CFPB’s credit card late fee cap is as good as dead

The news: A federal judge rejected the Consumer Financial Protection Bureau's (CFPB) request to reinstate its credit card late fee cap, per Reuters.

• The rule would have lowered the immunity provision for large issuers from the typical $32 to $8 and barred annual late fee hikes.
• It was expected to go into effect in the spring but was blocked by a federal judge in May.

The arguments:

• The CFPB argued the court’s injunction should be revisited because it relied on a ruling that the CFPB’s funding structure was unconstitutional—a decision since overturned by the Supreme Court.
• Groups that sued to stop the rule, including the US Chamber of Commerce and the American Bankers Association, said it could still be blocked on other grounds.

What this means: This ruling effectively kills the late fee cap.

The CFPB won’t be able to fight the rule in courts further this year, and come the new year, the agency will be reshaped under new leadership and likely won’t pursue the matter.

While President-elect Donald Trump could skew from the party norm, the credit card late fee cap doesn’t have Republican support: Republican Sen. Tim Scott introduced a joint resolution in April to prevent the CFPB from capping credit card late fees.

The bigger picture: Credit card issuers had already been preparing for the rule, finding ways to make up for the potential lost revenues.

• Bread Financial abandoned a “soft cap” of 29.99% on APRs and planned to charge other fees.
• Synchrony raised some store card rates as high as 34.99%.
• Chase planned to raise interest rates and underwrite credit card loans more conservatively in response to the cap.
• Capital One said it would take “mitigating actions” in response to the rule.

While all credit cards from big issuers would have been affected by the cap, it would have hit private-label cards the hardest. Private labels are often starter credit cards for consumers with thinner credit histories, and late fees are more common among them.

Our take: Now that the rule is no longer a worry for issuers, we should expect to see banks, especially private label issuers, bring down their interest rates. The Fed’s interest rate cuts should also help with this.

And with lower interest rates, consumers should have an easier time paying down their credit card debts, helping to speed up the credit card recovery.

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