Credit card late fee cap going into effect May 14 – or is it?

As we reported previously, the Consumer Financial Protection Bureau, on March 5, 2024, finalized a rule to reduce typical credit card late fees from $32 to $8, a change aimed at relieving American families who pay over $14 billion annually in such penalties. This rule, effective May 14, 2024, targets the largest issuers, representing over 95 percent of the credit card market. However, significant resistance from financial institutions and the U.S. Chamber of Commerce has put the rule's implementation into question.

The CFPB's decision is grounded in findings that major credit card companies have increasingly relied on late fees as a significant profit driver, despite reduced operational costs due to digital advancements. CFPB Director Rohit Chopra emphasized that the rule would correct a longstanding exploitation of consumers and ensure fees are more aligned with actual collection costs.

Strong opposition

However, this regulatory shift sparked strong opposition from industry giants. The U.S. Chamber of Commerce filed a lawsuit challenging the rule on March 7, arguing it unfairly burdens consumers who pay on time by redistributing costs to them, potentially limiting access to affordable credit. Neil Bradley, the organization's executive vice president and chief policy officer, stated, "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."

Similarly, the American Bankers Association vehemently opposed the rule. ABA President and CEO Rob Nichols highlighted that capping fees well below the actual costs would force issuers to tighten credit lines, raise APRs for all consumers, and potentially lead to more late payments and reduced credit access, especially for vulnerable groups. Nichols accused the CFPB of disregarding industry data and pursuing a politically motivated agenda.

The banking industry, represented by both the ABA and the Consumer Bankers Association, predicts that the lower fee cap will compel banks to recoup lost revenue by raising the cost of credit overall. Lindsey Johnson, CBA president, pointed out that the rule would disproportionately benefit habitual late-payers at the expense of the 74 percent of cardholders who pay on time. Legal concerns were also raised about the CFPB's rulemaking process, with allegations of procedural shortcuts and insufficient transparency.

A need to balance consumer, FI interests

In contrast, consumer advocacy groups have celebrated the rule as a victory for household finances. Chi Chi Wu of the National Consumer Law Center and Ira Rheingold of the National Association of Consumer Advocates emphasized the rule's alignment with federal laws and its potential to alleviate financial pressures for millions.

With the rule's effective date nearing, WalletHub released a statement indicating that while the $8 cap could ease burdens for late payers, it might lead to higher interest rates and other fees to compensate for lost revenue. John Kiernan, WalletHub Editor, cautioned that despite the reduced fees, late payments would still harm consumers' credit scores.

The rule's future remains uncertain with impending legal challenges and a pending decision in the U.S. Chamber of Commerce's lawsuit seeking an injunction to stop the rule's implementation. As the industry braces for May 14, all eyes are on the courts to determine whether these reduced late fees will become a permanent fixture in the credit card landscape or if further adjustments will be necessary to balance the interests of consumers and financial institutions.

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