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Opinion: Finally, a long-overdue change to credit card late fees

Editor’s Note: Ed Mierzwinski is senior director, federal consumer programs, US PIRG, a non-profit consumer group. The views expressed in this commentary are his. View more opinion at CNN.

Cookie Monster may be upset about “shrinkflation” — companies’ practice of reducing the amount or size of a product, like cookies, for instance, without also reducing the price — but the voracious Muppet should be thrilled about a new federal rule that will ensure that tens of millions of Americans have more money (that they could, conceivably, buy baked goods with).

Ed Mierzwinski - courtesy The Public Interest Network
Ed Mierzwinski - courtesy The Public Interest Network

The Consumer Financial Protection Bureau (CFPB) announced Tuesday that it will close a loophole that costs Americans more than $14 billion per year in late fees on their credit cards.

My consumer group, the US Public Interest Research Group (US PIRG), was involved in the creation of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), and nearly 15 years ago I was in the White House Rose Garden as then-President Barack Obama signed it into law. Congress designed the bill to protect consumers from banks’ and other credit card issuers’ predatory practices.

One key part of the legislation intended to only allow banks to charge late fees to recoup associated costs. However, when the Federal Reserve Board, which, at the time, was responsible for credit card regulation, created an ancillary rule in 2010, it also included an “immunity provision” that allowed credit card companies to charge up to $25-$35 without having to justify it. Those amounts have risen to $30-$41 to account for inflation, even as digital efficiencies have lowered banks’ costs.

The CARD Act rule requires that such fees be “reasonable and proportional” to the costs of handling late payments. It’s fair for banks to cover their costs when late fees cause them extra work. However, the CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. Now, the CFPB estimates that the largest credit card companies are generating income from late fees that are approximately five times the processing costs.

It’s not fair for companies to take advantage of consumers who have no options to fight back. In our increasingly cashless modern lives, credit cards are necessary. Sometimes people know their payments are late, but sometimes, given the variable reliability of US mail and various banking apps and websites, the payments of even those with the best intentions can trigger an automatic late fee. Then, unlike with “junk fees” added onto hotel bills or concert tickets, consumers can’t stop the transaction or choose another bank at that moment to avoid the fee.

Thankfully, this new rule builds on the CFPB’s nearly 13 years of getting results for consumers. It could save Americans $10 billion total a year. The average late penalty is currently about $32. However, the new rule sets a maximum fee of $8 and ends the automatic inflation adjustments to that amount for card issuers with 1 million or more open accounts.

This improved rule still has one main loophole: Larger card issuers that can prove they incur higher collection costs will be able to charge more than $8 to cover those costs. So what’s keeping credit card companies from violating the spirit of the rule? The CFPB says the rule is designed for credit card issuers to benefit more from on-time payment, rather than relying on late fees.

The new rule wasn’t even out half a day before the US Chamber of Commerce announced it would sue the CFPB. But the CFPB has built its reputation by representing consumers against powerful business special interests.

Credit card companies have been caught with their hands in the cookie jar. Now, the CFPB is making sure they get their just desserts — and American consumers from Main Street to Sesame Street won’t have to fork over unfair late fees.

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