The Consumer Financial Protection Bureau (CFPB) wants to send tens of millions of borrowers a lifeline by slashing the typical credit card fee from $32 to $8.

By finalizing a new rule, the CFPB is determined to close a loophole in the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 that allows card issuers to charge high late fees, a feature it says banks have exploited for years.

If the rule takes effect, American households could save more than $10 billion in late credit card fees each year, translating to an average annual savings of $220 per family. A whopping 45 million consumers have been hit with late fees, so the relief couldn’t come soon enough.

CFPB director Rohit Chopra described card issuers’ excessive charges as junk fees, saying: “Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines.”

While the wheels are in motion to drastically lower late fees, the rule won’t go live for another two months. If bank advocacy groups have their way, the rule will never see the light of day.

In defense of banks, the U.S. Chamber of Commerce filed a lawsuit against the CFPB days after the rule change was announced.

Americans have racked up more than $17.5 trillion in debt as of Q4 2023, including a $50 billion increase in credit card balances to $1.13 trillion, per the New York Fed Bank and as previously reported by Creditnews.

While the CFPB’s rule is sure to save consumers a bundle in fees, banks say all cardholders will pay one way or another, including those who settle their bills on time.

Fee focus

The CFPB contends that its single-digit fee cap is plenty to offset the collection costs that big card issuers inherit due to missed payments.

Nevertheless, card issuers must recoup the lower revenue somehow, most likely in the form of higher interest rates, annual fees, or “other card terms to offset the lost income,” the CFPB concedes.

Critics say that this fee model will backfire, resulting in more frequent late payments, greater debt, weaker credit scores, and tighter lending markets.

The Chamber said the consumer watchdog group failed to “consider how such adjustments might harm the average American family who carries a balance on their credit card yet makes timely payments.”

The CARD Act was crafted to help banks offset any losses they experienced from collection activities on late payments. Regulators didn’t ask too many questions as long as banks charged under $25 and $35 for the first and subsequent late fees, respectively. With inflation, those thresholds have since reached the $30-$41 range.

In addition to targeting this freedom, the new rule takes aim at an automatic annual inflation adjustment, a Federal Reserve Board-backed feature allowing card issuers to increase late fee thresholds each year without any evidence of rising costs. The CFPB, in its filing, offers to monitor market conditions and adjust its suggested fee cap as needed.

Nearly 4,000 banks and credit unions issue credit cards, and most of them remain fiercely competitive on fees. The CFPB is after the biggest ones.

Major credit card issuers, or those with over 1 million open accounts, represent approximately 95% of those combined borrower credit card balances. Their late fees tend to be on the maximum side of the fee spectrum, while the fees smaller card issuers charge generally fall on the lower side.

With an average balance in the ballpark of $6,100, borrowers pay average interest rates north of 21%, according to the Fed. Interest rates on predatory credit cards are closer to 30%, making it difficult for cardholders who fall behind to dig themselves out of the debt hole.

For their part, banks are going to do everything they can to to keep their revenue streams flowing.

Banks refuse to buckle

Banks aren’t going to let the rule change take effect without a fight. In its complaint, filed in the Northern District of Texas, the U.S. Chamber seeks to block the CFPB’s rule that it says “punishes responsible credit card users who pay their bills on time.”

They point to the fabric of the American legal system, which they say is built around having consequences for failing to pay obligations on time. Late fees are designed both as a punishment and to deter delayed credit card payments.

The Chamber believes it has the law on its side, accusing the consumer group of overstepping its statutory authority by targeting the CARDS Act.

“The [CFPB”s rule] slashes by 75% the safe harbor amount that the Fed […]set for credit card late fees, which every CFPB director has since maintained. The Rule, which upends more than a decade of regulations, is unlawful,” the Chamber said.

Not surprisingly, the American Bankers Association (ABA), which supports financial institutions of all sizes, joined the Chamber’s lawsuit.

The ABA calls the rule change flawed, stating it “will not only reduce competition and increase the cost of credit, but will also result in more late payments, higher debt, lower credit scores and reduced credit access for those who need it most.”