CFPB Releases Final Credit Card Late Fee Rule; Slashes Fees to $8

Early this morning, and just in time for Thursday's State of the Union Address, the Consumer Financial Protection Bureau (CFPB) issued a press release announcing its much-anticipated Credit Card Late Fee Rule (Rule). Claiming to "close a loophole," the Rule reduces a typical fee of $32.00 to $8.00 and ends automatic inflation adjustment for issuers with 1 million or more open accounts. 

According to the CFPB, credit card companies have increased fees despite moving to cheaper, digital processes. In a published statement released contemporaneously with the announcement of the Rule, CFPB Director Rohit Chopra stated the CFPB's research shows late fee revenue generated by the credit card industry is more than five times the companies' associated costs.  

The Final Rule, which changes very little (if anything) from the original proposal, institutes the following:

• Lowers the immunity provision dollar amount for late fees to $8. The CFPB says its analysis shows a late fee of $8 is sufficient for larger card issuers to cover collection costs incurred due to late payments.
  
  
• Ends abuse of the automatic annual inflation adjustment. The CFPB claims that issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB will monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
  
  
• Requires credit issuers to show their math. The Rule will allow larger card issuers to charge fees above the $8 late fee threshold so long as they can prove the higher fee is necessary to cover their actual collection cost. 

The Rule does not change the credit card issuer's ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late. 

After listing the main tenets of the Rule, the tone of the press release shifted. Per the CFPB, the rule is part of its continued efforts to address problems and foster competition in the $1 trillion credit card market. In support of those efforts, the CFPB raised its findings on APR margins charged by the largest issuers, data that the CFPB says shows small banks and credit unions offer significantly lower rates, the CFPB's recent guidance to rein in "rigged comparison-shopping results" for credit cards and other products, and recent enforcement actions.

The Final Rule can be found here. History and comments are linked here.

insideARM Perspective

The 338-page Rule was released less than two hours before this article was published. Therefore, the above covers the main points cited by the CFPB in its press release. In the coming days, we at insideARM, along with our news partners, will publish more details and insight regarding the Rule's substance and its official comments. In other words, this is a developing story and we will bring you more details and analysis as it becomes available, and once we've all had a chance to meaningfully review the Rule and its implications.

That said, noticeably absent from the press release and Director Chopra's prepared remarks is any mention of the Rule's downstream effects. The press release and the prepared remarks frame the issue as a simple one; to summarize, "credit card issuers charge too much for late fees, let's make them charge less = a win for everyone." Rarely is it ever that simple.

As reported in insideARM last year, when the proposed rule was first released, both the Consumer Bankers Association, the American Bankers Association, and Auriemma Roundtables* cautioned that if finalized as-is (which is exactly what has happened), the Rule would ultimately limit consumers' access to financial products and would effectively penalize those who pay on time.  In a complex financial ecosystem, actions have consequences, rules have both intended and unintended effects. This rule wasn't created in a vacuum and won't exist in one.  

Read the Consumer Bankers Association Statement here.

Read the American Bankers Association Statement here. 

A summary of the Auriemma Roundtables Comment can be found here.

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*Note: Auriemma Roundtables owns insideARM (acquisition press release here)