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By Kathryn Rock, Alexandra Sawyer
On June 22, 2022, the Consumer Financial Protection Bureau (CFPB) issued an advance notice of proposed rulemaking (the notice) seeking public insight pertaining to current industry practices revolving around credit card fees resulting from past due payments, under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) and Regulation Z.
The CFPB looks toward credit card issuers, consumer groups, and the public to better understand how late fees are determined industrywide and to what extent those fees contribute toward profits versus mitigating losses1.
Public input was due July 22, 2022. However, six industry groups sent a joint letter requesting a 60-day extension2 of the deadline for comment to allow sufficient time to gather data. The CFPB intends to use the information it collects to influence the direction of future regulatory standards. The exact timeline of the final initiative is not yet known, with estimates expecting new revisions to Regulation Z3 no earlier than the end of 2022.
In January 2022, the CFPB announced an initiative directed toward collecting public perception of fees, specifically in regard to “junk” fees collected by financial entities4 to better understand consumer concerns and needs.
Now, as the CFPB addresses market leaders to conduct further investigation into industry practices related to credit card late fees, future shifts in regulation can naturally be anticipated. The CFPB looks to both the card issuers and consumers as a holistic and targeted approach to evolving the industry of consumer financial products. Financial institutions and credit card issuers had the opportunity to provide detailed commentary and reasoning behind current product features.
The notice is specifically addressing two provisions under the CARD Act that are implemented by Regulation Z:
The CFPB believes further industry transparency will support the customers5 it serves by ensuring that fees are appropriately priced and fair. Late fees have been capped since the CARD Act of 2009, but current market trends indicate that 18 out of 20 issuers have set late fee6 amounts at the high end of the allotted limits. Rising inflationary pressures have caused concerns that fees will continue to rise in tandem, as a means of mitigating rising costs.
The CFPB believes that issuers might elect to follow these “safe harbor” provisions, which allow issuers to charge an industry-set maximum rate ($30 for the first late fee, and $41 for those thereafter) which voids the requirement of issuers having to show that fees are, in fact, reasonable and proportional. In response to these concerns, the CFPB notice highlights7 that:
“Specifically, we are seeking data and evidence about late fees and late payments, card issuers’ revenue and expenses, and the role late fees play in credit card companies’ profitability. We are not looking for opinions or rhetoric but rather empirical evidence with real data to determine whether the Fed’s special immunity provisions need to be amended.”
The CFPB put forth 38 questions in the notice, aimed at better understanding the domestic consumer credit card market across the following areas:
This amplified review of current practices could lead to more aggressive regulation imposed on late fee allowances.
While the recent notice does not incite any immediate change in policy, financial institutions can begin to anticipate shifts in regulations that could influence issuers’ pricing models and core revenue streams.
Changes in regulation could lead to competition risks if the CFPB later determines that certain fee pricing computations are advantageous and predatory on specific consumer groups and spark expensive industrywide repercussions.
Potential changes in regulation might squeeze profit margins in this category for issuers, notably as inflation pressures rise and consumers seek out competitive costs and benefits that suit their needs. Issuers can review current benefits provided to consumers who pay on time and look to leverage non-fee-based penalties for past due payments.
Issuers can seek opportunities to cut costs that arise from past due payment resolution and find efficiencies within current systems, review current methods used to deter customers from making late payments, as well as conducting further analysis to identify ways to support customers who might be more likely to incur late payment fees.
Issuers can also work to identify other institution-led incentives that will retain competitive advantage as costs rise, and leverage other revenue streams within their business models. For example, interest charges may dominate late payment revenue streams as punitive fees become more scrutinized.
Financial institutions should examine their practices relating to late fee and payment charges for all consumer product offerings and begin to prepare detailed rationales for imposing such charges.
Guidehouse teams have decades of experience evaluating policies, procedures, and documentation in response to regulatory changes across all consumer financial products, including analysis of fee structures. We can leverage our expert process improvement and cost-saving solutions, to support institutions as they review revenue streams that might be at risk. Our teams have also helped financial institutions with establishing and enhancing compliance programs, risk assessments, and exam preparation and response. With our experts, we will partner with your teams to help understand and manage that regulatory risk.
Special thanks to Courtney Cox and Emily Ventham for contributing to this article.
Kathryn Rock, Partner
Alexandra Sawyer, Director
Guidehouse is a global consultancy providing advisory, digital, and managed services to the commercial and public sectors. Purpose-built to serve the national security, financial services, healthcare, energy, and infrastructure industries, we collaborate with leaders to outwit complexity and achieve transformational changes that meaningfully shape the future.