AFSA Comments on CFPB’s Late Fees Rule
Today, AFSA commented on the CFPB’s proposal to radically reduce the safe harbor dollar amount for late fees. AFSA asked the CFPB not to proceed with rulemaking, as the proposal fundamentally misunderstands the role of late fees, would negatively impact customers and the market, ignores a bevy of consumer protections already in place, and violates several rulemaking requirements.
- Mischaracterization of Late Fees: The proposed rule mischaracterizes late fees as a profit maker, referencing “revenue,” on average three times every five pages. Contrary to the CFPB’s statements, late fees are crucial to managing credit risk and maintaining a safe and sound credit system. The CFPB ignores that late fees are used to cover the significant costs of notifying customers of delinquency, processing late payments, and incurring the opportunity cost of the lost use of the delinquent payment. Late fees help to defray the cost of extraordinary collection efforts made to help customers avoid the costs and implications of becoming further delinquent, as well as to potentially mitigate inevitable losses associated with riskier borrowers.
- Negative Individual and Market-wide Effects of the Proposed Rule: The CFPB also fails to adequately address in the proposed rule, or to have adequately researched in advance of the proposed rule, any quantification of the deterrent effect on consumer behavior. The proposed rule decreases the incentive for consumers to make timely payments by making the immediate cost of not paying on time negligible in the short term. If a consumer feels that there is minimal penalty for being late, they are more likely to skip a payment due, which may lead to longer-term consequences, such as an increase in accrued finance charges on existing credit and a decrease in credit score – consequences which are less immediate and likely less to be understood by consumers.
- Existing Consumer Protection Practices and Regulations: Previous legislation has already enhanced consumer protection. The CARD Act has significantly impacted limitations on credit card fees. This bipartisan legislation was signed into law by former President Obama, and until recently has received praise from the CFPB and both sides of the aisle. In fact, the CFPB’s own recent report on the credit card market noted that, “CARD Act pricing restrictions have resulted in a substantial decline in overall fee costs to consumers since the pre-CARD Act period.” As well, some aspects of the proposed rule actually contradict the Truth in Lending Act (TILA). The additional, 15-day “courtesy period” under consideration in this proposed rule impermissibly conflicts with TILA’s provisions that permit card issuers to treat payments not received by the due date as late immediately.
- Violation of Rulemaking Requirements: The CFPB has violated or skirted several rulemaking and regulatory requirements during this process, including the Administrative Procedure Act, Dodd-Frank, the CARD Act, the Small Business and Regulatory Enforcement Fairness Act, and the Truth in Lending Act.
The CFPB is regulating late fees for credit cards because it has specific authority to do so. However, it is clear that the CFPB is looking at late fees in other industries as well.
May 3rd, 2023 by gmcgurn@afsamail.org
