Win McNamee/Getty Images
- The Consumer Financial Protection Bureau proposed regulations that would reduce credit card late fees.
- The bank lobby says these regulations would hurt community banks and credit unions and reduce credit access.
- Sen. Elizabeth Warren wants to know if credit card companies stand with the banks.
Sen. Elizabeth Warren wrote a letter to the ten largest credit card companies asking how much money they make collecting late fees from cash-strapped consumers.
For years credit card companies have profited off collecting late fees, costing American families about $12 billion each year, according to the Consumer Financial Protection Bureau. In February, the federal consumer watchdog proposed closing regulatory loopholes that would save Americans $9 billion a year — without harming credit card companies. With the bank lobby fighting the new regulations, Warren wants credit card companies to explain themselves.
"American families have an opportunity to save billions in excessive credit card late fees and will benefit greatly from the CFPB's efforts to curb these practices," the Massachusetts Democrat and former CFPB chair wrote to PNC, JPMorgan Chase, Capital One, Citigroup, Discover, Bank of America, American Express, Wells Fargo, US Bancorp, and USAA.
She wanted to know if credit card companies are playing a role "in an ongoing effort by the county's most powerful banks to quash that rule" that would "limit exorbitant credit card late fees and save American consumers billions of dollars."
Currently, credit card companies are permitted to fine consumers up to $41 for each missed credit card payment — no questions asked. Finding the income generated from late fees is five times greater than the costs companies incur for collecting late payments, the CFPB proposed regulations that would require companies to justify late fees above $8, which the agency estimates would cover collection costs. The regulations would also end automatic annual inflation adjustment and ban late fee amounts above 25% of the consumer's required payment.
Altogether, the regulations would shift some of the burden of paying late fees off consumers and onto banks.
The bank lobby has argued these regulations would harm the very people the CFPB hopes to help.
"Late fees incentivize consumers to overcome or moderate behavioral biases that are potentially harmful to their financial health," the Bank Policy Institute said, thereby "encouraging timely repayment" which "is essential to efficient functioning of the market."
A JPMorgan Chase spokesperson pointed to a letter from several Republican senators calling CFPB Chair Rohit Chopra's proposed regulations "misguided" efforts "to demonize commonsense incentives that promote financial responsibility."
The lawmakers argued "these fees are used for a variety of legitimate purposes," including encouraging consumers to balance their checkbooks and discouraging consumers "from paying their bills late or otherwise violating the terms of financial agreements."
They argued these regulations "will unnecessarily cause financial harm to American consumers — particularly low- and middle-income consumers with a limited credit history" because late fees "enable companies to offset the costs of late payments and their associated risks" for providing credit to cash-strapped Americans.
The lawmakers said these regulations "will raise the cost of credit for all American consumers" as "shifting costs from a small subset of borrowers to the entire pool of borrowers raises the cost of borrowing for all, including those who made sacrifices to pay their bills on time."
Wells Fargo declined to comment. The other eight credit card companies Warren sent the letter to did not immediately reply to a request for comment.
Warren argued that consumers already "suffer under excessive late fees," citing thousands of late fee complaints made to the CFPB.
The bank lobby further argued that the regulations would force banks and credit card companies to reduce access to credit.
According to the American Bankers Association, any reduction in late fees that credit card companies are allowed to collect "would have a significant adverse impact on a substantial number of community banks and credit unions with assets below $850 million, many of which would be forced to exit the credit card market altogether," forcing credit card companies to offset new risks by "reducing credit lines, tightening standards for new accounts and raising APRs for all consumers."
In her letter, Warren asked if credit card companies agreed with the bank lobby. She said that many banks, including Citi, Capital One, and Discover, "have reduced or eliminated overdraft fees, another harmful junk fee, without raising costs for consumers." She wanted to know why reducing credit card late fees would be any different.
Warren also asked each credit card company to answer how much money they collect in credit card fees each year — and the proportion from low-income earners — and the actual cost of collecting those fees.