This past week, the Consumer Financial Protection Bureau (CFPB) finalized its rules on credit late fees by reducing the legal lime to $8 from a typical fee of $32. The CFPB said that an average saving per year for consumers would be around $220, as more than 45 million are hit with these fees. While on the surface, this reduction sounds good for consumers, in the long run, there may be unintended consequences for the political decision.
Labeling the fees exploitive, CFPB Director Rohit Chopra stated:
“Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”
However, financial firms dependent on these fees will most likely look elsewhere to make up the lost revenue or simply reduce the risk exposure to individuals most inclined to be tardy on their bills.
S&P Global issued a statement explaining that the fee change will hurt the earnings of credit card issuers who depend on subprime borrowers. The company pointed to firms like Bread Financial Holdings, Synchrony Financial, and Capital One Financial.
While some banks are more resilient than others, mitigation plans by these firms may include increasing the APRs on these cards or raising other fees to make up the difference. Another option is to stop issuing cards to the highest credit-risk individuals.
Michal Selbka, Associate Director, S&P Global Ratings, explained:
“The most exposed banks could lose up to 25% of ongoing revenue in the short run although, the impact is more manageable for the largest most diversified card issuers.”
The US Chamber of Commerce has already filed a lawsuit challenging the CFPB’s decision. The Chamber claims that the CFPB has gone beyond its authority while basing its decision on poor research. The Chamber is of the opinion that the CFPB is undermining people’s ability to make responsible decisions regarding credit.
One thing is certain: The card issuers will make up the revenue somewhere, which will mean greater costs to consumers, just not with late fees.