In January 2022, the Consumer Financial Protection Bureau (CFPB or bureau) launched a campaign against what it described as “junk fees”—those that it considered to be frivolous or excessive. As part of that campaign, the CFPB took aim at credit card late fees. Just over a year later, the bureau issued a proposed rule that would slash the safe harbor threshold for late fees from $41 to $8.1 The proposal argues that an $8 charge is sufficient to allow issuers to recover their costs. As support, the CFPB offers analysis of card data reported by bank holding companies with over $50 billion in assets as part of their Federal Reserve stress testing requirements. However, the bureau’s analysis offers little if any insight into the operations of smaller issuers, such as credit unions. NAFCU conducted a survey of its membership, which demonstrates significant differences between credit union credit card programs and those of larger issuers.
The CFPB defends an $8 maximum late fee by observing that, for large banks, late fee income is five times greater than collection costs. However, the margin for NAFCU members was much narrower. Average annual late fee revenue per credit card account was $7 for NAFCU members versus $13.80 for large banks. Furthermore, NAFCU members’ average cost per account was over 40% higher. As a result, the average breakeven late fee among NAFCU members was $20, more than double the CFPB’s proposed safe harbor threshold.
A distinctive challenge for federal credit unions as well as many state charters is that they face an 18% interest rate ceiling. Based on data from the Federal Reserve, the average rate on bank-offered credit card loans was 19.1% in the final quarter of 2022.2 The interaction between an increasingly-binding interest rate ceiling and a drastic reduction in fee revenue would uniquely hamper credit unions. While roughly 20% of NAFCU members said that the rate ceiling would be “moderately” or “severely constraining” with a $20 late fee cap, that figure balloons to 54% with a $15 late fee cap.
Finally, even ignoring the unique economics at play with credit unions’ credit card programs, the fact that they are not-for-profit cooperatives means that they will be distinctively impacted. Where the CFPB may view the curtailment of late fee revenue from large banks as facilitating a redistribution of profits from shareholders to card members, a credit union’s surplus goes directly to its members. The drastic reduction in fee income has the potential to radically reshape the manner in which credit unions administer their credit card programs, along with other products and services. When asked what changes would be necessary if the CFPB’s proposal is finalized, 61% of respondents said they would limit extension of credit to at-risk borrowers and 59% said they would readjust underwriting standards. In addition, 53% of respondents said that late fee revenue supported no fee checking and savings products.
NAFCU will continue to lead efforts to oppose the bureau’s mischaracterization of credit union late fees as excessive, while educating the bureau on the unique aspects of credit unions that make this such an ill-fitting proposal.
- For the first violation in a six-month period, the safe harbor is $30.
- Board of Governors of the Federal Reserve, G.19—Consumer Credit.