CR also calls on committee to oppose bills to allow earned wage access cash advances and other new fintech services without needed consumer protections
WASHINGTON, D.C. – Consumer Reports called on the House Financial Services Committee in a letter today to oppose a bill that would repeal the Consumer Financial Protection Bureau’s recently adopted limits on credit card late fees. CR also urged members of the committee in a separate letter to reject a bill that would authorize a new class of fintech cash advances and a separate measure that would allow financial companies to circumvent important consumer protection laws in order to encourage innovation. The committee will hold a hearing and is expected to vote on the bills on Wednesday, April 17, beginning at 10am ET.
“Credit card companies penalize consumers with exorbitant late fees that far exceed their actual costs, raking in billions of dollars in profits on the backs of those who can least afford it,” said Chuck Bell, advocacy program director for Consumer Reports. “The CFPB’s new late fee limits restore vital guardrails against excessive charges as Congress intended and will greatly benefit consumers, especially families living paycheck to paycheck and doing their best to manage expenses.”
One in five Americans – an estimated 52 million people – said they had paid a credit card late fee in the previous 12 months, according to a September 2023 CR nationally representative survey of 2,089 adults. In CR’s survey, 82 percent of Americans said they either somewhat supported or strongly supported lowering the maximum late fee.
The CFPB’s new rule applies to the largest credit card issuers (those with more than 1 million accounts) and lowers the typical late fee to $8 so that it is more in line with the true costs of the credit card issuer. Banks subject to the rule can charge a higher late fee if they can prove that is necessary to cover their actual collection costs. The CFPB’s rule also bans companies from increasing fees by the rate of inflation, as banks have been doing.
The CFPB’s rule is in keeping with the Credit Card Accountability and Disclosure Act of 2009 (CARD Act), which required that credit card late fees should be “reasonable and proportional” to the costs incurred by issuers to handle late payments. The CFPB estimates that the income generated by the largest issuers from late fees is approximately five times greater than the collection costs that the companies incur for late payments. As a result, credit card late fees average $30 for the first offense and $41 for subsequent ones.
HR 7440: Regulatory Sandboxes
The Committee is also expected to vote on HR 7440, a bill that would create “regulatory sandboxes” that allow financial companies to circumvent important consumer protection laws in the guise of encouraging innovation. However, the bill lacks adequate safeguards to ensure that the so-called innovations are safe for consumers.
CR’s letter notes, “Blind endorsement of untested financial ‘innovations,’ without proper oversight, often leads to consumer abuses – whether its toxic mortgages that fueled the foreclosure crisis, discriminatory algorithms, or predatory loans designed to evade credit laws. This bill will make it easier for bad actors to exploit consumers.”
CR points out that the bill would create an overly hasty rubber-stamp approval process that doesn’t provide regulators with sufficient time and the detailed information they need to thoroughly vet proposed products and services for risks for consumers. The bill would also allow companies to force consumers into arbitration to settle disputes and prevent federal and state agencies from taking enforcement actions by simply filing a petition.
HR 7428: Earned Wage Access Cash Advances
The Committee is also expected to take up HR 7428, a bill that would authorize Earned Wage Access loans. This new class of fintech cash advances are short term, small dollar loans that enable workers to access a portion of their wages before their payday. Some lenders also offer direct-to-consumer cash advances that are not tied to a borrower’s paycheck. Instead, borrowers apply for these loans by providing lenders access to their bank account transactions, running balances, and direct deposit activity and authorize lenders to debit their bank accounts to repay the loans.
While providers market these services as free or zero percent interest, some of them charge borrowers a variety of fees, such as fees charged for each transaction, fees for instant access to loan funds, a monthly subscription fee to receive multiple loans per month, or fees in the form of tips. Some EWA companies use deceptive designs and manipulative measures to induce consumers to tip, including disabling services if borrowers do not tip, setting default tips, making it difficult to set a $0 tip, or claiming that tips help other vulnerable consumers.
The bill purports to provide consumer protections for such products, but it exempts the loans from the Truth in Lending Act and preempts stronger state laws that may emerge to provide tougher safeguards for consumers. CR’s letter notes that more robust protections are needed around dispute resolution, liability for unauthorized transfer of funds, and data privacy and security. While the bill includes a provision requiring providers to offer a “no-cost” option, it still allows providers to charge fees and social tips, which could add significant costs for financially vulnerable workers. Finally, by allowing providers to access a consumer’s bank account to seek repayment, the bill could trigger overdraft fees if the timing of the withdrawal doesn’t align with a worker’s payday.
Michael McCauley, michael.mccauley@consumer.org