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CFPB reports “all-time high” interest rate margins on credit cards
On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”
CFPB report analyzes college banking and credit card agreements
On December 19, the CFPB released a report titled College Banking and Credit Card Agreements: Annual Report to Congress, which found that some college-sponsored financial products marketed towards students have less advantageous terms and conditions, and higher fees compared to typical market products.
According to the report, when colleges decided to subcontract with third-party financial service providers to facilitate the application of federal financial aid, they entered “college banking agreements” offering deposit accounts for students, which can function as debit or prepaid cards. The report distinguished between colleges that pay for certain service providers to facilitate the processing of federal financial aid disbursements (referred to as Tier One college banking arrangements), and colleges that are paid by certain service providers to offer deposit accounts and prepaid cards to the student population (referred to as Tier Two college banking arrangements). Tier Two account issuers paid colleges an aggregated of over $19.6 million in 2022. The CFPB observed that some colleges’ financial product partners charge students overdraft fees, despite the general industry trend to move away from such fees. The CFPB also warned in its report that certain overdraft fees can violate the CFPA.
The report also found that students at HBCUs and Hispanic-servicing institutions on average pay higher fees per account. The CFPB also noted several other additional fees charged to students by financial institutions, including (i) dormant account fees; (ii) deposit and withdrawal fees for student ID cards that also function as prepaid cards; and (iii) “sunset” fees imposed on students to pay after graduation or reaching a certain age.
Regarding partnerships in credit cards, the CFPB noted that although the passage of the CARD Act reduced the profitability of marketing credit cards on college campuses, thousands of new accounts between colleges and credit card issuers are opened every year. The CFPB also noted that college students maintain a high level of reliance on credit cards to cover costs and it indicated that it “will continue to research evolving practices” to understand how credit cards are being marketed to college students.
CFPB adjusts annual dollar amount thresholds under TILA, HMDA regulations
On September 18, the CFPB released a final rule revising the dollar amounts for provisions implementing TILA and its amendments that impact loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) and qualified mortgages (QM). The Bureau is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on June 1, 2023. The following thresholds are effective January 1, 2024:
- For HOEPA loans the adjusted total loan amount threshold for high-cost mortgages will be $26,092, and the adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,305;
- For qualified mortgages under the General QM loan definition, the thresholds for the spread between the annual percentage rate and the average prime offer rate will be: “2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $130,461; 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $78,277 but less than $130,461; 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $78,277; 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $130,461; 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $78,277; or 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $78,277”; and
- For all QM categories, the adjusted thresholds for total points and fees will be “3 percent of the total loan amount for a loan greater than or equal to $130,461; $3,914 for a loan amount greater than or equal to $78,277 but less than $130,461; 5 percent of the total loan amount for a loan greater than or equal to $26,092 but less than $78,277; $1,305 for a loan amount greater than or equal to $16,308 but less than $26,092; and 8 percent of the total loan amount for a loan amount less than $16,308.”
With respect to credit card annual adjustments, the Bureau noted that its 2024 annual adjustment analysis on the CPI-W in effect on June 1, did not result in an increase to the current minimum interest charge threshold (which requires “creditors to disclose any minimum interest charge exceeding $1.00 that could be imposed during a billing cycle”).
CFPB looks to increase card competition
On April 17, CFPB Director Rohit Chopra said the Bureau is focused on finding ways to increase competition and reduce costs as credit card debt continues to rise and interest rates increase. Chopra discussed a proposal announced in February (comments are due May 3), which would ensure that late fees on credit cards accounts are “reasonable and proportional” to late payments as required under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (covered by InfoBytes here). He also discussed updates made in March to the Bureau’s terms of credit card plans (TCCP) survey and database, which are intended to help consumers comparison shop for credit cards and find the best interest rates and products (covered by InfoBytes here). The refreshed TCCP survey allows issuers to voluntarily submit information about their credit card products and requires the top 25 credit card issuers to provide information on all their credit cards instead of just their most popular products, Chopra explained, stating that the initiative is designed to help smaller credit card issuers reach comparison shoppers and compete with bigger players in the market. Chopra also touched upon other initiatives, such as an ongoing review of the consumer credit card market and an examination focusing on large credit card issuers’ suppression of key data from consumer credit reports.
CFPB proposal targets late fees on cards
On February 1, the CFPB issued a notice of proposed rulemaking (NPRM) to amend Regulation Z, which implements TILA, and its commentary to better ensure that late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under the statute, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The NPRM would (i) adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type (a company would be able to charge above the immunity provision provided it could prove the higher fee is necessary to cover the incurred collection costs); (ii) eliminate the automatic annual inflation adjustment for the immunity provision amount (the Bureau would instead monitor market conditions and make adjustments as necessary); and (iii) cap late fees at 25 percent of the consumer’s required minimum payment (issuers are currently able to potentially charge a late fee that is 100 percent of the cardholder’s minimum payment owed).
