The Biden administration has finalized a new rule aimed at capping credit card late fees at $8, a decision that is anticipated to face strong opposition from industry leaders. The Consumer Financial Protection Bureau (CFPB) predicts that this regulation will result in over $10 billion in annual savings for American families by reducing the typical late fee of $32. This change is expected to benefit approximately 45 million individuals who are charged late fees, providing an average yearly savings of around $220 per person.
The rule specifically applies to the largest credit card issuers in the country, covering those with over 1 million active accounts. These companies account for about 95% of the total outstanding credit card balances. While smaller credit card issuers generally charge lower rates and fees to their borrowers, the CFPB has noted that larger issuers tend to charge close to the maximum allowable late fee amount.
This crackdown on late fees is part of a broader effort by the Biden administration to address what are often referred to as “junk fees.” These fees, which can be hidden surcharges, are imposed on consumers for various services, including credit cards, loans, and hotel rooms. Earlier this year, federal regulators proposed significant reductions in overdraft fees charged by banks. The White House is also striving to alleviate the financial burden on voters as they continue to grapple with persistently high inflation, which has driven up the cost of essential goods and services.
Although inflation has decreased significantly from its peak of 9.1% in June 2022, it remains well above the Federal Reserve’s target of 2%. Compared to January 2021, before the onset of the inflation crisis, prices have risen by a staggering 17.6%.
Rohit Chopra, the director of the CFPB, asserted, “For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers. Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”
However, major financial institutions have criticized the new rule, warning that it could have adverse effects on consumers. They argue that the regulation may reduce competition, increase the cost of credit, lead to more late payments, and limit credit access for individuals who need it the most. Rob Nichols, the president and CEO of the American Bankers Association, stated, “The Bureau’s misguided decision to cap credit card late fees at a level far below banks’ actual costs will force card issuers to reduce credit lines, tighten standards for new accounts, and raise APRs for all consumers – even those who pay on time.”
The American Bankers Association has pledged to fight against what they deem a “harmful consumer policy” by the CFPB, while the Chamber of Commerce plans to file a lawsuit against the bureau. The implications of this rule and the ensuing legal battles will undoubtedly shape the future landscape of credit card late fees and the overall cost of credit for American consumers.
