Loyola University Chicago School of Law, JD 2023
The Truth in Lending Act (TILA), established 1968, is aimed to protect consumers against unfair credit practices and billing by lenders. Under TILA, lenders must provide consumers (borrowers) with information that allows them to compare loan terms given by various lending institutions. One of the main protections provided by TILA, is that it gives a three-day safe harbor to consumers to change his or her mind on the decision of a loan without losing any money. According to the Department of Treasury, a main goal of TILA is to protect from “high-pressure sales tactics used by unscrupulous lenders.” Congress recently announced a proposal to amend Regulation Z, which establishes TILA.
The logistics of the proposal
This amendment, proposed by the Consumer Financial Protection Bureau (CFPB), aims to lower late fees charged on credit cards such that they are “reasonable and proportional” to the late payment. Specifically, this proposal would (a) change the safe harbor fee from $30 to $8; (b) make it so that the current provision that accounts for annual inflation adjustments for safe harbor charge amounts would not apply to late fee safe harbor amounts; and (c) that late fee amounts must not exceed 25% of the payment due. Late fees arise where a lender (credit card issuer) applies a fee to the cardholders account when they fail to meet a minimum payment for a bill’s due date. This late fee is set at a maximum of $29 for first time delinquencies, and up to $41 for consecutive delinquencies.
What the CFPB says
According to CFPB, late credit card fees cost American consumers roughly $12 billion each year. This proposal, if executed, is estimated to reduce that profit by as much as $9 billion a year. In 2020, the portion of money collected by credit card companies from late fees made up about 10% of all fees, including interest fees, charged to consumers. CFPB Director, Rohit Chopra, states in regard to the proposal that “[o]ver a decade ago, Congress banned excessive credit card late fees, but companies have exploited a regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee… [t]oday’s proposed rules seeks to save families billions of dollars and ensure that the credit card market is fair and competitive.”
What the critics say
On the other hand, several companies and organizations are highly critical of this proposal. One of the main concerns by those critics, including the U.S. Chamber of Commerce, being that lower fees gives consumers less incentive to pay credit card statements on time. According to the U.S. Chamber of Commerce, 75% of credit card holders pay bills on time and the new proposal could raise the costs of those who pay on time to compensate for those who do not. Notably, the CFPB itself concedes this criticism, stating in the proposal that: “cardholders who never pay late will not benefit from the reduction in late fees and could pay more for their account if maintenance fees in their market segment rise in response—or if interest rates increase in response and these on-time cardholders also carry a balance. Frequent late payers are likely to benefit monetarily from reduced late fees, even if higher interest rates or maintenance fees offset some of the benefits.”
Consumers and small lenders: the casualties
Another critic, the American Banking Association, through its President and CEO, Rob Nichols (Nichols), has harshly condemned the proposal asserting that credit card issuers will be forced to reduce credit lines for customers, create more stringent standards on new accounts, and raise annual percentage rates for all consumers, including those who pay credit statements on time. Some of the most at-risk parties to the effect of this regulation are community banks and credit unions. According to Nichols, the reduction in the safe harbor for late fees would harshly affect these lending institutions with assets below $850 million, in such a way that most would end up having to exit the credit card market. These banks provide accessibility to many of America’s consumers. In essence, this regulation would end up being bad for consumers and risk CFPB’s compliance with the Small Business Regulatory Enforcement Fairness Act of 1996.
Reconciliation of the views
While this amendment aims to save billions for consumers, it could have the adverse effect of driving up costs for credit card companies and making less credit available for lending purposes. Before Congress implements this amendment to a long-established way of practice, it is imperative that it take seriously comments obtained from small lending institutions made by way of the open comment period that concludes April 3, 2023. While at first glance this regulation may present itself as protecting consumers, in implementation it may provide the complete opposite effect. The CFPB would benefit in considering a lesser reduction in the fee; one that is more “reasonable and proportional” to all cardholders.