Financial Trades to CFPB: Misguided Credit Card Late Fee Proposal Will Harm Consumers and Limit Access to Credit

In a new comment letter filed today, the American Bankers Association, Consumer Bankers Association and National Association of Federally-Insured Credit Unions warned the CFPB that its untested and unvalidated assumptions about credit card late fees are wrong, resulting in flawed policy that will ultimately harm all cardholders whether they pay on time, pay late or carry a balance. If implemented as proposed, the associations said credit cards will cost more for all cardholders, will be more difficult to obtain and will be offered by fewer community banks and credit unions.

In the letter, the associations point out that the CFPB itself acknowledges that credit cardholders who do not incur late fees could pay more for their credit card:

“By the Bureau’s own admission, ‘[c]ardholders who never pay late will not benefit from the reduction in late fees and could pay more for their account if maintenance fees in their market segment rise in response’ to the Proposal. Cardholders who pay at least their minimum payment in a timely manner will pay more for existing and new credit because issuers will have to adjust rates and fees to manage new risks and recover costs (including potential losses) related to late payments. The cost of credit for these timely payers, who account for the vast majority of the consumer cardholder population, will increase with no corresponding benefit. In other words, the NPRM gives short-term preferential treatment to a small minority of frequently late paying consumers at the expense of the vast majority of consumers who pay their bills on time.”

In addition, the associations emphasized the long-term negative consequences of the proposed rule for late-paying cardholders. By lowering the late payment fee below any meaningful deterrence threshold, more consumers will pay late resulting in higher costs for and reduced access to credit in general.

“More late payments could harm creditworthiness and put consumers at a greater risk of default, higher interest rates, and lower credit scores. Altogether, these consequences will lead to reduced consumer credit opportunities and higher costs for credit.”

A recent survey conducted for ABA cited in the letter found that late fees are more effective in motivating consumers to pay bills on time than negative credit score impacts:

“Almost half of consumers (46 percent) said that avoiding late fees was the most important reason to pay credit card bills on time. Only 15 percent said that concerns about credit ratings was the most important reason to pay on time.” 

“Hardly surprising, the Bureau’s proposed $8 safe harbor…would not motivate many consumers to pay their credit card bills on time. In the survey, more than 4 in 5 consumers (83 percent) said that a $10 late fee would be insufficient to deter them from paying a credit card bill late. As shown in Figure 2, only 6 percent of respondents said that a fee of $10 would have a deterrent effect. For those who have paid a late fee in the past year, the deterrence effect of a $10 fee is even lower: only 4.3 percent said that such a fee would deter them from paying late.”

“In this same survey, consumers were clear that they consider late fees to be appropriate: 68 percent of consumers surveyed felt that it is reasonable for banks to charge late fees, a greater share than any other fees considered, including annual fees, as shown in Figure 3.”

The associations also underscored the importance of late fees as a deterrent—something recognized by Congress in the Credit Card Accountability Responsibility and Disclosure Act of 2009:

“Fees assessed for violation of a contractual obligation are common and exist across the federal, state, and local governments and the economy. Indeed, the CARD Act specifically requires the Bureau to consider deterrence in determining the standards for “reasonable and proportional” late payment fees for credit cards.

“The Bureau’s repeated mischaracterization of late payment fees as so-called ‘junk fees’ ignores the well-understood and accepted value of late fees as a deterrent and undermines the significance of the role of these late fees in the credit market. Penalty fees deter bad behavior and are avoidable. Indeed, a majority, 57 percent, of consumers recently surveyed think it is reasonable for banks to charge late fees and even more, 78 percent, believe that paying on time is a personal responsibility. Consumers who comply with their contractual obligations by making timely payments do not incur late fees.”

In the letter, the associations also argue that the CFPB has violated various process and procedural requirements including:

• The CFPB’s additional requests on various regulatory changes are underdeveloped and are not a logical outgrowth of this Proposal and may not be finalized without notice and comment.
• The Director improperly certified that the Proposal would not have a significant impact on the 3,283 small banks and credit unions that offer consumers credit cards and failed to consider the impact of the proposal on these institutions and competition.
• The CFPB is engaging in a rushed rulemaking with a preordained timeline and outcome, in violation of the Administrative Procedure Act (APA).
• The Proposal signals an intent to evade Section 105(d) of TILA, which sets forth the effective dates of regulations containing new or changed TILA disclosure requirements.
• The CFPB’s rulemaking process should be halted until the U.S. Supreme Court renders an opinion in CFPB v. CFSA.

In conclusion, the associations said:

“Credit cards are widely-popular financial products that provide valuable consumer benefits. Unlike the Bureau’s mischaracterization of late fees, consumers understand late fees and recognize the importance of late fees in promoting responsible consumer behavior and more efficiently allocating costs. As discussed above, the Bureau’s Proposal is based off flawed assumptions, which would create similarly flawed policy. If finalized as proposed, the NPRM will harm the vast majority of consumers by raising the cost of credit and limiting access to new and existing credit. In addition, as discussed above, the CFPB has violated various process and procedural requirements, which must be remedied before proceeding.”

Read the full letter.