CFPB Proposes New Credit Card Late Fee Regulation

CFPB Proposes New Credit Card Late Fee Regulation

INSIGHTi

CFPB Proposes New Credit Card Late Fee
Regulation
April 18, 2023
On March 29, 2023, the Consumer Financial Protection Bureau (CFPB) issued a Notice of Proposed
Rulemaking to reduce late fees on credit cards. The rulemaking would amend Regulation Z, which
implements the Truth in Lending Act (TILA; 15 U.S.C. §§1601 et seq.), by reducing the credit card late
fee safe harbor to $8 (generally from $30 now). The CFPB is currently receiving comments on its
proposed rule before it is finalized.
This rulemaking is a part of a larger White House initiative called the President’s Competition Council,
which is intended to “promote competition in the American economy” by limiting “junk fees.” According
to the CFPB, “junk fees” in consumer financial markets may include late fees, overdraft fees, out-of-
network ATM fees, and inactivity fees, among other things.
This Insight provides an overview of the credit card fee regulation and analyzes major parts of the
CFPB’s proposed rule.
Background
Credit cards allow a consumer to pay for transactions using unsecured revolving credit, meaning the loan
is not secured with any collateral if the consumer defaults. According to the CFPB, over 180 million
consumers—roughly 70% of U.S. adults—have credit cards, making it the most widely used consumer
credit product.
The 2009 Credit Card Accountability Responsibility and Disclosure Act (CARD Act; P.L. 111-24)
established new disclosure and fee requirements for credit cards, among other things. In particular, the
law requires that penalty fees, such as late payment fees, “shall be reasonable and proportional.” It tasks
the CFPB to establish standards by considering the creditor’s cost, the deterrence effect, the conduct of
the cardholder, and other factors that the CFPB deems “necessary or appropriate.” The CFPB may also
establish a safe harbor amount for penalty fees, which would specify an amount that complies with the
law, allowing credit card companies to ensure that they are in compliance. A 2010 regulation adopted this
approach to limit penalty fees, adjusted for inflation. The regulation currently establishes a safe harbor of
$30 initially and $41 for each subsequent violation.
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CFPB research finds that the average credit card late fee charged was $31, and late fees accounted for
nearly half of consumer fees and about a tenth of consumers’ total cost of credit (interest and fees).
Consumers with subprime credit scores are more likely to incur late fees. Many of the largest card issuers
charge at or near the safe harbor level established by the regulation, while smaller banks and credit unions
tend to charge less. In June 2022, the CFPB published an advanced notice of proposed rulemaking
seeking information on credit card late fees to inform this rulemaking.
CFPB’s Proposed Regulation
Cost of Late Fees
The proposal would lower the safe harbor for late fees to $8 for initial and subsequent violations. The
CFPB determines that an $8 late fee would allow card issuers to recover average pre-charge-off collection
costs from late payments, for example, by notifying consumers of their late payments and helping resolve
them. The CFPB estimates that this would reduce credit card late fees by about 75% for consumers.
The proposal would also no longer adjust the late fee safe harbor for inflation. The CFPB determined that
inflation is not necessarily reflective of the cost of late payments to credit card issuers over time.
The CFPB argues that current late fees are not “reasonable and proportional,” because credit card issuers
currently generate more revenue from late fees than their cost of late payments. The CFPB also argues
that when consumers shop for credit cards, they may not consider late fees, because such fees are “back-
end.” Therefore, CFPB argues that this proposal would lower consumer costs and increase transparency.
The lending industry argues that lowering late fees would increase costs on credit card issuers, causing
them to reduce credit access and increase interest rates, particularly for subprime consumers.
Deterring Late Payments
Late fees also act as a deterrent, and recent academic research finds that when late fees are lower, people
are more likely to pay late and incur the late fee. At the same time, subprime cardholders tend to pay
down credit card debt in response to lower late fees and so may pay less in interest over time. Therefore,
the impact of late fees on consumer financial health is mixed.
The CFPB argues that while consumers may be late more frequently with reduced fees, there are other
consequences that deter late payments, such as negative impacts on a consumer’s credit score. Lower late
fees could also incentivize card issuers to help consumers pay on time, such as by encouraging payment
reminders.
Industry and other critics argue that late fees promote repayment of credit cards, and lowering late fees
may cause the cost of credit to increase, potentially harming consumers who pay on time. They argue that
the CFPB’s proposal ignores the deterrence effect of late fees and fails to recognize the competitive credit
card market.
Impact on Small Institutions
The CFPB is required to complete a small business review process (SBREFA) for certain rulemakings to
obtain input from impacted small entities in the rulemaking process. In this rulemaking, the CFPB asserts
that the SBREFA process is not required because the proposal would not have a “significant economic
impact on a substantial number of small entities,” as credit cards may be less than 5% of most small
banks’ and credit unions’ assets and revenues.

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Some industry groups argue that a SBREFA analysis should have been done and that it may have led the
CFPB to different conclusions. According to industry analysis, more than half of credit-card-issuing
banks and 85% of credit-card-issuing credit unions are small. In addition, some of the data that the CFPB
relied on in its analysis may not be representative of smaller issuers. For example, some smaller
institutions may serve more subprime consumers who are more likely to be late, making these
institutions’ late payment costs higher than average. Therefore, from this perspective, a SBREFA process
may have informed the rule’s impact on smaller entities.

Author Information

Cheryl R. Cooper

Analyst in Financial Economics

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