Statement of CFPB Director Rohit Chopra on the Final Rule to Close the Credit Card Late Fee Loophole
The Consumer Financial Protection Bureau is taking action to rein in junk fees on credit cards, increase competition, and put billions of dollars back in the pockets of American families. We are finalizing a rule that will lower the typical late fees charged by big credit card issuers from an average of $32 down to $8 in most cases. We estimate this change will save families $10 billion every year, an average savings of $220 per year for the more than 45 million people who are charged late fees.
The announcement of this rule comes after an extensive process, consideration of thousands of comments, and a great deal of research into the credit card market. We have learned a lot, and we have real concerns about how the competitive process is working in this market.
Today, the credit card industry hauls in more than $14 billion in late fee revenue each year, which our research shows is more than five times the companies’ associated costs. They charge these fees to consumers even when their payment is only a little bit late or when it’s out of their control. This is on top of extra interest charges, negative credit reporting, and a slew of other consequences.
Last month, the CFPB released a report that found credit card interest rate margins, or the difference between the prime rate and the APR charged to the consumer, are at all-time highs. These excess margins cost consumers an extra $25 billion in annual interest charges in 2023 alone. And these higher rates don’t just cost more, they make it harder for families to pay off their growing balances. Our research has found that many consumers are trapped in “persistent debt,” meaning that they pay more in interest and fees than principal.
Industry data reveals that large banks that dominate the market are charging interest rates 8 to 10 percentage points higher than small banks and credit unions, regardless of credit risk, a massive difference. And just last week we issued guidance to address kickback payments that are turning purportedly unbiased comparison-shopping tools into digital advertisements, again undermining the competitive process.
When consumers don’t make required payments, they can face a long list of consequences. They pay extra interest, their credit report gets hit, their credit line can get cut, and, of course, they can face a late fee. However, late fees and other penalties aren’t supposed to be a core profit driver, since this would mean that credit card companies might benefit more when consumers miss payments.
More than a decade ago, Congress voted to pass the CARD Act to clean up widespread abuses in the credit card industry. One of the central components of the CARD Act was a prohibition on excessive penalties, such as late fees. In the law, Congress allowed credit card companies to charge “reasonable and proportional” fees to incentivize on-time payment and cover the costs associated with late payments.
At the time, the Federal Reserve Board of Governors was responsible for developing regulations to implement the law. In 2010, the Fed board voted to include an immunity provision in those regulations. The immunity provision allowed credit card companies to evade the “reasonable and proportional” penalty fee requirement, as long as they stayed below a threshold. In our review, the CFPB found that this has turned into a massive loophole that has allowed companies to charge unjustifiably high fees ever since. Almost all of the credit card giants have hiked their fees every year in lockstep, using inflation as an excuse.
Because banks are allowed to charge fees far in excess of costs, the current rule means large banks profit when borrowers inadvertently miss a payment or struggle to pay on time, and many do, repeatedly. Our research shows that borrowers with low credit scores are, on average, charged $138 per year per card, and many consumers have multiple credit cards. The status quo makes late fees an irresistible revenue stream, disincentivizing card companies from making it easy and simple to pay your bill on time.
Today’s rule that closes a longstanding loophole abused by credit card giants is an important step forward. It will help consumers keep more of their money, and hold credit card companies to the original intent of the CARD Act. The rule requires large card companies to either charge a maximum late fee of $8, or justify a higher amount by demonstrating that they need to charge more to cover their actual collection costs. The rule also eliminates an automatic inflation adjustment, which was added by the Federal Reserve Board and is not required by law.
This rule only applies to the largest card issuers, those with over 1 million open accounts. These companies account for more than 95 percent of the total outstanding balances. Smaller banks and credit unions will not be affected. We did not find evidence these smaller companies are employing the fee churning business model, and in fact they generally charge much lower fees overall.
In credit cards, like so many corners of the economy today, consumers are beset by junk fees and forced to navigate a market dominated by relatively few, powerful players who control the market. The CFPB will keep working to ensure that consumers do have meaningful choices, and that companies of all sizes have to compete and play by the rules.