WASHINGTON, D.C. – The Consumer Financial Protection Bureau (CFPB) finalized a rule today to cut excessive credit card late fees by closing a loophole exploited by large card issuers. The rule will curb fees that cost American families more than $14 billion a year. The CFPB estimates that American families will save more than $10 billion in late fees annually once the final rule goes into effect by reducing the typical fee from $32 to $8. This will be an average savings of $220 per year for the more than 45 million people who are charged late fees.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” said CFPB Director Rohit Chopra. “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.
Concerned that credit card companies were building a business model on penalties, fee harvesting, and bait-and-switch tactics, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The law banned credit card companies from charging excessive penalty fees and established clearer disclosures and consumer protections.
In 2010, the Federal Reserve Board of Governors voted to issue a regulation implementing the CARD Act, which made clear that banks could only charge fees that recover the bank’s costs associated with late payment. However, the rule included an immunity provision that allowed credit card companies to sidestep accountability if they charged no more than $25 for the first late payment, and $35 for subsequent late payments, with both amounts to be adjusted for inflation each year. Those amounts have ballooned to $30 and $41, even as credit card companies have moved to cheaper, digital business processes. Congress transferred authority for administering CARD Act rules from the Fed to the CFPB.
After a thorough review of market data related to the 2010 immunity provision, the CFPB’s final rule adopts a lower threshold of $8 and ends automatic inflation adjustments for that amount for issuers that have 1 million or more open accounts.
The CFPB has found that since 2010, issuers have generally been charging consumers more in credit card late fees each year—growing to over $14 billion in 2022, and representing more than 10 percent of the $130 billion issuers charged consumers in interest and fees. Late fees are layered on top of many other punitive measures credit card companies impose on consumers who miss payments, including extra interest charges, loss of their grace period, negative credit reporting, reductions in their credit limit, and a higher interest rate on future purchases. The average late fee for major issuers has steadily ticked up since the passage of the CARD Act, going from $23 at the end of 2010 to $32 in 2022. For some large credit card companies, late fees are a major driver of their profit model.
The CFPB’s final rule applies to the largest credit card issuers, those with more than 1 million open accounts. These companies account for more than 95% of total outstanding credit card balances. CFPB data shows that smaller issuers tend to charge lower rates and fees to their borrowers, while the vast majority of the largest issuers charge close to the maximum allowable late fee amount. Today’s final rule:
- Lowers the immunity provision dollar amount for late fees to $8: Based on data analyzed by the CFPB, a late fee of $8 would be sufficient for larger card issuers, on average, to cover collection costs incurred as a result of late payments.
- Ends abuse of the automatic annual inflation adjustment: The CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary.
- Requires credit card issuers to show their math: Larger card issuers will be able to charge fees above the threshold so long as they can prove the higher fee is necessary to cover their actual collection costs.
The rule does not change the credit card issuer’s ability to raise interest rates, reduce credit lines, and take other actions to deter consumers from paying late. In fact, the rule would increase the desire for credit card companies to facilitate on-time payment, since it would lower incentives to build a business model on late fees.
CFPB’s Credit Card Efforts
Today’s final rule is part of a continued effort by the CFPB to address problems and foster competition in the $1 trillion credit card market. The CFPB is working to help consumers find lower interest rates, as consumers paid a record-high $130 billion in credit card interest and fees in 2022, and the average cardholder carries a balance of over $5,000.
A recent CFPB report found that increases in APR margin charged by the largest issuers generated around $25 billion in additional interest revenue in 2023. Data submitted to the CFPB by credit card companies shows that small banks and credit unions offer significantly lower rates, about 8-10 percentage points lower than the largest 25 credit card companies. Last week, the CFPB issued guidance to rein in rigged comparison-shopping results for credit cards and other products, and is developing a consumer-facing tool that, once finished, will give people looking for a new credit card an unbiased way to compare credit card terms and interest rates.
The CFPB has also taken enforcement action against illegal conduct by credit card companies. Recent actions include ordering Bank of America to pay a $30 million fine and repay tens of millions of dollars to consumers for illegal conduct including withholding credit card reward bonuses the company explicitly promised and opening unauthorized accounts. The CFPB also ordered Citizens Bank to pay a $9 million fine for failing to give refunds to consumers who reported fraud or billing errors, and ordered Citibank to pay $25.9 million for intentional, illegal discrimination against credit card applicants the bank identified as Armenian American.
Read the text of today’s final rule.
The effective date of the final rule will be 60 days after publication of the rule in the Federal Register.
Consumers can submit complaints about financial products or services by visiting the CFPB’s website or by calling (855) 411-CFPB (2372).
Employees of companies who they believe their company has violated federal consumer financial laws are encouraged to send information about what they know to whistleblower@cfpb.gov.
The Consumer Financial Protection Bureau is a 21st century agency that implements and enforces Federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. For more information, visit www.consumerfinance.gov.
