The Consumer Financial Protection Bureau announced this week that it examine the fees that credit card companies charge consumers for late payments – in particular, whether those late fees are “reasonable and commensurate” with the amount people owe. The CFPB is looking at this now because credit card companies can change their late fees with inflation, and given recent inflation, they have some concerns.
Current rules governing credit card late fees date back to 2009. In the wake of the financial crisis, Congress was looking for ways to protect people from excessive debt, said Karen Petrou of Federal Financial Analytics.
“Credit cards became an area where consumer advocates were really focused,” she said.
In 2010, the Federal Reserve put a $25 limit on late fees. But it also allowed credit card companies to adjust these fees each year, based on the consumer price index.
Petrou said the idea was that credit card companies should be able to account for inflation.
“And if we fail to reflect that as a cost of doing business, then banks won’t do that business. And if banks don’t make this deal, consumers don’t get credit cards,” she said.
Since then, this late fee limit has increased to $30.
The thing is, between then and now, inflation wasn’t that high until recently.
“But when you have inflation at 8% or 9%, the math starts to look different,” said Georgetown University law professor Adam Levitin.
Now that inflation has gone up?
“There are concerns that there may be opportunistic behavior on the part of card issuers,” Levitin said. “That card issuers see a chance to increase late fees because of inflation, rather than because [of] real increased risk for them in the event of late payment.
To be clear, the CFPB has yet to see any credit card company do this. But CFPB senior adviser Brian Shearer said late fees were already too high, regardless of inflation.
“Our research shows that banks charge $12 billion in late fees alone,” he said. “That’s 10% of the total cost of credit cards to consumers.”
The Consumer Bankers Association said many credit card companies waived late fees throughout the pandemic. But Shearer said if the CFPB does nothing, those fees could exceed pre-pandemic levels.
“That’s why we’re reviewing the rules, to make sure credit card late fees are actually reasonable and proportionate,” Shearer said.
That could potentially mean drafting new rules that would effectively reduce late fees charged by banks, he said.
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