Dive Brief:

• The country’s largest credit card issuers defended the need for meaningful late fees in their recent responses to a group of senators who in May demanded details on their late fee practices.
• The correspondence related to the Consumer Financial Protection Bureau’s efforts this year to curtail those fees. At New York-based American Express last year, late fees collected from its U.S. consumer cardholders made up less than 1% of total revenue, a company executive said in Amex’s response.
• In countering the card issuers’ responses, Sen. Elizabeth Warren (D-MA) called on CFPB Director Rohit Chopra to “finalize the proposed rule without making any changes that weaken it,” according to a June 30 release. She shared the card issuers’ letters in last week’s release.

Dive Insight:

On May 9, Warren and six other senators sent the CEOs of the 10 largest U.S. credit card issuers a letter demanding details about their companies’ late fee practices and citing a CFPB effort to curtail those fees. The issuers include Amex as well as JPMorgan Chase, Discover Financial Services, Capital One and Wells Fargo.

The CFPB in February issued a proposed rule limiting credit card late fees to $8 per payment and banning those fees from being over 25% of the minimum payment. Banks and bank trade groups have pushed back on that proposal. 

In their responses to the senators, card issuers outlined their late fee practices, including auto-pay functions and the alerts and notifications directed at customers when a payment due date approaches. Riverwoods, Illinois-based Discover waives the fee the first time a payment is missed, Richard Santoro, that company’s head of government relations, noted in his letter.

Santoro didn’t detail late fees’ contribution to the company’s revenue last year, but Discover CFO John Greene has said during conference appearances this year that late fees typically make up between 3.5% and 4% of the company’s overall revenue.   

In defending their practices, issuers called meaningful late fees a deterrent to tardy payments and warned of potential consequences if fees are capped as the CFPB has proposed. 

Between 65% and 70% of JPMorgan Chase’s credit card customers who miss a payment don’t do so again for the subsequent payment, wrote Kathleen Mellody, head of government relations at the nation’s largest bank.  

The proposed late fee cap “could reduce the availability of credit across the market” for consumers with little credit history or lower credit scores, because late fees help banks manage the risk associated with giving credit access to those consumers, Mellody wrote.

Reducing late fees to a “nominal” level could lead to more late payments and “consequently raise costs on the entire system,” Santoro wrote in his response. He likened the situation to appropriate levels for fees tied to parking tickets, speeding fines and late income tax penalties. 

Even though late fees aren’t a meaningful contributor to Amex’s revenue, there are costs tied to non-payment or late payment, including recovery expenses to collect late payments and a higher cost of managing credit risk, Howard Grosfield, Amex’s president of U.S. Consumer Services, wrote in his response.

“The CFPB can achieve its objective of significantly reducing penalty fees for consumers while doing so in a way that more accurately reflects the variables that drive costs for issuers associated with late payments than the proposed rule does today,” Grosfield wrote. 

Amex has suggested to the CFPB that collection costs include pre-and post-charge-off costs, whereas the bureau’s proposal would only allow for the inclusion of pre-charge-off collection costs, Grosfield wrote.

After receiving credit card issuers’ responses to the letter, Warren wasn’t satisfied. Issuers “repeatedly revealed their interest in maintaining exorbitant late fees as tools of punishment,” Warren said in the release. Additionally, they provided “no evidence to suggest that excessive $41 fees are necessary to deter late payments,” she said.

“None of the issuers provided data we requested to substantiate their claims that the costs associated with collecting late payments exceeds the total late fees collected,” she added in the release.