Millions of Americans could soon see lower credit card bills after a federal rule that caps late fees at $8 a month was finalized on Tuesday by the Consumer Financial Protection Bureau, which estimates that the change will save households $10 billion a year.
Late fees have become a major profit source for credit card issuers, generating more than $14 billion in 2022, according to bureau data. A 2010 rule imposed by the Federal Reserve aimed to cap the charges, but allowed adjustments for inflation — a provision card issues have used to raise their fees far beyond the actual costs they incur when payments arrive late, the bureau said.
That allowed credit card companies to “harvest billions of dollars in junk fees from American consumers,” said Rohit Chopra, the bureau’s director. “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.”
The new restriction limits issuers to an $8 fee, unless they can prove they need to charge more to cover their actual collection costs. It applies only to large issuers that have more than one million open accounts, but the agency estimates that the rule will cover 95 percent of outstanding credit card balances.
The rule is scheduled to be published shortly in the Federal Register and will take effect 60 days later.
Banking trade groups fiercely oppose the rule and are likely to sue to try to block it.
Ian Katz, a managing director at the research firm Capital Alpha Partners, predicted that litigation would be filed “in a sympathetic district where industry is likely to get the rule’s implementation delayed while the case is considered.”
The Bank Policy Institute, a trade group, said the consumer bureau’s justification for the rule fell short of the “reasoned analysis and evidentiary support” required by the Administrative Procedure Act, which governs the agency’s rule making.
“Given the rule’s multiple deficiencies and shortcomings, its fate is likely to be resolved in federal court,” said Greg Baer, the trade group’s chief executive. “All consumers who pay on time will now pay more, and low- and moderate-income borrowers who pose greater risk will lose some access to credit.”
Lindsey Johnson, the chief executive of the Consumer Bankers Association, another trade group, pointed to a bureau analysis that acknowledged that card issuers could “adjust other fees or interest rates in order to recover any lost revenue” as an indication that the rule could negatively affect cardholders.
She added, “By normalizing being late on credit card payments, the administration is knowingly putting consumers’ financial health at risk.”
Consumer advocates cheered the change. The consumer bureau “showed its math” in laying out how it calculated the $8 fee limit, said Lauren Saunders, associate director of the National Consumer Law Center. “That’s how good, data-driven regulation is done.”
The final rule comes just over one year after the consumer bureau circulated a draft version for public comment. The final version hews fairly closely to the earlier proposal.
President Biden is likely to highlight the new rule in his State of the Union speech on Thursday. His administration has made a cross-agency crackdown on what it calls “junk fees” a signature effort.
Mr. Chopra’s agency has zealously embraced that campaign, targeting fees it considers excessive through a series of enforcement actions and proposals for new restrictions. In January, the agency began the formal process of adopting a new rule that would cut overdraft fees to $14 or less, down from the current $35 standard.