WASHINGTON D.C. โ The Consumer Financial Protection Bureau (CFPB) today finalized a rule to reduce excessive late payment charges on credit cards by closing a loophole exploited by large card issuers. The rule will reduce tariffs that cost American families more than $14 billion a year. The CFPB estimates that American families will save more than $10 billion in late fees annually once the final rule takes effect by reducing the typical fee from $32 to $8. This will save an average of $220 per year for the more than 45 million people who are charged late fees.
"For more than a decade, credit card giants have been exploiting a loophole to reap billions of dollars in junk fees from American consumers," said CFPB Director Rohit Chopra. โToday's rule ends the era in which large credit card companies hide behind the excuse of inflation when they raise rates on borrowers and increase their own bottom lines.
Concerned that credit card companies were building a business model based on penalties, fee collection, and bait-and-switch tactics, Congress passed the Credit Card Accountability and Disclosure Act of 2009 (CARD Act). The law prohibited credit card companies from charging excessive fines and established clearer disclosures and consumer protections.
In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act, which made clear that banks could only charge fees that recover banking costs associated with late payment. However, the rule included an immunity provision that allowed credit card companies to escape liability if they charged no more than $25 for the first late payment and $35 for subsequent late payments, with both amounts to be adjusted. to inflation every year. Those amounts have skyrocketed to $30 and $41, even as credit card companies have moved to cheaper digital business processes. Congress transferred authority to administer CARD Act rules from the Federal Reserve to the CFPB.
After a thorough review of market data related to the 2010 immunity provision, the CFPB's final rule adopts a lower threshold of $8 and ends automatic inflation adjustments by that amount for issuers that have 1 million or more open accounts.
The CFPB has found Since 2010, issuers have generally been charging consumers more late fees on credit cards each year, rising to more than $14 billion in 2022, and accounting for more than 10 percent of the $130 billion that issuers charged consumers in interest and fees. Late payment fees are in addition to many other punitive measures that credit card companies impose on consumers who miss payments, including additional interest charges, loss of your grace period, negative credit reports, reductions on your credit limit and a higher interest rate on future purchases. . The average late fee for major issuers has risen steadily since the passage of the CARD Act, rising from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver of its profit model.
The CFPB's final rule applies to the largest credit card issuers, those with more than 1 million open accounts. These companies represent more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of larger issuers charge close to the maximum allowable amount of late payment fees. Today's final rule:
- Reduces the dollar amount of the immunity provision for late fees to $8: According to data analyzed by the CFPB, a late payment fee of $8 would be enough for larger card issuers, on average, to cover collection costs incurred as a result of late payments.
- End the abuse of the automatic annual inflation adjustment: The CFPB found that many issuers increased their late fees at the same time each year without evidence of increased costs. The CFPB's final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. Instead, the CFPB will monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
- Requires credit card issuers to show their calculations: Larger card issuers will be able to charge fees above the threshold as long as they can demonstrate that the higher fee is necessary to cover their actual collection costs.
The rule does not change a credit card issuer's ability to raise interest rates, reduce lines of credit and take other measures to discourage consumers from paying late. In fact, the rule would increase credit card companies' desire to facilitate on-time payments by reducing incentives to build a business model based on late payment fees.
The CFPB's Credit Card Efforts
Today's final rule is part of an ongoing effort by the CFPB to address problems and encourage competition in the trillion-dollar credit card market. The CFPB is working to help consumers find lower interest rates, as consumers paid a record $130 billion in credit card interest and fees in 2022, and the average cardholder carries a balance of more than $5,000.
A recent CFPB report found that increases in the APR margin charged by the largest issuers generated about $25 billion in additional interest income in 2023. Data submitted to the CFPB by credit card companies shows that Small banks and credit unions offer significantly lower rates., about 8 to 10 percentage points less than the 25 largest credit card companies. Last week, the CFPB issued Guidance for controlling rigged price comparison results for credit cards and other products, and is developing a consumer-facing tool that, when completed, will give people looking for a new credit card an unbiased way to compare credit card terms and interest rates.
The CFPB has also taken enforcement action against illegal conduct by credit card companies. Recent actions include sorting Bank of America pay a $30 million fine and refund tens of millions of dollars to consumers for illegal conduct, including withholding credit card rewards bonuses that the company explicitly promised and opening unauthorized accounts. The CFPB also ordered Citizens Bank pay a $9 million fine for failing to refund consumers who reported fraud or billing errors, and ordered Citibank pay $25.9 million for intentional and unlawful discrimination against credit card applicants the bank identified as Armenian-Americans.
Read the text of today's final rule.
The effective date of the final rule will be 60 days after publication of the rule in the Federal Register.
Consumers can file complaints about financial products or services by visiting the CFPB website or calling (855) 411-CFPB (2372).
Employees of companies who believe their company has violated federal consumer financial laws are encouraged to submit information about what they know. whistleblower@cfpb.gov.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information visit www.consumerfinance.gov.
