The Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission are issuing proposed rules on fees and unfortunately, both have missed the mark.
Today, AFSA responded to the FTC’s proposed rule on fees. The work the FTC does is crucial, but the proposed rule is a solution in search of a problem and fundamentally misunderstands how the consumer credit market operates.
While the pejorative term “junk fees” is assured to get headlines, the Truth in Lending Act (TILA) already requires disclosure of the fees referenced, negating the need for new regulatory provisions.
- The consumer protections created in TILA have been expanded through the Real Estate Settlement Procedures Act (RESPA), the Truth in Savings Act (TISA), and the Consumer Financial Protection Act of 2010 (CFPA). Collectively, these laws are a robust set of protections for consumers, as well as a competitive arena for financial institutions.
- The Biden Administration’s initiative and the FTC’s Advanced Notice of Proposed Rulemaking (ANPR) fail to distinguish between price and value. The latter is a personal and subjective matter. Consumers should be able to decide the value of additional benefits for their own situation. To paraphrase the renowned economist Milton Friedman, the free market works best for all members of society; it engenders prosperity and solves problems where other approaches fail.
- Any rule limiting businesses to lawfully provide consumers with benefits for an additional fee could negatively restrict competition. The ANPR fails to consider that many fees are transactional fees that result from customer choice and behavior, and for which the costs are clearly disclosed and avoidable by the consumer. If lenders are not compensated for costs, it not only increases the cost of credit across the board for customers that pay responsibly, but results in limiting the availability of credit to those same customers.
- The FTC must follow certain specific guidelines for trade rules that declare an act or practice unfair or deceptive. In this ANPR the FTC’s line of questioning shows that it is engaging in a fishing expedition, rather than clear and appropriate rulemaking.
The first eleven questions of the ANPR are asking “how widespread” the practice of fee misrepresentation is, instead of providing concrete examples of the existing problem they purportedly are trying to solve.
The Consumer Financial Protection Bureau is also proposing a rule targeting credit card late fees.
The CFPB’s proposed rule would limit late fees that qualify for immunity provisions to just $8 and cap late fees at 25% of the required minimum payment. The Bureau claims that both amounts are “reasonable and proportional to the costs incurred by issuers to handle late payments.”
Late fees of all types, while inconvenient, are an important part of a healthy consumer credit marketplace. Removing them would increase the cost of credit and decrease availability. The Bureau’s proposed rule leaves out the aspect of deterrence, a crucial goal of a late fee and something that is in the consumer’s best interest.
When consumers pay late, their credit scores drop, and they face an increase in the cost of future credit and a reduced ability to access credit. Late fees also help financial institutions manage the risk. If financial institutions are unable to price for risk, they will raise prices across the board, limit rewards programs, or limit credit availability.
None of the outcomes above is good for consumers, despite the CFPB’s catchy headlines.
AFSA plans to comment on the Bureau’s proposed rule.
February 8th, 2023 by Dan Bucherer
