role late fees play in credit card companies’ profitability.  

“Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” said CFPB Director Rohit Chopra. 

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) establishes some limits to the type of fees companies can impose and how much credit card companies could charge for penalties such as late fees. The CARD Act banned excessive penalties, and in 2010, the Federal Reserve voted to implement provisions of the CARD Act that required penalties to be “reasonable and proportionate to the omission or violation.” In its rule, the Fed prohibited generating more revenue from late fees than was necessary to cover the cost of late payment. Today, the limits for late fees are $30 for the first late payment and $241 for a subsequent late payment within 6 billing cycles. 

The CFPB is targeting these late fees in its ANPR. While the notice published only seeks to gather information at this point, the CFPB is reviewing the Fed’s immunity provision and it will determine whether adjustments in late fees are needed. 

In an 11-page questionnaire, the CFPB is requesting information about factors used by card issuers to set late fee amounts; card issuers’ costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; methods that card issuers use to facilitate or encourage timely payments, including autopay and notifications; card issuers’ use of the late fee safe harbor provisions in Regulation Z; and card issuers’ revenue and expenses related to their domestic consumer credit card operations. 

Interestingly, the Bureau also poses some questions about the safe harbor provisions — the $30 and $241 limit — and how card issuers would react if they couldn’t use these safe harbor provisions. Alternatively, the CFPB is also questioning how card issuers would use a cost analysis to determine the amount of late fees. The CFPB seems particularly interested in finding out what a cost-benefit analysis would determine the right late fee is. This may be an approach to establishing a “proportionate” penalty, related to the cost incurred from a late payment. 

The Bureau does not anticipate what the next steps are, but it may want to act in a relatively short period of time, as the deadline to submit comments to this ANPR is just one month, until July 22, 2022. 

Read more: CFPB Report Shows Credit Card Late Fees Declining, Below Set Limits

While the agency may be interested in reviewing the credit card late fee limits imposed in Regulation Z and CARD Act, data from card issuers may play a key role in its final decision. The data provided by the Bureau earlier this year on a credit card report shows that the most common maximum late fee charged in agreements submitted to the CFPB was $25, which is far from the safe harbor provisions. Overall, most of the top 20 issuers contracted a maximum late fee at or near the safe harbor in 2020. 

The report also shows a steep decline in late fee volume. Monthly late fee volume in May 2020 plummeted over 33 percent from its January high, in parallel with the unprecedented decline in credit card debt from Q4 2019 to Q2 2020. Late fee volume hit its lowest point in recent years in April 2021. In dollars, total late fees in 2020 were $12 billion, down from $14 billion in 2019.