The NPRM also seeks feedback on other possible changes to the CARD Act regulations, including “whether the proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.” Comments on the NPRM are due by April 3, or 30 days after publication in the Federal Register, whichever is later.
According to the CFPB, the Federal Reserve Board “created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard.” As a result, the CFPB stated that immunity provisions have risen (due to inflation) to $30 for an initial late payment and $41 for subsequent late payments, resulting in consumers being charged approximately $12 billion in late fees in 2020. Based on CFPB estimates, the NPRM could reduce late fees by as much as $9 billion per year. CFPB Director Rohit Chopra issued a statement commenting that the current immunity provisions are not what Congress intended when it passed the CARD Act.
The Bureau also released an unofficial, informal redline of the NPRM to help stakeholders review the proposed changes, as well as a report titled Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies, which documents findings on the relationship between late fee revenue and pre-charge-off collection costs for certain large credit card issuers. According to the report, “revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.”
The NPRM follows several actions initiated by the Bureau last year, including a request for comments on junk fees, a research report analyzing credit card late fees, and an advance notice of proposed rulemaking that solicited information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses (previously covered by InfoBytes here and here).
CFPB seeks feedback on credit cards
On January 24, the CFPB issued a notice and request for information (RFI) seeking public feedback on several aspects of the consumer credit card market in accordance with Section 502(b) of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted by Congress to establish fair and transparent practices related to the extension of credit within the credit card market, and requires the Bureau to undertake a biennial review of the industry to determine whether regulatory adjustments are needed. The Bureau said it plans to publish its report to Congress later in 2023.
The RFI covers several broad topics ranging from lending practices to the effectiveness of rate and fee disclosures, and seeks comments on the experiences of consumers and credit card issuers in the credit card market, as well as on the overall health of the credit card market. Specifically, the RFI requests feedback on issues related to:
- Credit card agreement terms and credit card issuer practices;
- The effectiveness of issuers’ disclosure of terms, fees, and other expenses of credit card plans;
- The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans;
- The cost and availability of consumer credit cards;
- The safety and soundness of credit card issuers;
- The use of risk-based pricing for consumer credit cards; and
- Consumer credit card product innovation and competition
Comments on the RFI are due April 24. The Bureau noted in its announcement that it also issued market-monitoring orders to several major and specialized credit card issuers seeking information on various topics, including major credit card issuers’ practices related to, among other things, applications and approvals, debt collection, and digital account servicing.
CFPB adjusts annual dollar amount thresholds under TILA, HMDA regulations
On December 21, the CFPB released a final rule revising the dollar amounts for provisions implementing TILA and its amendments that impact loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) and qualified mortgages (QM). The Bureau is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on June 1, 2022. The following thresholds are effective January 1, 2023:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $24,866, and the adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,243;
- For qualified mortgages under the General QM loan definition, the thresholds for the spread between the annual percentage rate and the average prime offer rate will be: “2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $124,331; 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $74,599 but less than $124,331; 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $74,599; 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $124,331; 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $74,599; or 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $74,599”; and
- For all QM categories, the adjusted thresholds for total points and fees will be “3 percent of the total loan amount for a loan greater than or equal to $124,331; $3,730 for a loan amount greater than or equal to $74,599 but less than $124,331; 5 percent of the total loan amount for a loan greater than or equal to $24,866 but less than $74,599; $1,243 for a loan amount greater than or equal to $15,541 but less than $24,866; and 8 percent of the total loan amount for a loan amount less than $15,541.”
With respect to credit card annual adjustments, the Bureau noted that its 2023 annual adjustment analysis on the CPI-W in effect on June 1, did not result in an increase to the current minimum interest charge threshold (which requires “creditors to disclose any minimum interest charge exceeding $1.00 that could be imposed during a billing cycle”).
The Bureau also issued a final rule adjusting the asset-size threshold under HMDA (Regulation C). Under HMDA, institutions with assets below certain dollar thresholds are exempt from collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $50 million to $54 million, thereby exempting institutions with assets of $54 million or less as of December 31, 2022, from collecting HMDA data in 2023.
