The CFPB’s recent proposal to cap the safe harbor for credit card late fees at $8 would harm consumers across the credit spectrum, but particularly hit consumers with lower credit scores.

• More late payments: The CFPB recognizes that lower late fees may cause more consumers to pay late. This could damage customers’ credit scores and decrease their access to credit in the future, or result in higher interest rates.
• Priced out: The CFPB acknowledges that interest rates or other charges on subprime credit cards could increase more than for other cards to account for higher default risks, in the absence of late fees. Consumers with more challenged credit profiles could find these cards too expensive.
• Reward cuts, higher fees: Prime customers would be harmed, too, notes the CFPB. Customers with premium cards could face higher maintenance fees or interest or collect fewer card rewards if late fee revenue decreases.
• Credit losses: Additional missed payments as a consequence of lower late fees could result in more delinquencies and ultimately increase credit losses, the CFPB observes.

The CFPB takes an overly narrow view of late fee deterrence and only considers the potential deterrence role of late fees on the actual payment due date.

Late fees play a role in motivating consumers’ financial choices over the longer term, not just on the day a bill is due. The proposal:

• Ignores the risk pricing aspect of late fees. With risk appropriately priced, consumers can make better borrowing decisions and banks can offer a lower, baseline interest rate up front.
• Fails to give appropriate consideration to incentive effects of late fees for consumers who may make mistakes or exhibit behavioral biases, such as overoptimism about their ability to meet debt obligations. Not every consumer is the same when it comes to financial decision-making, and late fees can motivate consumers to make more proactive budgeting decisions. A consumer who is charged a late fee once may adjust their approach to payments after that instance. Late fees may also drive consumers to make healthier financial choices such as limiting excessive spending or the number of credit cards they hold.
• Asserts, without giving evidence or details, that while the proposal may weaken deterrence, it “creates additional incentives for issuers to emphasize reminders, automatic payment, and other mechanisms that maintain similar or better payment behavior.” Reminders are no substitute for late fees in terms of a deterrence effect, and automated payment plans, while convenient for many customers, may have unintended or costly side effects, such as the risk of overdraft.

The CFPB does not have fully adequate data to support its assertions, and it acknowledges data gaps in some parts of the proposal.

• “Although the Bureau does not have data equivalent to the Y-14 data for smaller issuers’ pre-charge-off collection costs, it has no reason to expect that smaller issuers exhibit substantially higher pre-charge-off collection costs than larger issuers. On the other hand, the Bureau expects that the proposed $8 amount would have a proportionately smaller impact on smaller issuers’ late fee income, due to smaller issuers’ having lower late fee amounts.”
• “The Bureau recognizes that late fees are a cost to consumers of paying late, and a lower late fee amount for the first or subsequent late payments might cause more consumers to pay late. The Bureau also recognizes that it does not have direct evidence on what consumers would do in response to a fee reduction similar to those contained in the proposal, and market participants did not provide data on deterrence in response to the Bureau’s ANPR.”
• “In particular, the Bureau is not aware of relevant, reliable, and quantified evidence that could be used to predict how changes to late fees would affect late payments and delinquencies or the expected substitution effects across credit cards and between credit cards and other forms of credit.”
• “Similarly, the Bureau believes there is little reliable quantitative evidence available on the cost and effectiveness of steps issuers might take to facilitate timely repayment, collect efficiently, reprice any of their services, remunerate their staff, suppliers, or sources of capital differently, or enter or exit any or all segments of the credit card market.”

Congress took bipartisan action to protect consumers against late fees through the Credit Card Accountability Responsibility and Disclosure (CARD) Act in 2009.

The law limited penalty fees to those that are “reasonable and proportional” and required more transparency for the fees charged to consumers, among other requirements. For context, it is helpful to recall how policymakers claimed success in passing the CARD Act. 

• The Credit Card Accountability Responsibility and Disclosure Act “put a stop to deceptive credit card practices and hold credit card companies accountable to their customers. … As of today, consumers will be protected against unreasonable fees and penalties for late payments, as well as unfair practices involving gift cards.  This law will also make the terms of credit cards more understandable and puts a stop to hidden over-the-limit fees and other practices designed to trap consumers.” President Barack Obama, White House press release, 8/10/2010
• “The CARD Act was designed to reduce surprises in re-pricing of accounts and to take a major step in improving the overall transparency of credit card costs. As a result of the CARD Act, consumers now have better information about how much they are paying for credit and how much they might save on interest if they pay down their balances more quickly than they might otherwise have planned.” Sen. Elizabeth Warren (D-MA), CFPB prepared remarks, 2/22/2011
• “The CARD Act’s reforms will level the playing field for consumers and usher in a new era of fairness and transparency in the market.” Rep. Carolyn Maloney (D-NY), press release, 2/22/2010
• “[The CARD Act] has made things simpler and easier for consumers and it continues to save them billions of dollars that had been draining out of their pockets.  At the same time, it has not restricted credit, which is available today on better terms that people are finding more dependable and satisfactory. This legislation shows that fair rules for the marketplace are good for consumers and for responsible businesses as well.” Fmr. CFPB Director Richard Cordray, Rep. Carolyn Maloney (D-NY), press release, 5/21/2019

The law already requires transparency. Banks are legally required to disclose credit card fees upfront. This framework has been administered and refined by the CFPB through multiple regulations.

Rules requiring clear fee disclosures include:

• TILA/Reg Z (credit card fees)
• Regulations DD and E (deposit account and electronic fund transfer fees)
• TILA/RESPA (mortgage origination and settlement service fees)
• Truth in Savings Act

The CFPB has the authority to write rules and pursue enforcement actions if it has concerns about banks’ fee practices. For example, if the Bureau felt credit card late fees are not adequately disclosed, it could have included disclosure changes in their new rule, but it did not.  It is concerning that the agency is using official resources to solicit negative feedback about legal and clearly disclosed fees while using misleading and false talking points, rather than studying any perceived issue and taking corrective action if it believes that there are illegal practices in the marketplace.

The request does not articulate the basis for the CFPB’s newfound concerns about credit card late fees nor engage in fact-finding to propose a solution for credit card late fees.

Future changes that are not rational and reasonably explained, including by not allowing commenters sufficient time to gather information, risk procedural challenges.