Credit Unions, Banks Decry $8 Credit Card Late Fee Limit

Credit unions joined with banks to decry a CFPB rule finalized Tuesday that limits credit card late fees to $8 for big banks and Navy Federal Credit Union.

CFPB Director Rohit Chopra said the new rule will lower typical late fees from $32 to $8 in most cases, saving American families $10 billion a year, or an average of $220 per year for the more than 45 million people who are charged late fees.

The rule applies to credit card issuers with more than one million card accounts.

The threshold means the new rule now only applies to the nation’s largest credit union: Navy Federal of Vienna, Va. ($170.8 billion in assets, 13.3 million members as of Dec. 31). As of Sept. 30, Navy Federal had 4.4 million open credit card accounts, followed by PenFed Credit Union of Tysons, Va. ($34.8 billion in assets, 2.9 million members) with 905,254 cards and Mountain America Federal Credit Union of Salt Lake City ($18.4 billion in assets, 1.2 million members) with 385,917 cards.

Chopra said the one million threshold applies to issuers who account for more than 95% of the total outstanding balances.

“Smaller banks and credit unions will not be affected,” Chopra said. “We did not find evidence these smaller companies are employing the fee churning business model, and in fact they generally charge much lower fees overall.”

However, America’s Credit Unions President/CEO Jim Nussle said it will hurt consumers by potentially trapping “millions of consumers in a cycle of debt instead of fulfilling their intended purpose of protection.”

“An $8 late fee, approximately the cost of a Big Mac and a large Coke, does nothing to protect the issuer and throws consumer accountability to the wayside,” Nussle said.

Rob Nichols, president/CEO of the American Bankers Association, also emphasized how lower fees will hurt consumers.

“Today’s flawed final rule will not only reduce competition and increase the cost of credit, but will also result in more late payments, higher debt, lower credit scores and reduced credit access for those who need it most,” Nichols said. “In creating today’s final rule, the CFPB relied on flawed assumptions and a mischaracterization of the important role late fees play in promoting responsible consumer behavior.”

But Chi Chi Wu, senior attorney at the National Consumer Law Center, said consumers are better off keeping “their hard-earned dollars in their pockets instead of forfeiting them to huge corporations.”

“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,” she said.

Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), banning credit card companies from charging excessive penalty fees and establishing clearer disclosures and consumer protections.

Federal Reserve Board of Governors in 2010 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 allowed credit card companies to charge 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.

The CFPB, which Congress later appointed to administer the rules, said the fees have risen while credit card companies have moved to cheaper, digital business processes. 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% of the $130 billion issuers charged consumers in interest and fees.

The CFPB said it monitors market conditions and adjusts the $8 late fee immunity threshold as necessary. And the new rule also allows any issuer to charge more than $8 million if they can prove the higher amount 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,” the CFPB said.