In 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). The CARD Act created a range of protections for consumers by prohibiting excessive fees, coercive contract clauses, and other practices deemed to be suspicious. A year after its enactment, the Federal Reserve Board of Governors (the Fed) implemented a provision of the CARD Act requiring penalties to be “reasonable and proportional to the omission or violation.” The Fed’s 2010 provision also prohibited financial institutions from generating more revenue from late fees than was necessary to cover the cost of late payments. The rule, however, included a provision that allowed credit card issuers to avoid enforcement scrutiny if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits. The Fed’s provision allows these fees to rise by inflation.
Under the Consumer Financial Protection Act, Congress transferred the authority to adjust the late fee provisions from the Fed to the Consumer Financial Protection Bureau (CFPB). The CFPB recently published an Advance Notice of Proposed Rulemaking (Advance Notice) to review the Fed’s 2010 immunity provision for excessive late fees that allows credit card companies to escape enforcement scrutiny. The Advance Notice was issued in an effort to reduce the $12 billion assessed in late credit card fees that financial institutions collect each year from consumers. These fees make up approximately 10 percent of the total costs of credit cards to consumers.
“Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” said CFPB Director Rohit Chopra. As explained by Chopra,“[t]his effort is particularly timely since current rules might give companies the incentive to impose big hikes based on inflation.”
The CFPB’s Advance Notice encouraged input from card issuers, consumer groups, and the public to comment on the following questions:
- How do credit card issuers set late fee amounts? How are the fees determined to be reasonable or proportionate, or at least related to the actual costs to the card issuer?
- How are the fees related to the statement balance?
- Are revenue goals a factor in determining late fees? How do these goals figure into profitability for the card issuers?
- What are card issuers’ costs and losses associated with late payments?
- Do late fees have a deterrent effect? Does the amount have a deterrent effect? Do card issuers impose other consequences other than late fees when payments are late?
- What methods are card issuers using to encourage timely payments, including autopay and notifications?
- How many calendar days after the due date do consumers make the late payment? For example, what percentage of accounts is less than 24 hours late versus 30 days late?
- For card issuers, what annual income comes from interest and fees? What are the annual expenses?
The CFPB will use the public’s input with regard to potential revisions to the CARD Act and the Truth in Lending Act.
Client Alert 2022-186