Finalized CC late fee rule ignores reality

Editor’s note: This column ran in the March 14 edition of The Pulse, a weekly BankBeat email sent to subscribers which also includes top stories from the previous week. 

The Consumer Financial Protection Bureau’s recent capping of credit card late fees at $8 continues the bureau’s erroneous view of the expense as an unnecessary “junk fee.” The rule also ignores two foreseeable unintended consequences: A rise in instantly declined transactions and reduced customer access to credit lines and credit card reward programs. 

Finalized March 5, the rule reduces the typical credit card late fee 75 percent from the usual $32 for credit card issuers with more than 1 million open accounts. The CFPB claims limiting late fees will save American families more than $14 billion annually.  

Alluding to the rule last week during his State of the Union address, President Joe Biden claimed that banks and credit card companies disapproved because he was saving Americans billions of dollars per year by eliminating “junk fees” such as the credit card late fee. 

The problem with Biden’s argument is that a credit card late fee is not a “junk fee.” The late fee is instead a necessary expense banks utilize to prevent late payments. Other sectors — including the federal government — also charge late fees to those who don’t pay on time. Why should banks and credit card companies be held to a different standard? 

Limiting late fees could require banks and credit card companies to change how they respond to late payers by reducing their lines of credit, raising their interest rates and strengthening credit reporting requirements. This could lead consumers who subsequently struggle to secure loans or mortgages from banks to move their business to payday lenders or fintechs. 

The late fee rule comes as the CFPB is also trying to limit how banks with more than $10 billion in assets determine overdrafts. Banks could either calculate their own overdraft expenses and losses using the bureau’s proposed standards, or use benchmark fee rates of between $3 and $14 set by the Bureau. 

The CFPB is proposing banning the mandatory use of preauthorized electronic fund transfers to repay transactions paid into overdrafts by institutions that charge overdraft fees higher than a designated threshold. The Bureau said it plans to evaluate the market’s response to the proposal before deciding whether to change overdraft service policies for smaller banks.

The CFPB’s stance against overdraft fees is another instance of targeting a valued customer service. Nearly 90 percent of customers said they were pleased with their bank and found overdraft protection valuable, according to a 2022 Morning Consult survey on behalf of the American Bankers Association. 

After the overdraft rule was unveiled in January, Hovde Group Managing Principal Kirk Hovde said banks would have to make up for the lost revenue in other places. Hovde’s prediction illustrates why the CFPB should withdraw both plans: The negative impacts the proposals will have on customers outweigh the benefits.