The Biden administration wants to cap credit card late fees through the Consumer Financial Protection Bureau (CFPB). But hold on – this could spell trouble, especially for those the rules intend to help.
The CFPB’s proposed rule to cap credit card late fees may reflect a well-intentioned effort to enhance consumer protection, suggesting that lower-income households may be hurt the most. However, stakeholders, including the American Bankers Association, caution against doing so because of many unintended consequences. These include restricting access to credit for those in need, creating perverse incentives to not pay on time, and raising the cost of banking and credit by passing along these costs to everyone.
Late fees may be a nuisance, but they’re crucial to keeping credit card systems in check and getting credit to those who need it. By capping late fees at $8 and limiting them to 25 percent of the minimum payment, the CFPB risks upsetting the delicate balance of the financial ecosystem.
Whether we like it or not, credit cards serve as a lifeline for millions of Americans, offering convenience, security, and a way to build credit.
Indeed, for families living paycheck to paycheck, every dollar counts. But it’s imperative to point out that late fees are not solely punitive measures. Late fees encourage people to pay on time, reducing defaults and helping provide needed access to credit.
But if late fees get capped, it’s not just the big banks that’ll feel the pinch – it’s everyday people and small businesses. Banks will likely raise fees or tighten lending standards to compensate for lost revenue. That means higher costs and less access to credit for everyone.
Economist Dan Mitchell’s analysis highlights the unintended consequences of well-intended regulations and urges policymakers to tread carefully. Late fees contribute significantly to the bottom line for card issuers, but they also influence consumer payment patterns and debt management strategies.
Imposing price controls like these on the marketplace isn’t free. People in the marketplace are best at pricing things, including credit card late fees. Government-imposed restrictions, such as caps on late fees, will distort market signals and hinder economic efficiency.
In Texas, where local banks are the backbone of many communities, as in many other states, this policy could hit especially hard. If banks can’t use late fees to encourage timely payments, businesses might struggle to get the credit they need to grow and thrive.
In fact, Glenn Hamer, president of the Texas Association of Business, recently noted the symbiotic relationship between late fees and small depository institutions. Many local banks rely on late fees to cover operational costs and extend credit to consumers. Imposing strict limits on late fees could jeopardize the viability of these institutions, limiting access to credit for underserved communities.
The Small Business Regulatory Enforcement Fairness Act (SBREFA) underscores the importance of assessing the impact of regulatory proposals on small businesses. Late fees are a lifeline for small depository institutions, enabling them to compete in the credit card market. Any regulatory changes must carefully consider the implications for these businesses and the communities they serve.
Economist Milton Friedman warned: “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.”
Before the CFPB rushes into this, let’s pump the brakes. Because when it comes to late fees on credit cards, or “junk fees” in general, one size does not fit all.
Vance Ginn, Ph.D., is the president of Ginn Economic Consulting, host of the Let People Prosper Show, and was previously the associate director for economic policy of the White House’s Office of Management and Budget, 2019-20. Follow him on X.com at @VanceGinn.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.
