Banks, credit unions outraged by CFPB’s $8 credit card late fee plan

Ron Sachs/Bloomberg

Rohit Chopra, the director of the Consumer Financial Protection Bureau, wants to slash $9 billion a year in late fees currently charged by credit card companies. Since banks and credit unions currently collect $12 billion a year in late fees, the bureau has set itself up for a massive fight that is widely expected to end in contentious litigation. 

While the cost to assess a late fee on a credit card may be minimal, the CFPB’s proposal in February to slash credit card late fees to just $8 a month — down from the current $30 for a first offense and $41 for subsequent violations — has raised major questions about how banks and credit unions set late fees, including the costs of debt collection and losses from delinquent borrowers. The CFPB said it received 57,933 comment letters on its proposal.

Chopra has said he wants to address what he called “a loophole,” created by the Federal Reserve Board in 2010, that set the safe harbor and allowed issuers to raise credit card late fees every year in line with inflation. Chopra has repeatedly criticized the Federal Reserve for setting late fees at a high level and allowing issuers to raise them every year with inflation. The bureau’s proposal also would cap late fees at 25% of a minimum credit card payment.

With billions of dollars at stake, trade groups representing large issuers are threatening to sue the CFPB, once the rule is finalized, for failing to convene a small-business review panel as required by law. Hundreds of small community banks and credit unions claim they will suffer economic harm if the plan goes into effect. 

“Our rate and fee schedules reflect an effort to balance the costs of lending programs, fraud prevention, and operations against providing credit to members at a reasonable cost,” wrote Deborah Cook, senior vice president and chief financial officer at Sun East Federal Credit Union in Aston, Pennsylvania, in a comment letter. “The [proposed] rule presents a significant threat to operations and places credit unions at a competitive disadvantage to large card issuers.”

The CFPB’s proposal comes within the backdrop of the Biden administration trying to show that it is helping reduce costs for average Americans. The CFPB has claimed that the income generated from late fees is roughly five times higher than the collection costs incurred by the largest issuers, though the bureau excluded post-collection costs from its calculation.

The Consumer Bankers Association said the costs incurred by credit card issuers when a consumer is late on a payment “likely exceed the amounts that they would be allowed to charge customers under the new safe harbor and the 25% payment cap.”

In comment letters, bankers and credit union executives called the CFPB’s proposal “misguided,” “upsetting” and “an assault” on community banks in particular, claiming the bureau is stigmatizing late fees as “junk fees,” to the detriment of all borrowers.

“The CFPB is creating the harmful perception among consumers that late payments are unimportant or trivial, which they are not, and may actually encourage late payments, which is wrong and harms consumers,” wrote David Schroeder, senior vice president of federal governmental relations at the Community Bankers Association of Illinois. 

Banks and credit unions are defending their right to impose a penalty on borrowers for nonpayment under the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act. While the Card Act primarily limited interest rate increases, it also stated that late fees be “reasonable and proportional,” to the total costs incurred by a financial institution, plus other factors. Some commenters dug into the legislative record of the CARD Act to claim that Congress purposefully described late fees as a penalty…