The Consumer Financial Protection Bureau (CFPB) held a private press conference last Wednesday announcing plans to increase regulation on credit card late fees. The agency issued an advance notice of proposed rulemaking and is seeking comments from credit card companies, consumer groups and the general public.

Per the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act), issuers are limited in their ability to apply fees to late payments. In 2010, the Federal Reserve Board of Governors made a follow-up decision that allowed for special provisions to the late fee rule, requiring penalties to be reasonable and proportional. The rule specifically prohibited credit card companies from charging late fees in excess of the burden they bear on the issuer, but allowed them to escape enforcement as long as they were not above a given level and the rate of inflation.

Late fee provisions have since been placed under the control of the CFPB by the Consumer Financial Protection Act. Given rapidly rising inflation, the CFPB expects to see issuers increase their rates under the so-called “immunity provision.” The limits for 2022 are capped at $30 for an initial late payment and up to $41 for subsequent late payments.

During the press conference, CFPB Director Rohit Chopra questioned whether these rates should be going down instead of up, due to advances in technology potentially lessening the burden on issuers to process late payments. He also raised concerns that credit card companies may actually desire late payments as a method of increasing revenue.

Industry groups, including the Consumer Bankers Association, took issue with the announcement, stating that these restrictions “will hurt hardworking families most,” forcing them to meet their needs elsewhere. They stressed their commitment to helping Americans through troublesome times, noting that they voluntarily waived late fees during the height of COVID-19. “This continues an emerging and harmful pattern at the Bureau of turning a blind eye to many of the bank-led efforts and innovations that have been introduced without regulatory intervention to meet the evolving needs of the customers they serve,” they said.

Credit card companies primarily earn money in three ways: charging interest, charging consumer fees and processing fees on merchants. Credit card companies took in $12 billion in late fees in 2020, down slightly from $14 billion in 2019, according to the CFPB. Attempts to slash these fees may disincentivize issuers from providing credit to lower income individuals with lower credit scores, thus pushing them to riskier, less regulated ways to obtain credit. This may also push issuers to impose additional annual cardholder fees on users, becoming too costly for some Americans, or slash benefits many credit card holders have become accustomed to. Further, late fees act as an incentive, along with interest charges, to make at least the minimum payment each month.

As seen in similar attempts at financial price controls, regulation often has unintended consequences. For example, the Dodd-Frank Durbin Amendment, in its attempt to lower debit card fees passed on to consumers, harmed small businesses and consumers while benefiting large corporations. It also led to banks recouping their losses by slashing benefits and imposing checking account fees, resulting in loss of access to checking accounts for 1 million Americans. Government-imposed price controls tend to harm the very people they claim to help. The R Street Institute believes in free markets and limited, effective government for this very reason—to stop regulations that create a lose/lose scenario in the name of “doing something.” We prefer a light touch on regulation and more freedom for banking institutions and credit card companies to give consumers the best range of product offers via competition and incentives for timely payments, both of which ultimately benefit the consumer.

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