CFPB’s Credit Card Late Fee Rule: How Small Banks Became Larger Card Issuers

The Consumer Financial Protection Bureau’s (CFPB) new final rule related to credit card late fees has certainly generated a good amount of controversy since being released by the CFPB on March 5, 2024. A lawsuit to set aside the final rule was filed a mere two days after the final rule was released, and many articles, blog posts, and other commentary have been written. One point not raised by others as of the date of this writing is how the CFPB’s conclusion related to the final rule not having a “substantial economic impact” on “the vast majority of small banks” is wrong.

At only 338 pages, it is not as long as most new rules issued by the federal agencies today. However, what is in those 338 pages will certainly have a big impact on the industry given the reduction in late fees to a maximum of $8 for almost all credit cards issued in the United States. The CFPB says that impact is more than $10 billion a year in its press release related to the final rule. The CFPB analyzed various regulatory reports and concluded that the multitude of small banks would be impacted little by the final rule. That conclusion is based solely on the fact that only 498 of 3,780 small banks they analyzed “reported outstanding credit card debt on their balance sheets.”

The CFPB crafted a definition of “Smaller Card Issuer” to mean a “card issuer together with its affiliates” that has “fewer than one million open credit card accounts ….” The rule allows Smaller Card Issuers to charge a late fee of $32. The CFPB assumes that the 498 small banks will not be impacted by the final rule and concludes that for “the vast majority of small banks, … therefore, [the new rule] would not have” any “significant economic impact.” The CFPB must have assumed that the remaining small banks do not offer credit cards and thus are not impacted by the final rule. Voilà, problem solved for small banks.

The CFPB’s simple analysis related to small banks misses a concept discussed elsewhere in its rulemaking. That concept is private label and co-branded credit cards. The CFPB describes in the rulemaking a financial institution’s comment related to the proposed compliance period being too short in part because of those types of cards. The comment indicated that “due to existing contractual limitations that will need to be renegotiated with partners to effectuate change in account-pricing terms” more time was necessary. The CFPB concludes those “issuers are likely to be Larger Card Issuers,” “likely have the capacity and resources to make the required disclosures” by the compliance date, and, in any event, can always “adopt the $8 late fee” while they collaborate with their partners.

This is one of many examples of the CFPB not understanding the products and industries it regulates. The fact that only 498 small banks reported credit card debt does not mean that only 498 small banks offer a credit card solution to their customers. Rather, what those statistics prove is that the vast majority (to use the CFPB’s words) of small banks offer a credit card solution for their customers through an agreement with a Larger Card Issuer.

Small banks are community based financial institutions whose employees live in and serve their customers and community. They need a card solution for their customers so that those customers have a full range of banking products and services available through the institution. However, economies of scale do not make it efficient for them to do so; thus, they do so through agreements with a Larger Card Issuer. Small banks perform due diligence and identify a Larger Card Issuer that fits their customers, and then negotiate various terms in the agreements with their customers in mind. The negotiation includes trade-offs that compensate the Larger Card Issuer for certain card terms and features offered to their customers in order to have a competitive offering. Commenters have written about the competitive effect of the $8 late fee on Smaller Card Issuers to reduce their own late fees despite the exemption from it. However, for the vast majority of small banks, reducing their late fees won’t be because of the competitive pressure, but rather because of the renegotiated terms of their arrangement with their Larger Card Issuer partner.

The result of the final rule for these thousands of small banks (and credit unions if the CFPB’s analysis related to credit unions is also accurate) will be the Larger Card Issuers renegotiating terms with the small banks, leaving less revenue for the small banks and/or less favorable terms for the small banks’ customers, thus making the small bank less competitive and leading to even more consolidation into the larger and largest financial institutions.