Rohit Chopra, director of the Consumer Financial Protection Bureau, testifies during a Senate Banking, Housing, and Urban Affairs Committee hearing on April 26, 2022.
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The Consumer Financial Protection Bureau reported a crackdown on late fees charged by credit card companies on Wednesday, as inflation threatens to increase so-called “junk” fees levied on consumers.
The watchdog, a federal agency created in the wake of the 2008 financial crisis, issued a prior notification of proposed regulation seek information from card issuers, consumer groups and the public about late fees.
The data will help the regulator draft new rules aimed at firming up “weak spots” in existing laws governing “substantive penalties” imposed by card companies, CFPB Director Rohit Chopra said Wednesday during a briefing. call for the press.
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Public comments are expected by July 22. The timeline for a formal rule proposal (and ultimately a final rule) is unclear, but agency officials said they don’t expect the process to be completed before the end of the year.
Officials expect the changes to reduce total late fees by billions of dollars each year, they said Wednesday. They also pointed to future regulations on other types of fees, without giving details.
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More than 175 million Americans have at least one credit card, according to the CFPB.
Businesses typically charge late fees when a customer doesn’t make the minimum card payment by the due date.
In 2019, consumers paid an average of $26 for each late payment, according to the CFPB. The fee increases if another late payment is made within six billing cycles, up to an average of $34.
Total late fees were $12 billion in 2020, down slightly from the record high of $14 billion set the previous year, the CFPB said in a recent report. report.
The costs disproportionately impact users in low-income and majority-black neighborhoods, according to the regulator.
The watchdog characterizes late fees as a type of “unwanted” fee charged by credit card issuers. The agency had issued a separate request in January asking consumers to give their views on hidden and excessive fees from a range of lenders.
“It is only a project linked to a type of junk fee”, according to a CFPB official, who spoke on the merits. “I think it’s fair to say that there will be other projects related to other fees in the near future.”
Richard Hunt, president and chief executive of the Consumer Bankers Association, said additional restrictions would hurt customers and could ultimately push them into riskier types of credit.
“Today’s announcement is another reminder that the Bureau seems more interested in advancing a particular agenda than in developing evidence-based policies that improve the lives of hard-working families,” Hunt said in a statement. “Missing from this announcement is that banks – more than any other industry – have taken concrete steps to make their products more affordable and accessible to millions of Americans.”
What would the CFPB do?
Current law prohibits credit card issuers from charging customers fees for late payment, except in certain circumstances. To levy a fee, the business must determine that the fee represents a “reasonable” proportion of the total costs incurred by the business to process a late payment.
But the law also provides a legal safety net: issuers can generally avoid cost analysis (and regulatory review) if they charge $30 or less for a late payment, and up to $41 for each late subsequent payment made within the next six billing cycles.
“In today’s proposed rulemaking advance notice, the CFPB is requesting information about these fees in order to assess whether they are truly reasonable and proportionate,” Chopra said.
The headquarters of the Consumer Financial Protection Bureau in Washington, DC
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These maximum “safe harbor” fees are adjusted annually for inflation, making CFPB regulation urgent at a time when consumer prices are falling. at their fastest pace in about 40 years.
“This effort is particularly timely given that the rule allows banks to increase their fees in line with inflation,” according to a CFPB official. “Many [people] struggling to make ends meet right now and dealing with higher costs.”
Most smaller banks and credit unions charge maximum late fees of $25 or less, but nearly all larger issuers have fees at or near the maximum allowed, according to CFPB data.
Chopra wondered if the cost of processing late payments increases with inflation or if it is more reasonable to expect these costs to decrease due to improvements in technology.
However, the Consumer Bankers Association’s Hunt called inflation the main reason why the CFPB should not impose additional rules on the industry.
“Imposing more restrictions on credit products offered by banks will hurt hard-working families the most, forcing them to meet their needs outside of the well-supervised banking system,” Hunt said. “That risk is even greater now that families are dealing with the effects of inflation.”
The CFPB said it was seeking information on the following, among others: the factors used by card issuers to set late fee amounts; business costs and losses associated with late payments; the deterrent effects of late fees; cardholders’ late payment behavior; the methods used by companies to facilitate or encourage timely payments (such as automatic payment and notifications); and their use of “safe harbor” provisions.