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Joint Trades Comment Letter on Late Fees ANPR
Ladies and Gentlemen:
The American Bankers Association (ABA), Consumer Bankers Association, Credit Union National Association, and National Association of Federally‐Insured Credit Unions (collectively, Associations) welcome the opportunity to comment on the Consumer Financial Protection Bureau’s (Bureau) Advance Notice of Proposed Rulemaking (ANPR) regarding credit card late fees and late payments. Specifically, the Bureau is reviewing Section 1026.52(b) of Regulation Z (Truth in Lending Act), which implements Section 1665d of the Truth in Lending Act requiring that credit card penalty fees, including late payment fees (late fees), be “reasonable and proportional to [the] omission or violation.” Areas of inquiry in the ANPR include factors used by card issuers to set late fee amounts, card issuers’ costs and losses associated with late payment, the deterrent effects of late fees, cardholders’ late payment behavior, methods used by card issuers to facilitate or encourage timely payments, and card issuers’ use of the late fees safe harbor provisions of Regulation Z.
In implementing the Truth in Lending Act’s requirement that late fees and certain other fees be “reasonable and proportional” to the violation, Regulation Z currently limits late fees, along with other penalty fees, to the dollar amount that represents a reasonable proportion of the total costs resulting from the violation. As an alternative, the rule offers a safe harbor amount that issuers may charge in the event of late payment.4 The safe harbor amount, which the Bureau reviews and adjusts annually for inflation, currently allows issuers to charge $30 for the first late payment and $41 for a second late
payment in the six billing cycles following the violation.
- When set appropriately, late fees encourage consumers to pay on time and develop good financial management habits. However, if late fees are too low, consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced credit access, and higher credit costs.
- Reducing or eliminating the safe harbor could harm consumers. As the Bureau found with previous restrictions on credit card prices, if late fees are not set at an appropriate amount to cover issuers’ costs, effectively encourage on‐time payments, and mitigate the risks associated with late payments, issuers may have to rebalance the risks to their credit portfolios in other ways. This could include reducing credit lines, tightening standards for new accounts, and raising annual percentage rates (APRs) and fees for all cardholders, including those who pay on time.
- The current safe harbor for late fees should remain in place. Although it does not cover all of the costs associated with late payments and may not be as effective a deterrent against late payments as would a higher fee, the current safe harbor provides legal certainty to issuers, as well as predictability and consistency to consumers.
- Should the Bureau proceed with additional rulemaking, any proposed permitted late fees should account for costs incurred by issuers related to late payments, the deterrent effect of late fees, and the conduct of the cardholder as required under the Truth in Lending Act.
- Any reduction in or elimination of the late fee safe harbor would have a significant adverse impact on a substantial number of financial institutions with less than $750 million in assets. Accordingly, if the Bureau proceeds with rulemaking, it must comply with the Small Business Regulatory Enforcement Fairness Act (SBREFA).
I. When set appropriately, late fees encourage on‐time payments and
better credit management.
Credit cards provide valuable benefits—including consumption smoothing, convenience, safety and security, fraud protection, credit‐building opportunities, and cardholder benefits and rewards—to millions of cardholders across the country. Like many other entities, card issuers depend on their customers paying their bills in a timely manner and assess a fee in the event of a late payment. Late fees are designed to recover at least part of the issuer’s costs associated with late payment and also to encourage on‐time payments, minimize defaults and delinquencies, and promote good credit management.
In the ANPR, the Bureau asks about the deterrent effects of late fees, including whether the amount of the late fee impacts its effectiveness in encouraging on‐time payments. This section addresses those questions, laying out the data and research on how late fees encourage on‐time payments in a variety of settings, including the credit card industry.
To read full comment letter, click here.