Trade Groups: Removing Late Fee “Safe Harbor” Could Harm Consumers
Late fees for financial products, when charged appropriately, encourage timely payment and good financial management, the ABA and three other financial trade groups told CFPB in response to a request information this week. Conversely, setting late fees too low means that “consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced access to credit and lower costs. higher credit ratings,” they added.
Under credit card law, credit card late fees must be “reasonable and proportionate” to the costs incurred by the issuer due to late payment, unless the bank has rather based on a safety limit set by regulators. In 2010, the Federal Reserve approved CARD Act regulations that set fees at $30 for a late payment and $41 for each subsequent late payment over the next six billing cycles, subject to an annual inflation adjustment. In subsequent years, the CFPB adjusted the safe harbor amount based on annual changes in the weighted consumer price index.
The groups pointed out that reducing or eliminating this safe harbor could ultimately hurt consumers and would have particularly negative effects on smaller institutions with less than $750 million in assets. “[I]If late fees are not set at an appropriate amount to cover issuers’ costs, effectively encourage on-time payments, and mitigate the risks associated with late payments, issuers may need to rebalance the risks to their credit portfolios by other means,” they said. “This could include reducing lines of credit, tightening standards for new accounts, and increasing annual percentage rates and fees for all cardholders, including those who pay on time.”
The associations recommended that the CFPB retain the current rule, but if the agency proceeds to develop additional rules regarding credit card charges, they urged it to ensure that any proposed authorized charges take into account costs incurred by issuers related to late payments, the deterrent effect of late fees and cardholder conduct in compliance with the Truth in Lending Act, the associations said.