The CFPB's $8 Late Fee Rule (Part 1)

This week we’re taking a look at some breaking news in the regulatory space. Following a proposal that was initially surfaced by the CFPB (that we covered last year), the CFPB has now finalized a rule which says that card issuers can no longer charge you (the consumer) statement late fees that exceed $8 per period. Initially, when the CARD act passed in 2009 and was implemented in 2010, the idea was that as a starting point, late fees would be capped at $25 for the first late fee occurrence and $35 for all subsequent late occurrences. However, there was a provision (the “automatic inflation adjustment” to allow this amount to be adjusted with inflation and currently, the amounts sit at $30 and $41 (which most issuers are either right at or at most, one dollar under from my anecdotal surveying).

The CFPB felt that the inflation adjustment was being abused and decided to act, stating that this will apply to those issuers that have over 1 million or more open accounts. They state that this will impact companies that make up 95% of all outstanding credit card debt. If issuers feel they need to charge certain fees to cover their collection costs, they can request permission from the CFPB. The end. Or is it?

Some quick initial thoughts from this end:

• How many issuers are out there that have over 1 million accounts in circulation? Let’s keep in mind, there are a number of banks that do not issue cards directly but rather do it in partnership with or on behalf of other companies. You have BaaS banks, banks that issue on behalf of retailers (i.e. Department Stores National Bank), etc. The 1 million figure is going to be aggregated and considering DSNB’s dominance in the department store space, an entire industry could be disrupted. This is great, isn’t it? Retail customers having to pay less late fees? Well, that leads to the next point.
• Issuers will almost certainly raise prices in other areas to make up the difference. I did some napkin math and assessed the impact to five of the biggest issuers out there. Take a look:

• For at least three of the five issuers, it’s a non-negligible hit. And what will likely happen is changes to any of the following: a) APR/Interest Rates increasing b) Other fees i.e. cash advance, NSF, annual fees increasing c) Rewards programs getting cut to lower costs d) Elimination of late fee forgiveness or late fee waivers, which many issuers offer as an either advertised or unadvertised courtesy.
• This rule will almost certainly be used as an election season issue. It was touted as part of a press conference by the Biden Administration yesterday, and the ranking GOP member of the Banking committee (Sen. Tim Scott, who is being touted as a VP possibility for Trump), came out firing in response.
• As we love to do here, some thoughts from the people this is touted as helping - regular people - reactions from Reddit:

• So folks even in the “poverty finance” spectrum can see what is the final point not mentioned previously about impact on consumers - issuers will tighten underwriting standards and there will be less access to credit across the board. Despite the touting of the economy being on fire, unemployment being low, and more, layoffs are still going strong, interest rates are still high, and it doesn’t quite feel like we’ve escaped a recession here in the U.S. This is the worst time for something like that to happen.

We’ll have more on this in an upcoming issue, as the CFPB released the final rule in a 338-page behemoth. But for now I wanted to put this out from our perspective.

Announcement

As most of you who have followed me or know me for a while will realize, Ramadan starts next week. As I like to do every year, I will take some time away from the newsletter to focus in on the “bare essentials” of life to give the holy month my full concentration.

However, with that said, just as we did last year, we are excited to announce that the newsletter will be supplemented by some amazing guest writers. This year, we’ve got folks with compliance expertise in the world of model risk, blockchain, banking/payments, and more. We are expecting five guest writers to join the fold in the coming weeks, with the first “guest appearance” dropping next Wednesday, March 13. And as always, we’ll continue to put out the Fintech Events Roundup every week.

Before all that, one more major announcement though coming this weekend. Stay tuned to see what it is!