CFPB Going after Fees Would Restrict Credit Access

pa href=https://www.cato.org/people/nicholas-anthony hreflang=enNicholas Anthony/a
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pThe Consumer Financial Protection Bureau’s (CFPB’s) plan to introduce tougher restrictions on credit card late fees has attracted significant attention since its February announcement, and for good reason. Although the CFPB might not say as much, it’s attempting to establish price controls that risk pushing those most in need out of credit markets.brbr In a href=https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-rein-in-excessive-credit-card-late-fees/anbsp;press release/a, the CFPB made its case by arguing that it is unfair for credit card issuers to profit from late fees under the law and that the practice should be illegal:/p
blockquotepMajor credit card issuers continue to profit off late fees that are protected by an expansive immunity provision. Credit card companies have also relied on this provision to hike fees with inflation, even if they face no additional collection costs. The proposed rule would help ensure that over the top late fee amounts are illegal./p
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pLet’s break down exactly what the CFPB is describing here by first explaining what the “expansive immunity provision” used to protect fees is and then exploring whether the provision should exist at all./p
h4The “Expansive Immunity Provision”/h4
pSo, what is this “expansive immunity provision” that the CFPB argues is protecting late fees? Is it really, as CFPB Director Rohit Chopra described it, anbsp;regulatory loophole that allowed banks to escape scrutiny? The answer can be found within a href=https://www.law.cornell.edu/cfr/text/12/part-1026Regulation Z/a under the Truth in Lending Act. In short, it is here that the Federal Reserve was tasked with hashing out some of the finer details for implementing regulations on credit card issuers. In the final a href=https://www.federalreserve.gov/newsevents/pressreleases/bcreg20100615a.htmrule approved/a by the Federal Reserve Board in 2010, anbsp;number of restrictions were set on what credit card companies are allowed to charge in terms of late fees:/p
ul
liCredit card issuers are prohibited from charging more than $25 for late payments unless certain conditions apply./li
liCredit card issuers are prohibited from charging penalty fees that exceed the amount owed./li
liCredit card issuers are prohibited from charging multiple penalty fees for anbsp;single late payment./li
/ul
pWith that said, there is an a href=https://www.govinfo.gov/content/pkg/FR-2010-06-29/pdf/2010-14717.pdfexception to these rules/a—referred to as anbsp;safe harbor. This exception states that credit card issuers can avoid the restrictions if they use the penalty rate set by the Federal Reserve:/p
blockquotepConsistent with the safe harbor authority granted by the Credit Card Act, the final rule generally permits … issuers to impose a $25 penalty fee for the first violation and a $35 fee for any additional violation of the same type during the next six billing cycles. … These amounts will be adjusted annually to the extent that changes in the Consumer Price Index would result in an increase or decrease of $1./p
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pThis exception is the “expansive immunity provision” that the CFPB has taken issue with since the initial restrictions can be avoided if the issuers agree to use prices set by the Federal Reserve. Taken together, credit card issuers essentially have the choice between one set of price controls that is flexible but involves individual verification and another set of price controls that offers anbsp;flat rate. Given the already immense cost of regulatory compliance, it shouldn’t be anbsp;surprise that companies chose the latter./p
h4A Problem, Indeed/h4
pThe CFPB might be on to something by noticing that there’s anbsp;problem with this exception. It’s just anbsp;shame that the CFPB didn’t dig deeper. Rather than distort the market further with even more restrictive price controls (as the CFPB is calling for), the better route would be to eliminate the controls and their faulty design altogether./p
pRestricting the fees on credit cards is effectively restricting the price of credit. Whether it is attempting to a href=https://www.cato.org/commentary/aoc-sanders-credit-card-interest-rate-cap-would-be-disastrousrestrict credit card interest rates/a, a href=https://www.cato.org/commentary/pay-day-lending-not-harmful-low-income-borrowersrestricting payday lending/a, or any other restriction on prices, the lesson remains the same: mandating price controls to prohibit prices from rising will limit the supply of the good or service in question./p
pAs a href=https://www.cato.org/commentary/aoc-sanders-credit-card-interest-rate-cap-would-be-disastrousDiego Zuluaga/a has explained in the past, the stated goal of the proposals is laudable. Taken at face value, the proposals seek to make credit more affordable for Americans. The only problem is that these proposals risk the exact opposite./p
pa href=https://www.wsj.com/articles/biden-plays-the-junk-card-banks-credit-card-financial-regulation-fees-loans-interest-rates-borrowing-congress-consumer-financial-protection-bureau-e704f16Thomas P. Vartanian and William M. Isaac/a took to the pages of the emWall Street Journal /emto make anbsp;similar point by explaining how restricting fees will likely lead to prices rising in other financial services or lenders simply leaving the market:/p
blockquotepOne obvious reaction to [a cap on fees] would be to increase credit‐​card interest rates. But increasing lending interest rates disproportionately harms lower‐​income borrowers who may no longer qualify for loans that require anbsp;higher income to carry anbsp;higher monthly payment. Borrowers with lower credit scores also would have anbsp;harder time obtaining anbsp;loan when the amount of lendable funds shrinks because bank revenue, no longer supplemented by late fees, would get smaller. Other possible moves reacting to such anbsp;cap would be anbsp;decrease in interest rates paid to bank depositors or the imposition of additional fees on other financial products or services. When those don’t work, lenders simply exit anbsp;particular market, reducing the consumer credit available to borrowers with lesser credit histories./p
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pThis description of limiting services and shifting costs on to other financial services is similar to what consumers experienced in the wake of the Durbin Amendment, which a href=https://www.law.cornell.edu/cfr/text/12/235.3restricted the fees/a that banks could charge businesses for using debit cards. In practice, the restriction resulted in banks replacing fees on debit cards with a href=https://scholarship.law.upenn.edu/faculty_scholarship/2046/fees on bank accounts/a./p
h4Conclusion/h4
pRestricting prices at $8, or 19.5 percent of their current level, could be anbsp;negotiating tactic so the CFPB may later come back with anbsp;somewhat modest proposal of, say, restricting fees at $30.75, or 75 percent of the current rate. But if that compromise comes to pass, it should be rejected too. In fact, those in favor of free markets should take this opportunity to reject the existing rate as well. The CFPB may argue that the rate is too high, but it is anbsp;price control just the same and its foundation rests on little more than anbsp;paternalistic preference for policy./p
pIf the goal is to truly reduce the cost of financial services, reducing regulatory compliance costs is anbsp;much clearer place to start. Part of that means removing the restrictions established by the Card Act and the Federal Reserve’s rulemaking./p