CFPB’s Rule on Credit Card Late Fees: Punishing Responsible Consumers

Bill Hulse
Senior Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce

Published

May 14, 2024

On May 10, the U.S. Chamber scored a major win for the business community against federal agencies’ micromanagement of business decisions. The Northern District of Texas granted the Chamber's motion for a preliminary injunction and stayed the Consumer Financial Protection Bureau's (CFPB) credit card late fees rule.

The U.S. Chamber of Commerce had previously filed a lawsuit on March 7 in the Northern District of Texas and sought a preliminary injunction to stop the Consumer Financial Protection Bureau (CFPB) from implementing a rule that punishes responsible credit card users who pay their bills on time.

Among other arguments, the U.S. Chamber and co-plaintiffs specifically are suing the CFPB for:

Violating the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 by preventing issuers from collecting reasonable and proportional late fees when cardholders don’t pay their bills on time;
Violating the Administrative Procedure Act (APA) by promulgating a final rule that is arbitrary and capricious, relying on secret data collected from only the largest banks for a different purpose and by a different agency; and
Issuing the rulemaking with funds drawn in violation of the U.S. Constitution’s Appropriations Clause.

Read the full complaint.

Background on the Rule

Americans benefit from a wide variety of credit cards from numerous financial services providers that let them find one that best suits their needs.

For their part, consumers understand the requirement to pay their credit card bills on time. According to a recent poll, 99% believe it is important to pay their credit card bill on time, with 82% making all their payments on time. Additionally, 96% know that not paying their bill on time can decrease their credit score, while 74% know that their bank charges a fee for late payments. And, by a 21-point margin, poll respondents believe that a decrease in credit card late fees will result in more people making late payments. This will not protect consumers.

A similar poll conducted by FGS Global found that 71% of credit card holders agree that late fees are necessary so credit card companies can cover the risks and costs of late payments.

However, the Consumer Financial Protection Bureau’s (CFPB) concerning new rule would alter credit card late fee regulations. The agency’s rule changes would mean higher costs for existing credit card users who pay their bills on time and fewer options for those looking for a new credit card.

The CFPB Admits the Rule Hurts Those Who Pay on Time

The CFPB’s rule changes would punish responsible consumers who pay their credit card bills on time by forcing them to subsidize the costs of those who don't. For its part, the agency admits as much by stating in its filing:

“Cardholders who never pay late will not benefit from the reduction in late fees and could pay more for their account if maintenance fees in their market segment rise in response - or if interest rates increase in response and these on-time cardholders carry a balance. Frequent late payers are likely to benefit monetarily from reduced late fees, even if higher interest rates or maintenance fees offset some of the benefits."

It gets worse. The CFPB’s rule goes so far as to have the audacity to describe consumers who pay their credit card bills as “sophisticated” and those who pay late as “naïve.” It is a curious choice of words, given the Bureau flatly admits that its rule would reward those who pay late and punish those who pay on time.

New Rules Mean Less Choice

In addition to higher costs, consumers should expect fewer credit card options and benefits, given the red tape the CFPB’s rules would impose. Faced with rising costs and increased complexity, credit card issuers would have no choice but to curtail offerings. The upshot is that credit card users should expect fewer benefits than they do today – the CFPB’s rule will likely cause a reduction in popular perks such as cashback rewards, discounts on groceries and gas, and travel perks with airline and hotel partners.

Americans are concerned that the CFPB’s rule to cap late fees could reduce credit card benefits or cause other fees to be increased. According to the same poll, when asked if capping late fees would cause credit card companies to increase other fees like annual fees, balance transfer fees, and cash advance fees, respondents said it is not a good tradeoff by 57% to 30%.

Similarly, when asked if capping late fees would cause credit card companies to eliminate or reduce benefits like cashback, discounts at restaurants, or airline miles, respondents said it was not a good tradeoff by 54% to 33%.

Credit card users are well aware that they incur late fees if they don’t pay their bills on time. The Truth in Lending Act requires that borrowers receive written disclosures from credit card issuers about important terms of credit – including late fees – before they open the account. The rules for how credit card fees should be disclosed are working.

Moreover, credit card issuers oftentimes provide disclosures and communications that are even more extensive than those required under the law because they want consumers to pay on time. Many credit card issuers even offer communications via email, text, and push notifications, as well as online and in-app banking capabilities that prominently display the consumer’s next payment due date. Issuers use these methods to maximize a consumer’s awareness of their payment due date and potential late fees.

If the Consumer Financial Protection Bureau wants to protect consumers, it shouldn’t raise costs for responsible consumers who pay on time. The rule is harmful and misguided, and the agency should withdraw it at once.