Banking and Finance Law Daily Wrap Up, TOP STORY—Credit card late fees totaled $12B in 2020, down from 2019, (Mar 29, 2022)

By Jonathan Anderson

Late fee volume fell after stimulus checks were issued, particularly for households with lower credit scores, according to the federal agency.

Credit card issuers charged $12 billion in late fees in 2020, down from $14 billion in 2019, according to a new report from the Consumer Financial Protection Bureau (CFPB). In the report, released March 29, 2022, the CFPB also found that many major issuers charge the maximum allowable late fee and that such fees are likely to increase. Further, the analysis concluded that subprime and private label cardholders are particularly susceptible to late fee charges, and that the overall credit card market “continues to rely on late fees disproportionately paid by economically vulnerable consumers.”

Background. In 2010, the Federal Reserve Board of Governors implemented provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) that required penalties to be “reasonable and proportional.” The Board’s rule includes an immunity provision allowing issuers to set fees at a particular level, subject to an annual inflation adjustment. Congress later removed the authority of the Board to adjust these provisions and transferred them to the CFPB.

Major findings. Four major findings are detailed in the report.

Maximum late fees charged. First, many major issuers charge the maximum allowed late fee. Eighteen of the top 20 issuers set late fees at or near the established maximum level of $30 for the first late payment and $41 for a subsequent late payment within six billing cycles, according to the CFPB, which said it expects many major card issuers to raise fees further based on inflation. Meanwhile, most smaller banks and credit unions charge a maximum late fee of $25 or less, and other companies charge no late fees or offer products with increased flexibility for late payments.

Subprime and private label cards. Second, the report found that subprime and private label cardholders are particularly susceptible to late fee charges. Deep subprime cardholders pay late fees that represent a higher percentage of their balances compared to other types of cardholders. For private label cards, late fees accounted for nearly all consumer fees and a quarter of total interest and fees.

Late fees are a penalty, not an incentive. Third, late fee volume fell when stimulus checks arrived in 2020 and 2021, particularly for households with lower credit scores, which the CFPB said suggests that late fees are a penalty on households living paycheck-to-paycheck rather than a meaningful incentive to make on-time payments. In 2020, issuers charged $12 billion in late fees; that compares to $14 billion in 2019 and $13 billion in 2018.

Disproportionate late fee burden. Fourth, credit card accounts held by cardholders living in the United States’ poorest neighborhoods paid twice as much on average in total late fees than those in the richest areas in 2019, according to the CFPB. Further, cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas. The analysis also found that people in areas with the lowest rates of economic mobility paid nearly $10 more in late fee charges per account compared to people in areas with the highest rates of economic mobility.

Data sources. The CFPB relied on three major data sources for its analysis: (1) de-identified, account-level data from bank holding companies collected through the Y-14M report; (2) data from issuers collected in response to data filing orders; and (3) the CFPB’s Credit Card Agreement Database.

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