Late Fees Aren ’ t Always Easy Income : CFPB Proposes Narrowing the “ Reasonable and Proper ” Meaning in the CARD Act
Inflation , which has hit almost every area of Americans ’ lives in the past year and a half , has also become an area of concern where consumers may least expect it — credit card late fees .
Credit card late fees , which provide many financial institutions an easy , accessible and persistent stream of revenue , cost American families about $ 12 billion per year , according to a recent Consumer Financial Protection Bureau ( CFPB ) news post . While late fees are typically said to be “ limited ,” recent findings show many credit card companies have been using provisions in the Credit Card Accountability Responsibility and Disclosure Act of 2009 ( CARD Act ) to set relatively high late fees through an “ expansive immunity provision loophole .”
According to the CFPB , these exorbitant late fees pose a serious risk to consumers , by charging fees not “ reasonable and proportional ” to the costs incurred by issuers who handle late payments . In response to the growing concern over financial institutions ’ use of late fees , the CFPB has released a proposed rule with “ request for comment on junk fees , a research report , and an advance notice of proposed rulemaking ”. Here are some of the proposed changes , and how those changes could affect financial institutions .
Lowering the Immunity Provision Dollar Amount
In 2010 , a vote by the Federal Reserve Board of Governors implemented the original “ reasonable and proportional ” language into the CARD Act . This language was implemented to include an “ immunity provision ” for credit card issuers so credit card late fees could increase over time in proportion to the cost to recoup late collections . This provision was also subject to annual inflation adjustments .
As of 2022 , this provision has raised the limits to $ 30 for the first late payment , and $ 41 for each subsequent late payment within six billing cycles . This , according to the CFPB , is five factors higher than what the estimated associated collection costs would require .
The Federal Reserve Board of Governors no longer has authority to adjust the CARD Act provisions . Instead , Congress has opted to pass that authority to the CFPB . There is a fear by the CFPB that if inflation continues
to rise , so will credit card late fees , as many credit card issuers will take advantage of the immunity provision to further raise costs to increase revenue . The CFPB is using the “ factor of five ” calculation in tandem with the current highest cost as part of the basis for the proposed rule . The proposed rule would lower the general dollar amount of late fees to $ 8 .
The rule would allow for exceptions if the credit card issuer could prove a higher fee is necessary to cover any incurred collection costs which are not covered by the $ 8 .
For consumers , this change would most likely mean late fees would be capped at $ 8 , potentially saving consumers $ 9 billion a year . For credit card issuers , this would probably effectively discontinue the raising of late fees .
Eliminating the Automatic Annual Inflation Adjustment
Previously , many credit card issuers have relied on the “ safe harbor ” provision annually adjusting to charge the
10