Following this announcement, the Consumer Financial Protection Bureau (CFPB) has finalised the rule that cut excessive credit card late fees, by closing a loophole that was exploited by large card issuers. The new regulation is expected to curb fees that usually cost American families more the USD 14 billion a year.
According to the official press release, CFPB estimates that US-based families will save more than USD 10 billion in late fees per year once the final rule goes into effect, while the process will take place by reducing the typical fee from USD 32 to USD 8, as this sum will be sufficient for larger credit card issuers to cover collection costs that are incurred as a result of late transactions. This is set to be an average savings of USD 220 per year for more than 43 million individuals who are charged late fees.
Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), as it was concerned that credit card companies were building a business model based on penalties, bait-and-switch tactics, and fee harvesting. Following this decision, the law banned credit card companies from charging excessive penalty fees, while focusing on the process of establishing cleared disclosures and customer protection tactics.
In 2010, the Federal Reserve Board of Governors voted to issue a new regulation that implemented the CARD Act. This made clear that banks and financial institutions could only charge fees that recover the costs associated with late payment. The regulation included an immunity provision that enabled credit card firms to sidestep accountability in the case where they charged no more than USD 25 for the first late payment, and USD 35 for subsequent late payments, with both sums to be adjusted for inflation each year.
After making a detailed review of market data related to the 2010 immunity provision, the CFPB’s final rule adopts an overall lower threshold of USD 8, while also ending automatic inflation adjustments for that amount for enterprises and issuers who have 1 million or more open accounts.
The Consumer Financial Protection Bureau’s final rule applies to the larger credit card issuers, which account for more than 95% of total outstanding credit card balances. The institution’s data also shows that smaller issuers tend to charge lower rates and fees to their customers, while the vast majority of the larger issuers charge close to the overall maximum allowable late fee amount.
In addition, the new rule is expected to end abuse of the automatic annual inflation adjustment and requires credit card issuers to provide the needed proof that the higher fee is necessary in order to cover their actual collection costs. However, the regulation does not change the credit card issuer’s ability to reduce credit lines, raise interest rates, or take other actions in order to deter customers from playing late. Moreover, it is expected to increase the desire for credit card companies to facilitate on-time payments, since it is set to lower incentives that build a business model on late fees.
The final rule represents a part of a strategy made by CFPB to address the problems and challenges present in the market, while also fostering competition in the USD 1 trillion credit card industry. The institution will continue to work in order to optimise the manner in which clients find and benefit from lower interest rates, as users paid a record USD 130 billion in credit card interest and fees in 2022, and the average cardholder carries an overall balance of USD 5.000.
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