CFPB Report Shows Credit Card Late Fees Declining, Below Set Limits

The Consumer Financial Protection Bureau published on March 29 a report on credit card late fees where the regulator provided data about the amount of late fees charged by type of consumer. The main findings from the report are that credit card late fees have been in decline for the last few years and consumers with lower credit scores incurred more late fees than consumers with better scores. 

The CFPB launched a public consultation in January to analyze the markets for credit card fees and “junk fees” to identify potential distortions that may affect consumers and take action if necessary. This report shows that financial institutions are charging late fees, on average, below the limits established in the law, and the trend in the industry is to reduce or eliminate these fees. 

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) required late fees be “reasonable and proportional” and the implementing regulation (Regulation Z) sets a “safe harbor” for specific fee amounts. As of 2021 the safe harbor values were $30 for a first late payment and $41 for each subsequent violation within the next six billing cycles. 

The data provided by the Bureau shows that the most common maximum late fee charged in agreements submitted to the CFPB was $25, as driven by the practices of smaller banks and credit unions. Overall, most of the top 20 issuers contracted a maximum late fee at or near the safe harbor in 2020. 

The CFPB also states that “a small but increasing percentage of companies charge no late fees or offer products with increased flexibility for late payments.” 

If we look at the bigger picture of late fee volume, the report also shows a steep decline. Monthly late fee volume in May 2020 plummeted over 33 percent from its January high, in parallel with the unprecedented decline in credit card debt from Q4 2019 to Q2 2020. Late fee volume hit its lowest point in recent years in April 2021. In dollars, total late fees in 2020 were $12 billion, down from $14 billion in 2019. 

Interestingly, if we look at the data by type of consumer, the decline in overall late fee volume in early 2021 was largely driven by a steep decline among accounts with below-prime scores. Between February 2020 and April 2021, late fee volume for accounts associated with deep subprime and subprime scores fell 59 percent and 49 percent respectively, whereas late fee volume for prime and superprime accounts fell by 30 percent and 23 percent. According to the CFPB, “this pattern suggests that changes in payment behavior for consumers with lower credit scores explain much of the significant reduction in late fee volume.”

For some issuers, late fees may be an increasing source of revenue. For general purpose cards, late fees represented 45 percent of the total consumer fee — but this figure increased to 91 percent for private label cards. Among issuers there is a strong correlation between reliance on late fees and concentration of subprime accounts.  

Overall, the report emphasizes the negative impact that late fees may have on consumers with fewer resources, but it falls short of suggesting that these fees should be amended or scrapped. The report doesn’t suggest any course of action. 

It is noticeable, though, how the CFPB may be changing its approach to credit card fees for the last few months, which may bring a clearer separation between these fees and “junk fees.” In January, when the Bureau launched the consultation, it included both credit card fees and junk fees in the same press release, as part of the same efforts to help consumers. Both were also included in the same request for information sent to the Federal Register.

Now, in March, the press release to inform about credit card late fee data didn’t mention “junk fees” even once. On Monday, when the Bureau announced the extension of the deadline to receive additional comments on junk fees, credit card late fees were not part of the press release. However, one day after publishing this data, the CFPB issued another press release to talk about overdraft and non-sufficient funds fees and referred to these as junk fees. 

Read More: CFPB Extends ‘Junk Fees’ Deadline After Receiving 25,000 Comments