The Biden administration recently proposed a new rule that would slash credit card late fees “by 75 percent,” but critics argue this would harm consumers, including customers who pay their bills on time.
The Consumer Financial Protection Bureau (CFPB), the federal government’s consumer protection watchdog, issued a measure to prohibit excessive credit card late fees. The proposal would reduce the total amount users can owe for late payments from an average of $31 to $8. It would also abolish the automatic annual inflation adjustment and limit late fees to 25 percent of the minimum payment owed by the cardholder.
In March 2022, the CFPB reported that cardholders pay approximately $12 billion a year in late fees.
CFPB director Rohit Chopra noted that Congress banned excessive credit card late fees a decade ago, but issuers “have exploited a regulatory loophole that has allowed them to escape scrutiny for charging otherwise illegal junk fees.”
“These unfair fees add up. It’s a basic question of fairness. And with the help of the folks in this room, we’re going to keep building an economy that’s fair, an economy that’s competitive, and an economy that works for everyone,” President Joe Biden told his Competition Council meeting earlier this month.
President Joe Biden delivers the State of the Union address to a joint session of Congress as Vice President Kamala Harris and House Speaker Kevin McCarthy listen, in the House Chamber of the U.S. Capitol in Washington, on Feb. 7, 2023. TNS
Targeting credit card late fees has been a part of Biden’s broader initiative to rein in what he says are junk fees, including online concerts, entertainment, and sporting event costs.
But opponents of these efforts contend that they would negatively impact consumers.
Help or Hurt Credit Card Holders?
The common defense for late payment penalties is that they serve as a deterrent to ensure credit cards remain paid and credit markets remain functional.
Dennis Shirshikov, a professor of economics and finance at the City University of New York, told The Epoch Times that this might offer short-term relief to customers, but it offers “unintended consequences” in the future.
“In the long run, it could have unintended consequences such as limiting access to credit and reducing the availability of financial services in certain areas,” he said.
“Instead of imposing more regulations, banks would prefer to work with regulators to develop industry standards and best practices that protect consumers while also allowing for innovation and growth in the industry.”
Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, purported that this plan would limit consumer options and loyalty benefits and punish responsible borrowers, adding that this late payment policy is the same tool that “the Internal Revenue Service uses to deter late tax payments.”
According to Rob Nichols, president and CEO of the American Bankers Association (ABA), the proposed rule would reduce competition, increase credit costs, and limit access to credit.
“If the proposal is enacted, credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts, and raising APRs for all consumers, including the millions who pay on time,” Nichols said in response.
“Americans value and appreciate the convenience and security they get from their credit cards, and they recognize there is a cost for that service.”
Smaller, community-based financial institutions, which usually maintain lower interest rates than their larger counterparts, have warned that they may need to hike rates in response to this rule change.
“CUNA [Credit Union National Association] strongly opposes this proposal, as any reduction in late fee safe harbors will have a significant negative impact on many small, community-based credit unions,” said Jim Nussle, CUNA president and CEO, in a statement.
The Biden administration and the CFPB are engaging in “mischaracterization” and “misrepresentation” of overdraft protection services and credit card fees for late payments by calling them “junk fees,” said Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America (ICBA).
“Such language misrepresents the overdraft protection services that banks offer their customers and how community banks meet the credit card needs of their customers,” she said in a statement. “Community banks offer credit cards under contracts that consumers voluntarily enter into and that feature clearly disclosed late fees that deter late payments, help offset issuer costs, and represent a small portion of customers’ credit card costs.”
Ultimately, at a time when more Americans depend on credit cards to cover emergency expenses and complete everyday purchases, it is “deeply unfortunate and puzzling” that officials would impose measures that would limit consumers’ access to credit, noted Lindsey Johnson, president and CEO of the Consumer Bankers Association (CBA).
Former Labor Department secretary Robert Reich disagrees, writing in a tweet that these prevalent fees are “egregious” and that they are “used to manipulate and prey on working people.”
But while “the cap is welcome news,” President Biden should also consider limiting credit card interest rates, proposed Alexis Leondis, a Bloomberg Opinion columnist.
“The Biden administration and the Consumer Financial Protection Bureau said they’re focused on late fees because the costs card issuers are charging customers far exceed the costs they incur when someone makes a late payment,” she opined. “The federal government should use the same argument to go after lenders who charge sky-high levels of interest.”
According to LendingTree, the average credit card interest rate was 23.39 percent in January, up from 22.91 percent in December.
As the Federal Reserve continues raising interest rates for the foreseeable future, financial experts warn that borrowing costs could keep rising in 2023.
With more consumers taking on debt as they live paycheck to paycheck, this could be a concerning trend. In the third quarter, credit card debt surged by $38 billion, or 15 percent year over year, to $930 billion, according to the Fed Bank of New York.
Andrew Moran
Author
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."
