Late fees for financial products, when charged appropriately, incentivize timely payment and good financial management, ABA and three other financial trade groups told the CFPB in response to a request for information this week. Conversely, setting late fees too low means “consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced credit access, and higher credit costs,” they added.
Under the CARD Act, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment, unless the bank instead relied on a safe harbor limit set by regulators. In 2010, the Federal Reserve approved implementing regulations for the CARD Act that set fees at $30 for a late payment and $41 for each subsequent late payment within the next six billing cycles, subject to an annual inflation adjustment. In the years since, CFPB has adjusted the safe harbor amount based on annual changes in the weighted Consumer Price Index.
The groups emphasized that reducing or eliminating this safe harbor could ultimately harm consumers, and would have particularly negative effects on small institutions with less than $750 million in assets. “[I]f late fees are not set at an appropriate amount to cover issuers’ costs, effectively encourage on‐time payments and mitigate the risks associated with late payments, issuers may have to rebalance the risks to their credit portfolios in other ways,” they said. “This could include reducing credit lines, tightening standards for new accounts and raising annual percentage rates and fees for all cardholders, including those who pay on time.”
The associations recommended that the CFPB retain the current rule, but should the agency proceed with additional rulemaking regarding credit card fees, they urged it to ensure that any proposed permitted fees account for the costs incurred by issuers related to late payments, the deterrent effect of late fees, and the conduct of the cardholder as required under the Truth in Lending Act, the associations said.