CFPB Caps Late Fees on Credit Cards:
- Ruling by CFPB:
- The Consumer Financial Protection Bureau (CFPB) has finalized a ruling that limits late fees charged by credit card issuers with over one million open accounts in the US to a maximum of $8. This marks a significant reduction from the previous cap of $32.
- Objective of the Ruling:
- The CFPB aims to save account holders more than $14 billion annually and eliminate business models based on “penalties, fee harvesting, and bait-and-switch tactics.”
- Response to CARD Act Flaws:
- The ruling addresses shortcomings in the Credit Card Accountability Responsibility and Disclosure (CARD) Act, which allowed issuers to charge late fees higher than the actual cost by exploiting a provision in the law.
- Historical Late Fees:
- Late fees allowed under the CARD Act had risen with inflation, reaching $30 for the first late payment and $41 for subsequent late payments. The average late fee was $32 according to 2022 CFPB data.
- Additional Revenue for Issuers:
- Issuers had generated additional revenue of $130 billion by accompanying late fees with extra charges on interest, reduced credit limits, higher interest rates, and negative impacts on credit reporting.
- New Ruling Details:
- The $8 cap will now be a flat rate and not tied to inflation. Issuers exceeding this limit will need to justify their charges. However, the ruling does not impact issuers’ ability to raise interest rates, reduce credit lines, or implement other measures to deter late payments.
- Director’s Statement:
- Rohit Chopra, Director of the CFPB, emphasizes that the new rule ends the practice of credit card companies exploiting a loophole to extract billions in fees from consumers, providing relief to borrowers.
- Similar Rulings by CFPB:
- In January, the CFPB proposed a ruling against financial institutions and certain peer-to-peer payment companies charging fees for non-sufficient funds, continuing its efforts to protect consumers from excessive fees.
