WASHINGTON (CN) — The Biden administration announced Tuesday it will limit late fees for credit cards to $8 in a new set of efforts aimed at targeting hidden fees for consumers.
The Consumer Financial Protection Bureau has finalized a regulation that would close a loophole used by large card issuers to impose late fees.
“For over a decade, credit card giants have been exploiting a loophole to harvest billions of dollars in junk fees from American consumers,” the bureau's director, Rohit Chopra, said in a press release. “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.”
Federal officials said the loophole is in the Credit Card Accountability Responsibility and Disclosure Act of 2009, which was passed amid concerns companies were building a business model based on penalties and fees.
When the law was implemented in 2010 it allowed banks to charge fees only to recover the bank’s costs associated with the late payment. But it also included a provision that allowed companies to sidestep some regulations if they charged $25 for the first late payment and $35 for subsequent payments, with the amounts adjusted each year for inflation.
The late payments guidelines have since increased to $30 and $41, officials said. The new rule would lower the threshold to $8 and end automatic inflation adjustments for companies with one million or more open accounts. Such companies account for 95% of total outstanding credit card balances.
Larger card issuers will be allowed to charge fees above the threshold if they can prove it is necessary to cover actual collection costs.
The Federal Reserve Board of Governors added the extra provision before the law went into effect. The Consumer Financial Protection Bureau, which now administers the law, is adjusting the provision since it was not included in the original legislation.
The bureau estimated the new rule would save consumers more than $10 billion annually. For the 45 million people who are charged late fees, the average savings would be $220 a year.
The financial industry painted the announcement as a move to boost President Joe Biden’s chances in an election year. Lindsey Johnson, CEO of the Consumer Bankers Association, said it would hurt “consumers’ long-term financial health.”
“While the administration is messaging this rule as a ‘win’ for consumers going into an election year, it’s anything but,” Johnson said in a statement. “By normalizing being late on credit card payments, the administration is knowingly putting consumers’ financial health at risk.”
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