CFPB releases annual college credit card report
On October 13, the CFPB released its annual report to Congress on college credit card agreements. The report was prepared pursuant to the CARD Act, which requires card issuers to submit to the CFPB the terms and conditions of any agreements they make with colleges, as well as certain organizations affiliated with colleges. According to the Bureau, the report “raises questions about whether some marketing deals between colleges and financial institutions comply with Department of Education rules.” The report also highlighted the need for transparency in the arrangements schools have with financial institutions. In conjunction with the report, the DOE issued guidance clarifying colleges’ responsibility to ensure that campus financial products are consistent with students’ best financial interests, including by reviewing whether any fees assessed are consistent with or below prevailing market rates. The DOE’s guidance discussed overdraft and NSF fees, given that financial institutions in the general market have increasingly been reducing or eliminating certain fees. The Bureau’s report included data on 11 account providers, including non-bank financial service providers, banks, and credit unions offering more than 650,000 student accounts in partnership with 462 institutions of higher education during the 2020-2021 award year. Key findings of the report include, among other things: (i) financial services providers and their partner schools appear to offer and promote more costly products to students than are otherwise available in the market; (ii) one entity dominates the market for financial aid disbursements, providing nearly 70 percent of the accounts offered in partnership with schools; and (iii) nearly 30 percent of accounts in the Bureau’s sample were subject to arrangements in which the financial services provider made payments to the partner school.
CFPB reports on credit card interest rates
On August 12, the CFPB released a blog post analyzing factors affecting high credit card interest rates. According to the Bureau, over 175 million Americans have at least one credit card and nearly half of active credit card accounts carry a balance. The Bureau noted that reforms in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) “advanced competition and saved consumers billions of dollars by restricting harmful back-end or hidden pricing practices,” however, “after the market adjusted to these changes, credit card interest rates have increased despite falling charge-off rates, a stable share of subprime cardholders, and a historically low prime rate.” The Bureau further noted that credit card interest rates increased following the Great Recession, even though several industry indicators suggested the risk of credit card lending has fallen to an all-time low. Regarding subprime accounts, since 2015, the share of credit card holders with subprime scores has remained stable, representing less than one-fifth of total accounts. Therefore, high rates persist even though presumably riskier subprime loans have not increased. Regarding prime accounts, the Bureau noted that “[c]ompared to other lending products, credit card pricing appears to be less responsive to macroeconomic trends like changes in the cost of funds – a measure of how much banks spend to acquire money to lend to consumers – as represented by the prime rate.” As for credit card profitability, the Bureau suggested that the apparent mismatch between credit card interest rates and the risk and cost of lending may explain part of the market’s profits. The Bureau further explained that in 2021, large credit card banks reported an annualized return on assets of near seven percent, which was the highest level since at least 2000, and “[w]hile credit card portfolios have higher rates of defaults than other consumer lending products, it is unclear whether these factors fully account for revenue from high interest rates.” The Bureau also noted that because six credit card issuers account for more than two-thirds of total balances every year since 2005, the CFPB plans to assess whether this is the result of “trends, like increasing rewards and high switching costs, or the result of anti-competitive practices.”
CFPB to look at late fees on cards
On June 22, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) rules inherited by the CFPB from the Federal Reserve, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. However, the rules provide for a safe harbor limit that allows banks to charge certain fees, adjusted for inflation, regardless of the costs incurred. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.”
In 2010, the Federal Reserve Board approved implementing regulations for the CARD Act that allowed credit card issuers to charge a maximum late fee, plus an additional fee for each late payment within the next six billing cycles (subject to an annual inflation adjustment). As the CFPB reported, the safe harbor limits are currently set at $30 and $41 respectively. The CFPB pointed out that in 2020, credit card companies charged $12 billion in late fee penalties. “Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” CFPB Director Rohit Chopra said. Chopra issued a separate statement on the same day discussing the current credit card market, questioning whether it is appropriate for card issuers to receive enforcement immunity if they hike the cost of credit card late fees each year by the rate of inflation. “Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?” he asked.
Among other things, the ANPRM requests information relevant to certain CARD Act and Regulation Z provisions related to credit card late fees to “determine whether adjustments are needed.” The CFPB’s areas of inquiry include: (i) factors used by card issuers to determine late fee amounts and how the fee relates to the statement balance; (ii) whether revenue goals play a role in card issuers’ determination of late fees; (iii) what the costs and losses associated with late payments are for card issuers; (iv) the deterrent effects of late fees and whether other consequences are imposed when payments are late; (v) methods used by card issuers to facilitate or encourage timely payments such as autopay and notifications; (vi) how late are most cardholders’ late payments; and (vii) card issuers’ annual revenue and expenses related to their domestic consumer credit card operations. The Bureau stated that public input will inform revisions to Regulation Z, which implements the CARD Act and TILA. Comments on the ANPRM are due July 22.
The ANPRM follows a June 17 Bureau blog post announcing the agency’s intention to review a “host of rules” inherited from other agencies such as the FTC and the Federal Reserve, including the CARD Act. (Covered by InfoBytes here.)