CFPB aims for crackdown on junk fees, late charges
Amid still-rising interest rates, most families remain financially challenged to make household needs fit into their budgets. For Black Americans, whose wealth on average amounts to 25 cents for every $1 of white family wealth, according to the Federal Reserve Bank of St. Louis, the challenge is especially daunting.
So it is particularly encouraging to Blacks and others of modest means for a sitting president to speak to the average person’s concerns in the annual State of the Union Address.
“Junk fees may not matter to the very wealthy, but they matter to most folks in homes like the one I grew up in,” said President Joe Biden in his Feb. 7 address. “They add up to hundreds of dollars a month … I know how unfair it feels when a company overcharges you and gets away with it.”
He added, “Not anymore.”
Junk fees are hidden and unexpected charges that often are not included in the initial or listed price of a transaction but are added on at the time of the payment.
Many consumers are unaware of how junk fees bloat the costs of a variety of goods and services. As a result, the actual costs consumers pay are much larger than expected or advertised. Prepaid card fees, convenience fees, overdraft fees and late fees are among the myriad add-on charges that consumers often learn about after or during transactions.
As the consumer’s financial cop-on-the-beat, the Consumer Financial Protection Bureau (CFPB) has begun the rulemaking process to rein in the financial harms caused by a number of fees affecting at least 85 percent of consumers, according to a 2019 survey by Consumer Reports.
The proposed CFPB rule change would make exorbitant late fees illegal. Based on the agency’s estimates, the proposal could reduce credit-card late fees by as much as $9 billion per year — even though no additional collection costs are incurred.
“In markets across the economy, junk fees have unfortunately become the norm,” noted CFPB Director Rohit Chopra, in announcing the proposed rule. “These junk fees aren’t subject to the normal forces of competition. They’re often charged for so-called services that a consumer never wanted and are set at levels far beyond the true cost. Junk fees inflate prices and chip away at monthly budgets by obscuring part of the price from comparison shopping, making it difficult for Americans to shop around.”
The proposed rulemaking is based on CFPB research released last year that found that in just one year, 2020, credit card companies charged $12 billion in late fees alone. Card interest rates generate a separate revenue stream.
Other key findings from this report found that cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019. People in areas with the lowest rates of economic mobility paid nearly $10 more in late fee charges per account compared to people in areas with the highest rates of economic mobility.
While acknowledging the Bureau’s earlier efforts to rein in high-cost overdraft fees, Nadine Chabrier, a senior policy counsel with the Center for Responsible Lending, says more must be done to protect consumers from other costly junk fees.
“These charges wreak havoc on household budgets,” said Chabrier. “We applaud President Biden for highlighting their harm … We are encouraged that the consumer bureau announced it will take additional steps, and we urge the bureau to place strong limits on the size and frequency of these fees.”
More support for eliminating these budget-busting fees came from Congresswoman Maxine Waters, the current ranking member of the House Financial Services Committee, and its former chair.
“I was pleased to hear President Biden call out junk fees by name and double down on the Administration’s commitment to limit hidden fees and surcharges in a number of industries,” stated Waters on Feb. 8, the day after the State of the Union address.
“Thanks to the leadership of Director Chopra, the CFPB is helping to advance these efforts to put more money back into consumers’ pockets,” Waters added. “I, and consumers across the country, can’t wait for this rule to be finalized as soon as possible.”
Charlene Crowell is a senior fellow with the Center for Responsible Lending.