by Jeff Sovern
The CFPB has lately been up in arms over credit card late fees. Late fees and many other fees are troubling because it is likely that consumers don't think about them when choosing their credit cards. Classical economics presupposes that consumers will make optimal decisions if they know what prices they will pay, but if consumer ignore late fees, lenders can charge more for those fees and make excessive profits from them. To be sure, the late fee disclosure appears in the Schumer Box, the disclosure required for credit card solicitations, but probably many credit card applicants focus on other terms, like the APR and annual fee. Consumers may ignore the late fee because, perhaps blinded by the optimism bias, they anticipate making all their payments on time and also because they can consider only so much information at a time when making decisions. Then they miss a payment and get zapped by the late fee that they overlooked.
Because the market doesn't protect consumers from excessive late fees, Congress decided to step in. It enacted the Credit CARD Act, which provides that late fees have to be "reasonable and proportional to such omission or violation." Congress also authorized the CFPB, in consultation with other financial regulators, to issue a regulation providing a safe harbor late fee. Late fees at or below that amount are presumptively reasonable and proportional. Under the CFPB regulation implementing that section, as adjusted for inflation, card issuers can charge a late fee of up to $30 for the first late payment and $41 for subsequent late payments within the next half dozen billing cycles.
But that number now seems higher than it should be. According to a recent CFPB report, nearly all large credit card issuers charge the maximum late fee, but many smaller issuers charge late fees. That suggests that $30 is more than needed for an issuer to cover its costs and make a reasonable profit when consumers make late payments. Indeed, the most common late fee charge is only $25. The Bureau Report also notes that some credit card issuers, including Citibank, offer cards with no late fees. All this implies that larger issuers other than Citibank are using late fees as a profit source in a way that smaller lenders are not. If smaller issuers find $25 sufficient, then why is it reasonable for larger issuers–who are likely to be the most efficient in their operations–to charge larger amounts? Consequently, the Bureau could reduce the existing ceiling and still have it be reasonable. I think it should.
According to a recent Roll Call article by Steven Harras, Experts debate if CFPB credit card late fees report presages rule changes (I can't find a link but it's available on WestLaw), Ballard Spahr's Alan Kaplinsky thinks that CFPB Director Rohit Chopra will not act on this and is only jawboning. "I don't think he is a fan of rulemaking," Kaplinsky said of Chopra. "It takes too long for him." [Disclosure: the article also reports my prediction that the Bureau will adjust the ceiling] Jawboning may work in the short term with some issuers but it isn't sufficient for the long term and is unlikely to persuade all credit card issuers. When Director Chopra leaves the Bureau, his successors may not find this matter salient. Credit card issuers may then raise their late fees to the maximum allowed. And it isn't a sufficient answer that credit card issuers will compete by offering lower late fees. As noted above, Congress has already rejected that position for good reason. In sum, the Bureau should move to amend the regulation to lower the late fee safe harbor numbers.