Consumer Financial Protection Bureau proposes credit card fee rule

WASHINGTON — The federal government’s consumer protection watchdog proposed a new rule on Wednesday to ban excessive credit card late fees, potentially reducing them by as much as $9 billion per year.

Congress banned exorbitant credit card fees under the Credit CARD Act in 2009, but an immunity provision instituted by the Federal Reserve Board of Governors enabled card companies to dodge enforcement standards, said Rohit Chopra, director of the Consumer Financial Protection Bureau.

“Over a decade ago, Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee,” Chopra said. “Today’s proposed rule seeks to save families billions of dollars and ensure the credit card market is fair and competitive.”

The proposal follows a March 2022 report that showed credit card issuers charged consumers $12 billion in late fees in 2020. Many issuers charge the maximum late fee outlined by the Fed Board in 2010: $30 for the first late payment and $41 for subsequent late payments within six billing cycles. Card issuers that hike fees with inflation are also protected by immunity clauses, according to Chopra.

The CFPB rule proposed Wednesday would lower the amount consumers can owe for late payments to $8 from as much as $41, end the automatic annual inflation adjustment for the provision and cap late fees at 25% of the minimum payment owed by the cardholder.

Chopra said credit card issuers have made late penalty fees “a core part of their profit model,” and that protections offered by the Credit CARD Act effectively reduced the total cost of credit for consumers. The fees disproportionately affect households living paycheck-to-paycheck, borrowers living in America’s poorest neighborhoods, areas where the population is mostly Black as well as subprime and private label cardholders.

“Markets work best when companies compete on price and service, rather than relying on back-end fees that obscure the true cost,” Chopra said. “Given their current practices, we expect that credit card issuers will hike fees, based on inflation, as limits continue to rise.”

The CFPB will seek public comment on other potential changes, including whether to make the proposed rule apply to all credit card penalties, eliminate the immunity provision altogether, create a 15-day courtesy period for credit card holders before the assessment of late fees and require credit card companies to offer autopay services as a condition of immunity provisions.

The rule change also follows a request for comment on the Biden administration’s initiative to reduce certain “junk fees” burdening American consumers.

Late fees cost American families around $12 billion a year in addition to billions in interest, the CFPB said.

The Fed Board did not immediately respond to a request for comment from CNBC.