The Consumer Financial Protection Bureau (CFPB) is a U.S. government agency. It is dedicated to ensuring fair treatment of consumers by their lenders, banks and other financial institutions.
The Truth in Lending Act (TiLA) seeks to protect consumers from unfair credit card practices. This act, also known as Regulation Z, protects users of any form of consumer credit, including mortgage loans, installment loans and open-end credit. Under the current act, credit card late fees are limited to $31 initially, then $41 for each subsequent late or missed payment.
What is the proposed change?
The amendment to TiLA would limit late fees to $8 for all late or missed contractual monthly payments. According to the CFPB's proposal, the automatic penalty of $8 would apply and would be capped at a maximum of 25% of the contractual payment.
In addition, within the current rules, limits can be reviewed periodically with a view to amending them according to inflation. However, the proposed amendment would ensure fees remain at the newly proposed rate.
In this article, we look into how these proposed changes will affect consumers and our US-based clients. We will also compare the similarities between UK and US regulations.
What’s driving the need for the change?
The CFPB has observed a notable escalation in consumer debt, soaring from $15.85 trillion in the first quarter of 2022. This surge can be attributed, in part, to heightened inflation, increased interest rates, burgeoning consumer demand, and strategic decisions made by financial institutions.[1]
Notably, within the realm of non-housing debt, the expansion is predominantly fueled by credit card balances, which surged to $986 billion in the fourth quarter of 2022, surpassing the pre-pandemic peak of $927 billion. Auto loan balances also experienced significant growth, reaching $1.55 trillion in the same quarter, while student loan balances currently stand at $1.60 trillion. Given these trends, it underscores the importance for the CFPB to scrutinise the actual cost of debt to individual consumers.[2]
How does the US compare to the UK?
In the UK, in 2006 a report from the Office of Fair Trading (OFT) published guidelines relating to late payment fees on credit cards.[3]. This report stated that they believed that the industry at the time was charging consumers unfair late payment fees up to £35 based on industry consultation with credit providers. They then followed this with a guideline that all late payment fees should be £12.
How does the update to TiLA affect the consumer?
In the below examples, let’s look at how a reduced late payment fee amount affects customers making monthly repayment amounts of $100 and $20.
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With existing late payment fee amounts
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After implementation of reduced late payment fees under TiLA (Regulation Z)
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Example 1 - John
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Contractual payment of $100. First missed payment, late fee to apply = $31
Contractual payment of $100. Second missed payment, late fee to apply = $41
By month three, John is expected to make a payment of $372 to keep up to date with his payments.
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Contractual payment of $100. First missed payment, late fee to apply $8
Contractual payment of $100. Second missed payment, late fee to apply $8
By month three, John is expected to make a payment of $316. This is $56 lower with the reduced late payment fee amount in place.
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Example 2 - Jane
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Contractual payment of $20. First missed payment, late fee to apply = $31
Contractual payment of $20. Second missed payment, late fee to apply = $41
By month three, Jane is expected to make a payment of $132 to keep up to date with her payments.
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Contractual payment of $20. First missed payment, late fee to apply $5
Contractual payment of $20. Second missed payment, late fee to apply $5
By month three, Jane is expected to pay $70, with the reduced late payment fee, she is paying $62 less.
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What are the benefits for the consumer?
The current late payment fee structure has a negative impact on the consumer’s ability to pay back their overall credit card debt as they are faced with higher fees and a higher overall balance. The amendments will mean consumers should be able to repay their debt more effectively and earlier.
In addition, the overall financial stress will decrease for many consumers in financial difficulties.
What are the benefits for the client?
The proposed changes should cause a reduction of bad debt for the card provider, as this should make it easier for consumers to repay their debt and hopefully avoid falling into arrears.
Due to the reduction of fees and consumers being able to repay their debt more easily, this should in turn decrease the volume of consumers entering collections and recoveries as their debt value will be lower and more manageable.
What’s our overall take on this proposal?
The proposed change to the regulation is a major step forward for the US credit industry in ensuring consumers are treated more fairly and reducing the country's debt burden at what is seen as a difficult financial period. Over the longer term, debt providers will reap the benefits of this as their own provisioning can be reduced and bad debt should also decrease along with this.
Through our expertise and knowledge, we can support creditors and debt providers across the globe to adapt and adhere to changing regulations for their region. We can support them through the selection and implementation of systems that align with their goals and resolve bad debt efficiently.
About the author
Michael Dry
Lead Consultant
Arum
Mike has worked within the debt industry since 2006. He spent most of his career working in the retail banking sector for a major UK credit card company, whilst achieving his degree. Shortly after, he became a part of the team responsible for maintaining and improving the FICO (now C&R) Debt Manager v6.2 collections platform and has since worked in debt recovery and the public sector.
Since joining Arum in September 2013, Mike has worked across various clients including the full project lifecycle of the first UK implementation of C&R Debt Manager v9. Mike plays a key role across all cycles of project delivery; planning, pre/post Implementation, design and migration. He is currently engaged in a C&R Debt Manager v12 SaaS implementation with one of our international clients.
[1] Fair Debt Collection Practices Act CFPB Annual Report 2023
[2] Center for Microeconomic Data, “Household Debt and Credit Report: Q4 2022” (Feb. 2023), Federal Reserve Bank of New York
[3] OFT rules credit card late fees 'unfair'