A cardinal rule of policymaking is to do no harm. A related one is to carefully comprehend the unintended consequences of regulatory changes. Yet again, the Biden administration shows it failed in both respects in its proposed rule to distort the credit card market. This will make it harder for Americans, especially the most vulnerable, to access credit and make wiser, long-term financial solutions.
Rather than helping people, as the Biden administration claims, placing arbitrary new restrictions on fees for delinquent credit card payments will drive more Americans into sketchy, underground financial markets, putting them at further risk. It also shatters the nudging process that helps empower consumers to make wiser financial choices in the long run.
The Consumer Financial Protection Bureau (CFPB) is accepting comments until April 3 about their proposed credit card fees rule change proposed this month.
Bryan Bashur at Americans For Tax Reform gives the background, including how this move could be an illegal violation of the Administrative Procedure Act:
Without any direction from Congress, the proposed rule (1) changes the safe harbor dollar amount for late fees from $30, or $41 for subsequent late payment violations, to a strict threshold of $8 while prohibiting any higher amount for future delinquencies; (2) removes the safe harbor late fee adjustment to account for inflation; and (3) caps late fees at 25 percent of the total payment due.
Eighty-three percent of Americans own at least one credit card. Hamstringing lenders’ ability to charge late fees that are commensurate with the level of delinquency could drastically reduce the availability of credit. It may also incentivize borrowers to neglect their payments.
The result of implementing these changes will reduce the capacity for lenders to fund revolving lines of credit that consumers rely on every day to go grocery shopping, fill their car with gas, and pay utility bills.
Since last year the Biden Administration has been targeting industries throughout the American economy to regulate how they collect fees. Without this fee income to cover expenses, services such as offering revolving lines of credit on a credit card transaction or providing customer service to borrowers could be severely reduced if not eliminated altogether …Restrictions already currently exist on credit card fees. The lack of evidence and need for additional regulation of credit card fees remains to be seen. The CFPB fails to prove that there is an existing problem under the current regulatory framework.
During his 2023 State of the Union, President Joe Biden repeated a misleading claim about the CFPB’s recent credit card late fees proposal. Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, which represents the credit unions serving small businesses, called him out on it in a statement.
“President Biden and the CFPB are not giving Americans the full picture of what the credit card late fees proposal will actually mean for their pocketbooks,” Berger said. “Consumers rely on safe, reliable short-term credit to afford daily life. This rule will severely restrict the market for credit cards, making those products harder to qualify for and increasing the cost of all other financial products and services. For Americans with low credit scores or lower incomes, this rule would cripple their ability to achieve any sense of financial security.”
Bank Policy Institute (BPI) noted that the CFPB is targeting credit card late fees—in particular, it may reconsider “safe harbor” limits embedded in law by Congress, under which certain late fees are assumed to be reasonable and proportional. BPI cited studies showing that late fees help consumers correct their financial mistakes. BPI expounded in an emailed press release last month:
Late fees play an important role in keeping the financial system functioning safely and encouraging responsible financial decisions…
Late fees help consumers avoid widely studied behavioral biases, such as present bias and temptation bias, that can lead to overuse of debt financing. They also discourage consumers from opening too many credit card accounts, motivate them to limit missed payments to unavoidable hardship situations and encourage them to work with their bank to identify ways to meet their payment obligations.
Implications: The safe harbor policy arose from the Federal Reserve’s thoughtful considerations of costs and benefits. Dismantling it would disrupt market functioning and weaken incentives for healthier financial decision-making. It could also raise costs for consumers by necessitating higher interest rates or limiting credit availability.
At Independent Women’s Forum, we advance the well-being of all Americans, with careful attention to the most vulnerable, especially women. And we see these types of policies that Biden is proposing likely hurt poor, minority, or female-led households hardest.
As ATR points out, this latest CFPB move is part of a broader attack by the Biden administration against financial services serving low-income Americans. A similar proposal has been floated at the federal level to cap the interest rates on installment loans, sometimes called “payday loans.” Unfortunately, this has been tried already at the state level with devastating results in Illinois.
Most borrowers, who are more likely to be single mothers and non-white than the general population, reported that “they have been unable to borrow money when they needed it following the imposition of the interest-rate cap. Further, only 11 percent of the respondents answered that their financial well-being increased following the interest-rate cap, and 79 percent answered that they wanted the option to return to their previous lender.”
Wisdom comes from learning from mistakes; the installment loan interest rate cap failures give strong evidence that Biden’s plan to move this idea into the credit card realm will backfire and harm the most vulnerable.