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The CFPB is attentive to the limitation of late fees on credit cards | Credit Union Journal

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Banks and credit unions are opposing an effort by the Consumer Financial Protection Bureau to halt a roughly 9% hike next year in inflation-indexed credit card late fees.

The question has been moot for years because inflation is so low. But with the consumer price index up 9% over the past year, the CFPB is questioning whether credit card late fees should be linked to inflation, a provision established by the Reserve. Federal in 2010.

Under the “safe harbor” provision, institutions can increase late fees due to inflation without any cost-benefit analysis as long as the fees charged are “reasonable and proportionate”. To qualify for Safe Harbor, credit card issuers can charge $30 for the first late payment and $41 for subsequent late payments within six billing cycles.

The Consumer Financial Protection Bureau is going after banks and credit unions over its proposal to limit increases in credit card late fees that would otherwise rise due to rising inflation.

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Under a complicated formulacredit card late fees are expected to increase next year to around $33 for the first late payment and $45 for subsequent late payments.

Consumer advocates and critics of the Fed’s safe harbor suggest that the CFPB step in and halt inflation adjustments. CFPB director Rohit Chopra wants to reduce credit card late fees in general and has already called financial institutions to charge consumers about $12 billion a year in late fees.

The CFPB received 42 comments to a prior notice proposed regulations in June which seeks to determine how credit card issuers set late fees. A critical part of the CFPB’s review is to determine whether late fees generate more revenue than is necessary to cover their cost, a requirement set by the Fed.

But Chopra also worried about whether the Fed originally set late fees too high more than a decade ago, and whether giving financial firms a safe harbor, with immunity from lawsuits. enforcement to set fees at the safe harbor level, incentivizes issuers to increase. late fees each year.

David Silberman, a former acting deputy director of the CFPB who is now a lecturer at Harvard Law School, said the bureau should issue an interim final rule to prevent late fees from rising in 2023. Silberman, who is also adjunct professor at the McCourt School at Georgetown University. of Public Policy, said inflation-indexed increases do not meet the Fed’s own standards.

“There is good reason to doubt that a safe harbor that increases with the current rise in the cost of living meets the reasonable and proportionate requirement,” Silberman wrote in a comment letter. “Although Safe Harbor levels were set correctly in 2010 to cover costs and deter breaches, there is no reason to assume that current levels are reasonable and commensurate with breaches (i.e. payment late or missed) that trigger the charge.”

Bankers, trade groups and others have taken the opposite route, raising a litany of defenses to block the CFPB from making changes to late fees.

“These late fees are calculated as a business judgment to establish a deterrent effect to mitigate credit granting risk,” said Ann Petros, vice president of regulatory affairs at the National Association of Federally-Insured Credit Unions. , or NAFCU. The Bureau should not question this business judgment or further limit fees across the board by reducing the Safe Harbor fee amounts. »

Of the 20 largest card issuers, 18 charge late fees at or near the maximum allowed. Many smaller banks and credit unions charge late fees of $25 or less, though Petros said credit card payment processors set most fee limits and then pass their costs on to credit unions. .

Bankers see late fees as a deterrent to consumers going into debt. (Late fees and interest are charged to cardholders who do not make the minimum payment by their credit card’s due date.)

“This is an example of regulation working as intended,” said Mickey Marshall, director of regulatory legal affairs at Independent Community Bankers of America. “The supply of US dollars has exploded dramatically, customer deposit account balances remain high, and the purchasing power of the dollar has declined. If late fees are not allowed to rise with inflation, the actual cost of late fees will decrease, causing them to lose their necessary deterrent effect.”

Some commentators said the CFPB should look elsewhere for culprits charging excessive fees such as fintechs and Buy Now Pay Later companies.

Others said that reducing late fees or eliminating the safe harbor would wreak havoc on the industry, forcing financial institutions to raise fees elsewhere or increase the cost of credit as a whole. that would impact small banks and credit unions.

“Any reduction in the safe harbor amount or the elimination of the safe harbor would impact the thousands of credit card issuers operating in this market, including smaller issuers,” wrote Paige Pidano Paridon, Senior Vice President and Senior Associate General Counsel at The Banking Policy Institute.

The CFPB has the authority to regulate late fees under the Truth in Lending Act and Regulation Z, the Cards Act Regulation.

Chi Chi Wu, an attorney at the National Consumer Law Center, said credit card late fees should be commensurate with the debt owed. She suggested that the CFPB create a sliding scale under the safe harbor so that late fees are proportional to account balance.

“Late fees should not exceed 1% of the balance and no more than 25% of the missed payment,” Wu wrote in a comment letter. “A fee collector card with a maximum credit limit of $300 cannot charge more than $3, and a subprime card with a balance of $1,000 cannot charge more than $10.”

The technology has also reduced the cost of collections, making it easier and cheaper for credit card issuers to use automated methods to collect overdue payments and overdue debts, Wu said.

Another issue concerns minimum credit card payments. Currently, late fees cannot exceed the minimum amount required. But if late fees increase, issuers will also have to raise the minimum payment floor, Silberman said.

Some commentators said the CFPB needed to spend more time studying the issue. Others suggested that vulnerable communities would be hit hardest if late fees were unable to rise with inflation.

“Any effort to reduce allowable fee amounts would result in a credit crunch, with tighter lending criteria making it difficult for consumers with lower credit scores to access credit,” Petros said.