The Consumer Financial Protection Bureau (CFPB) is cracking down on credit card late fees, slashing the typical fee from $32 to $8.
The new rule, adopted on Tuesday, will save Americans more than $10 billion a year, according to the CFPB.
It also closes a 2010 loophole “exploited by large credit card giants” that allowed them to harvest billions of dollars in junk fees from American consumers, according to the consumer watchdog agency.
“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,” CFPB Director Rohit Chopra wrote in a statement.
The new rule is in line with the Credit Card Accountability and Disclosure (CARD) Act, which Congress passed in 2009 out of concern that credit card companies were building a business model on penalties and fee harvesting.
The CARD Act required late fees to be “reasonable and proportional” to the costs incurred by issuers to handle delinquent payments.
“Credit card companies collect billions of dollars in excessive late fees at the expense of economically vulnerable families every year,” according to a statement by Chuck Bell, advocacy program director at Consumer Reports.
“It’s simply unfair to impose a steep late fee penalty that far exceeds the credit card company’s costs, especially when someone is just a few hours or a couple of days late making their payment,” he wrote.
While consumer advocacy groups praised the move, it has sparked criticism from Congressional lawmakers who vow to fight its implementation.
GOP Senator Tim Scott, Ranking Member of the Senate Banking Committee, wrote a letter to the head of the CFPB, saying the new rule would ultimately hurt, not help, consumers.
According to the senator, if credit providers are not compensated by borrowers for their delinquent payments, other borrowers are forced to compensate. Ultimately, the lawmaker says, slashing late fees would raise the cost of credit for all Americans. This would particularly impact low and middle-income consumers with limited credit history and restrict their access to credit, bank accounts, and financial products.
“Shifting costs from a small subset of borrowers to the entire pool of borrowers raises the costs of borrowing from all, including those who made sacrifices to pay their bills on time,” Sen. Scott wrote.
He also accused the CFPB of “demonizing commonsense incentives” that promote financial responsibility, pointing out that late fees deter poor financial behavior.
The U.S. Chamber of Commerce plans to sue the CFPB over the rule, saying the agency has once again exceeded its authority.
“The agency’s final credit card late fee rule punishes Americans who pay their credit card bills on time by forcing them to pay for those who don’t,” according to a statement by Neil Bradley, executive vice president, chief policy officer, and head of strategic advocacy at the Chamber of Commerce.
The CFPB’s new rule is part of the Biden Administration’s broader initiative to limit so-called junk fees, which it says are often disguised as surcharges on credit cards and loans. However, opponents argue that late fees are always disclosed to consumers. Critics also say these fees differ from those hidden surcharges imposed by concert vendors and hotels, which the White House has also scrutinized.
During a press conference on Tuesday, the White House praised the CFPB’s crackdown, which it says will impact 45 million Americans who are charged late fees and save them an average of $220 every year.
The CFPB’s final rule applies to the largest credit card issuers with more than one million open accounts. It will go into effect 60 days after its official publication in the Federal Register.
