The US Consumer Financial Protection Bureau enacted a new law in early March that bans credit card companies from collecting excessive late fees from customers, but the regulations have been slammed by numerous business entities for its potential impacts on small businesses.
The Consumer Financial Protection Bureau (CFPB) implemented the rule without approval from Congress, selling it as a way for American families to save an estimated $10 billion in late fees annually. They say it will reduce the typical fee from $32 to $8, providing an average savings of $220 per year for the more than 45 million people who are charged late fees.
While it may appear like a positive economic move upon first thought, digging deeper reveals unintended repercussions. Critics say the rule will prompt banks to increase interest rates and fees in other areas. It will also restrict credit for small businesses and low-income individuals, burdening rural and minority communities in North Carolina.
“You’re essentially restricting the income of the bank or the credit card company. And by restricting that income, they essentially find other ways to make it up,” explained Algenon Cash, the managing director of Wharton Gladden & Company. “So they either go find other fees that they can raise higher if they can figure that out. Or they just essentially restrict capital or restrict credit to people that they think might be more at risk of defaulting.”
As a North Carolina businessman, Cash recently penned an op-ed in the Carolina Journal in which he cautioned of the ‘wrongheaded’ policy change. Most North Carolinians are financially responsible, he argued, and they are the ones who would be harmed.
The Biden administration began discussions around the rule over a year ago, and Biden promoted the plan during his State of the Union address in early March. While they argue the rules will address problems and foster competition in the $1 trillion credit card market, business executives say it will result in credit card companies finding other places to tact on fees.
The National Small Business Association sent a letter to CFPB Director Rohit Chopra before the rule was enacted requesting that the federal agency conduct an analysis of the rule’s impacts on small businesses.
“Today, I am reaching out to you with a concern that recent regulatory efforts did not entirely consider the potential impacts on this critical community,” CEO Todd McCracken wrote in the letter. “More specifically, as the Consumer Financial Protection Bureau (CFPB) prepares to announce a final rule on credit card late fees, it is our understanding, the organization did not complete the required analysis of its impact on small businesses.”
Additionally, after the rule was announced, the US Chamber of Commerce filed a lawsuit alleging the rule violates the CARD Act of 2009 by preventing credit card companies from collecting reasonable and proportional late fees, which deter late payments.
“This rule effectively denies issuers the ability to do the very thing that Congress permitted them to do—charge a reasonable and proportional penalty fee for late payments, one that accounts for deterrence, the conduct of the cardholder, and costs to the issuer,” the suit argues.
The CFPB was originally proposed in 2007 by Sen. Elizabeth Warren (D-MA), who was a Harvard professor at the time. Obama appointed her to facilitate the creation of the new federal agency, which officially launched in 2011. Since then, many lawsuits have been filed questioning the legal standing of the CFPB. Last fall, the Supreme Court heard arguments around the federal agency’s constitutionality and funding structure, and a decision on the case is expected to come in the next few months.