Federal regulators have taken a significant step towards protecting American consumers from excessive credit card fees by finalizing a rule to cap late fees charged by large credit card issuers. The Consumer Financial Protection Bureau (CFPB) claims that this rule will close a loophole that has been exploited by credit card companies for over a decade, resulting in billions of dollars in fees being collected from consumers.
The finalized rule, announced by the CFPB on Tuesday, will lower the typical late fee from $32 to $8 for credit card issuers with 1 million or more open accounts. This move is part of President Joe Biden’s efforts to eliminate fees on travel and credit cards, with the goal of saving American families over $10 billion annually in late fees once the rule goes into effect later this year. This translates to an average savings of $220 annually for the more than 45 million Americans who are currently charged late fees.
CFPB Director Rohit Chopra emphasized the importance of closing this loophole, which was originally included in the Credit Card Accountability Responsibility and Disclosure Act of 2009. While the law aimed to prevent credit card companies from charging excessive penalty fees, the immunity provision allowed companies to charge up to $25 for the first late payment and up to $35 for subsequent late payments. These amounts were adjusted for inflation over time, reaching $30 and $41, respectively.
Under the new rule, credit card issuers will only be allowed to charge late fees that are necessary to cover the collection costs incurred due to late payments. The CFPB’s research found that $8 is typically sufficient for large card issuers to cover these costs. Issuers will only be permitted to charge fees above this threshold if they can demonstrate that a higher fee is required to cover their collection expenses.
This consumer protection-driven crackdown is part of a broader initiative by President Biden to eliminate so-called junk fees across various industries, including hotels, airlines, and credit cards. The president’s Junk Fee Prevention Act, introduced in 2023, aims to ban surprise fees that are added to consumers’ bills without warning, such as resort fees and airline seat selection fees.
The issue of hidden fees in the travel industry has been a longstanding concern for consumers, particularly when it comes to hotel stays and airline tickets. President Biden’s proposed legislation would require airlines to disclose the full fare price upfront, including all taxes and fees, during the booking process. This would prevent airlines from charging additional fees for families to sit together on flights, a practice that has drawn criticism from travelers.
Several major airlines have already made changes to their seating policies to allow families to sit together without incurring extra fees. However, some airlines still charge travelers for selecting seats in advance, particularly with basic economy fare types. President Biden’s bill aims to address these issues and ensure that families can travel together without facing additional charges.
The White House has confirmed that the Department of Transportation (DOT) will publish a family seating fee dashboard and launch a rulemaking to ban the practice of charging families extra to sit together on flights. The president has called on Congress to fast-track the ban on family seating fees to allow the DOT to crack down on these practices more quickly.
In addition to addressing airline fees, President Biden’s legislation also focuses on lowering merchant credit card fees to promote market competition and introducing a bill of rights for air travelers. While efforts to eliminate these fees entirely may face challenges, the president’s action to regulate and reduce excessive fees is a step towards protecting consumers and ensuring fair practices in the financial and travel industries.
Industry experts have noted the significance of these regulatory changes in response to consumer concerns about hidden fees and excessive charges. While some fees, such as seat selection fees on airlines, may have legitimate reasons for being charged, the focus on protecting families from additional charges for sitting together reflects a commitment to consumer rights and fair pricing practices.
Overall, the finalization of the rule to cap credit card late fees is a positive development for American consumers, as it will help to save billions of dollars in fees annually and prevent credit card companies from exploiting loopholes to generate revenue from consumers. By closing this loophole and imposing limits on late fees, federal regulators are taking a proactive stance to protect consumers and promote fair and transparent practices in the financial industry.