Will CFPB’s $8 cap on credit card late fees encourage late payments?

On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule capping credit card late payment fees at $8 for the biggest card issuers after inviting public comment on the matter last year. According to the consumer protection agency, the move is an effort to rein in “excessive” credit card 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,” Rohit Chopra, the CFPB’s director, said in a statement. “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.”

The rule will apply to the largest card issuers, which, according to the regulatory agency, have more than a million card accounts open and account for more than 95 percent of outstanding card balances. Smaller issuers tend to charge lower fees, the CFPB notes.

The CFPB said that, in 2022, late fees accounted for more than 10 percent of the $130 billion issuers charged customers on credit card interest payments and fees. As a result, the agency expects that the rule going into effect could save American families more than $10 billion a year by bringing down late fees to $8 from the $32 that’s typically charged currently.

While the CFPB expects the law to go into effect 60 days after it is published in the Federal Register, there is some talk of litigation against the agency to prevent the law from being implemented. Therefore, it is currently not clear if or when the rule will actually take effect — or when consumers will see relief from high late fees.  

Late charges are not in line with collection costs

Currently, credit card late fees are capped at $30 for a first late payment and $41 for a second late payment within the next six credit card billing cycles. Issuers can charge higher late fee payments if they can justify that their late payment collection expenses merit higher late fee charges.

In line with the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009, the Federal Reserve Board of Governors issued a regulation clarifying that card issuers were required to keep late fees in line with the costs they incur because of late payments. At that time, issuers could charge up to $25 for a first late payment and $35 for any subsequent late payments. These amounts have been adjusted for inflation annually to arrive at today’s cap of $30 and $41 on late fee payments. At the same time, card issuers have benefited from lower costs as they have moved to digital collection processes.

According to the CFPB, “many issuers hiked their late fees in lockstep each year without evidence of increased costs.” Considering this, the CFPB’s new rule will also eliminate the automatic annual inflation adjustment allowance. Instead, the regulatory agency will “monitor market conditions” annually and decide whether to raise the $8 safe harbor, or base rate, cap. Bigger card issuers can still charge a higher credit card late fee if they are able to justify it based on their costs. 

Banking industry says late fee cap will raise cost of credit

The banking industry is opposed to the CFPB rule and says that the move will end up raising the cost of credit for all consumers as banks seek to recoup costs that lower late fees don’t cover.

In a media statement, Rob Nichols, president of the American Bankers Association (ABA), a banking industry trade group, said that the CFPB’s “misguided decision to cap credit card late fees at a level far below banks’ actual costs” will cause card issuers to cut credit lines, toughen standards for new accounts and raise interest rates for all consumers, including for those who pay on time.”

He added, “Just days before the State of the Union, this supposedly independent agency is clearly choosing to put politics over sound public policy.”

Consumer Bankers Association (CBA), another banking industry trade group also weighed in against the rule. In a media statement, Lindsey Johnson, CBA’s president and CEO, said that as credit card interest rates rise, “this final rule will benefit a small minority of frequent late-payers by offsetting the costs of their late payments by increasing costs amongst the 74 percent of cardholders that pay their bills on time.”

Johnson also added, “The CFPB has skipped important legal requirements in its haste to finalize the rulemaking, raising concerns about the sufficiency of the rulemaking process under the Administrative Procedures Act.”

Is the CFPB inviting litigation and reducing market transparency?

David Gossett, a partner with the law firm of Davis Wright Tremaine (who previously served as the CFPB’s initial assistant general counsel for litigation) said in an email that he expects a lawsuit to challenge the agency’s rule on both procedural and substantive bases. On procedural grounds, the data the CFPB used to support the rulemaking is incomplete and secret, according to Gossett.

Gossett added, “Substantively, the agency excludes relevant expenses and costs from its calculation of the appropriate level of late fees; largely ignores the deterrent effect of late fees; and is based on the fallacy that late fees are a type of ‘junk fee’ and thus should be part of President Biden’s war against junk fees.”

James Mann, another Davis Wright Tremaine partner, noted in the same email that if the big cuts to the safe harbor late fees cause issuers to set different late fees that are higher than the safe harbor, that will make it difficult for consumers to comparison shop.

Also, according to Mann, the rule, as written, does away with an issuer’s right to recover costs beyond the safe harbor amount since it doesn’t allow it to recover collection charges incurred once a debt is charged off. As a result, Mann said, “The Rule encourages issuers to price transparently but also envisions that issuers will raise their APRs. This makes no sense since raising the APR to compensate for late-payment costs along with receivables funding costs actually reduces transparency.”

Consumer advocates point to savings

Consumer advocate groups, however, lauded the new rule for helping consumers save money. According to Chi Chi Wu, senior attorney at the National Consumer Law Center (NCLC), in a press release issued by the organization, “The CFPB’s credit card late fee rule will help the balance sheets of millions of households stretched thin by record-high housing costs and other expenses.”

Further, Ira Rheingold, executive director of the National Association of Consumer Advocates (NACA), was quoted in a press release by the agency as saying that, “The $8 cap on allowed late fees not only relieves American families from burdensome charges, it also brings credit card practices back in line with the statutory requirements of longstanding federal laws.”

Other deterrents to late payments

Considering that the new rule would substantially lower credit card late fees, some argue that it provides an incentive for consumers to be tardy with their card payments.

The CFPB, however, expects the rule to create an incentive for card issuers to encourage consumers to pay on time, since late fees will not be a source of income for them.

“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.”

— According to CFPB

Given the many downsides to late payments, consumers should always prioritize making their card payments on time. Even if the idea of a smaller late fee makes a late payment seem less daunting, being late on a payment could lead to other significant negative effects, such as higher interest rate payments and reduced access to credit.

The bottom line

The CFPB has finalized a rule it proposed last year and will cap credit card late fees for the largest card issuers at $8. According to the agency, these issuers are profiting from late fees that do not reflect their actual costs incurred as a result of late payments. Issuers can still charge a late fee that is higher than the $8 cap, but they will have to justify it based on their costs. The new rule also doesn’t allow issuers to automatically adjust their late fees annually, based on inflation.

Banking groups have opposed the cap, saying that it will raise the cost of credit for all consumers, while consumer advocates see it as a measure that will save consumers money. While the reduced late fee could mean there is less incentive for consumers to pay on time, late payments could cause you to pay higher interest rates and reduce your access to credit. That’s why you should always aim to make your credit card payments on time, regardless of any late fee you might pay.