On April 17, the Consumer Bankers Association (CBA) issued a news release responding to the CFPB’s proposal to lower the credit card late fee safe harbor amount to $8. The CFPB claims that, even though Congress banned excessive credit card late fees, credit card companies have exploited a regulatory loophole “to escape scrutiny for charging an otherwise illegal junk fee.” As the CBA points out, although this proposal may seem appealing to consumers at first glance, it could have significant long-term negative consequences for consumers.
The CBA first challenges the perception that late fees are “junk fees” with the facts that not only do credit card late fees serve as a necessary cost of providing financial products and services but also that a majority of consumers agree to their legitimacy. The CBA next addresses the myth that reducing credit card late fees would help consumers who make timely payments by observing that such a reduction in fees may force banks to adjust their business models to mitigate the risk associated with more missed payments. An adjustment of this nature could lead to lower credit lines, tighter standards for new accounts, increased APRs, and even the termination of credit card rewards programs.
The CBA also confronts the belief that the proposal would assist consumers who miss payments by noting that reducing late fees would instead remove an important motivation for consumers to make timely credit card payments. As the CBA highlights, the CFPB has acknowledged that lowering the late fee may remove the deterrent effect of the fees and cause more consumers to pay late, which could in turn have a drastic effect on a consumer’s credit score. The CBA further dismisses the argument that banks profit when consumers pay late by observing that banks actually prefer consumers to pay on time due to the costs associated with pursuing defaulted consumer accounts. In fact, banks have invested heavily in technology and methods to encourage on-time consumer payments, such as permitting payments online or via a mobile app; issuing proactive payment reminders to customers via email or a mobile app; and by offering financial education resources to inform consumers on the importance of and improving credit scores.
Finally, the CBA asserts that instead of increasing competition, reducing late fees could have the opposite effect by forcing some banks out of the market as well as creating barriers for the entry of new banks into the market. For these reasons, it is the CBA’s view that the cumulative effect of the CFPB’s proposal on the banking industry, credit card holders and other consumers could be very negative and, although the proposal is well intended, it is misguided.