August 29, 2023
Estimated reading time: 5 minutes
Compliance Confessionals – CFPB Proposed Rule on Credit Card Late Fees
I recently had a conversation with a colleague who works for a private equity firm. She asked for my thoughts on how the Consumer Financial Protection Bureau (CFPB) Prosed Rule on Credit Card Late Fees may affect the industry and if I believed the rule would become final. To give everyone a little background, here are some of the key points made by the proposed rule, which was published in February 2023:
- Lower the immunity provision for late fees to $8 for a missed payment and end automatic annual inflation adjustment. The immunity provisions, created by the Federal Reserve Board, allow credit card issuers to avoid scrutiny by using a set fee that is adjusted due to inflation. Over time, the allowed late fee has risen to $30 for an initial late payment and $41 for subsequent payments.
- Cap late fees at 25% of the required minimum payment. The current rule allows card issuers to charge up to 100% of the minimum payment owed. The CFPB believes this new cap is more consistent with reasonable and proportional late fees.
- In addition, the CFPB may also be contemplating applying these changes to all credit card penalty fees, adding a 15-day grace period after the due date before late fees can be assessed, and requiring issuers to offer auto-pay to make use of the immunity provision.
Key challenges for firms
From a compliance perspective, I did not see any great challenges to an organization implementing these changes if they became final. System changes, changes to disclosures, and notifications to existing customers are all that are required. It is not overly complicated. However, as CFPB cited, families are being charged approximately $12 billion a year in late fees. Therefore, these changes can have a significant financial impact on a card issuer’s revenue stream.
This situation reminds me of when the CFPB began beating the drum about deposit account overdraft fees. Although that issue never became a regulation, it made many financial institutions change their practices reducing, redefining, and/or eliminating overdraft fees. In addition, many states added new requirements on caps to overdraft fees. Today’s consumers find themselves in a much better position to avoid and/or understand these fees. The reduction or elimination of these fees has become a part of marketing campaigns to attract more deposits, resulting in many institutions finding themselves in a better position as it pertains to marketing deposit accounts and the associated revenues.
Card issuers, who manage this potential new rule effectively, may find themselves all the better for it in their ability to attract a bigger market share. Some will use it as an opportunity to increase interest rates to offset lost fees. Although some states have rules in place on interest rates charged by credit issuers, there are no federal caps on credit card interest rates. If all that can be charged is $8, it may be better to advertise no late fees (very few card issuers offer that today) and offer slightly higher interest rates instead. Consumers tend to pay attention to fees so it can become a marketing tool.
I will take it one step further – maybe this new rule presents a chance for greater change. I recently wrote an article comparing US Consumer Protection Laws to the UK’s Consumer Duty regulation. The CFPB’s focus on eliminating excess fees in financial products is forcing financial institutions’ hand in the design of products, such as credit cards, to balance profits with a broader fiduciary responsibility of serving the consumers’ needs. It may not be the fastest path to keep the consumer needs first and foremost, but we may get there by regulating one fee at a time.
My colleague also asked me if I thought that the larger financial institutions would push back. I don’t believe any major bank wants to be the headliner in any newspaper or social media piece demanding the right to continue charging extremely high late fees. I do believe there could be some behind-the-scenes negotiations on whether $8 is a sufficient charge to cover true collection expense or the value of additional grace periods when you consider the impact on credit reporting and so on. I also responded in the affirmative, when asked if I believe the rule will become final. It is impossible to justify up to $41 for each missed payment. The final dollar amount that will be considered acceptable or digestible is what is left to be seen.
Conversely, the CFPB may want to start turning its attention to interest rates. The rate hikes over the course of last year have forced some consumers with variable-rate credit products to start feeling the pinch. Over the course of the last year, the national APR is hovering north of 20% on credit cards up from a low of approximately. 16% in March 2022. Given that the average consumer has around $5,900 outstanding on their credit card at any point, any further changes to interest rates, to account for loss of fee revenues, will have an effect.
What is compliance’s role in this?
All we can do is try to influence our organizations to think beyond the immediate bottom line and to stress that doing right by the consumer can have long-term positive market appeal and favourable views from the regulators.
The desire some firms may have to adjust interest rates for the customer segment that may be affected will be evident in data collection for fair lending analytics. Discourage your organization from going down that rabbit hole. Compliance officers must stretch themselves beyond the regulations and become stronger business partners in helping to rethink strategy and focus on the spirit versus the letter of the law as the end game in this vastly competitive landscape.
Contact CUBE so we can help you proactively manage every single regulatory change.