As Richard and Allison posted, the CFPB has proposed a new rule limiting the credit card late fee safe harbor to $8. And as is perfectly predictable, banks are angry about facing a restriction on late fee revenue. I want to comment on their arguments against the proposed rule.
First some background: the Credit CARD Act of 2009 provided that credit card late fees must be “reasonable and proportional.” It also gave the Fed–then in charge of issuing the regulations that implement the CARD Act–the power to set a safe harbor fee. The Fed did so, and when the CFPB inherited the regulations, it also inherited the safe harbor. The safe harbor is currently $30 for a first violation, and $41 for a second violation. Now the Bureau is proposing to reduce that to $8.
One argument the industry makes against the proposal is that, in Consumer Bankers Association’s President and CEO Lindsey Johnson words “banks are required by law to provide clear and conspicuous disclosures.” Well, yeah, they are, but a study I conducted with Nahal Heydari found that about a third of consumers couldn’t understand the late fee disclosure on their monthly statement. And when we asked consumers which of two credit cards charged a lower late fee, more than a quarter of the respondents attempting to compare on their smartphones two different credit card Schumer Boxes (the disclosure in credit card applications) got it wrong. That matters because consumers increasingly apply for loans on their smartphones (as Lindsey Johnson’s predecessor, Richard Hunt has said, for many people, [the iPhone] is their bank. . . .”). And don’t get me started on how many people ignore disclosures. Anyway, Congress decided when it passed the CARD Act that disclosures are just not enough when it came to late fees.
The industry also argues that reducing the safe harbor will increase credit costs. In other words, if banks charge less, consumers will pay more. I think their thinking is that banks will be forced to raise other costs to offset the reduced revenue from lower late fees. But remember that banks don’t need to use the safe harbor. They can charge more if they show that the amount they charge is “reasonable and proportional.” But ok, they might not want to prove that their higher amount is reasonable and proportional. So are they right?
That depends on whether the Bureau is right that $8 is a reasonable and proportional amount. If it isn’t, the industry can be counted on in their comments to demonstrate why it isn’t. But I’m guessing that the Bureau has a good basis for saying it is. If it’s right, then credit card issuers were not just covering their costs from late fees but also making excess profits when consumers made late payments. So now they won’t be able to make those excess profits. That shouldn’t oblige them to raise other fees in a competitive market. Unless, of course, the credit card market is not really competitive and the industry is making excess profits. The comments on this one are likely to be pretty interesting.