When so many working families are struggling, the Biden administration is proposing rules that would squeeze low-income Americans out of the credit market. The Consumer Financial Protection Bureau has announced a rule limiting the amount a credit card company can charge for late or delinquent payments. On its face, this sounds like a well-intentioned regulation that might protect consumers — but like many government “solutions,” if implemented, it will hurt millions of low-income families.
Late fees act as an incentive to make payments on time and, therefore, help encourage borrowers to improve their credit scores. Currently, the law allows for these fees to be up to $30 for the first fee and up to $41 for subsequent late payments, but the proposed rule would limit a late-payment fee to just $8 with no additional fee for future delinquencies.
Estimates say this will remove $9 billion yearly from the industry. While some might herald this a victory in the “Junk Fees War,” it will certainly have a devastating effect on the availability of credit. Those with low credit scores stand to lose the most by this new rule. By implementing a price control on late fees, the CFPB will be directly responsible for reducing access to credit because credit issuers must examine their product offerings and eliminate as much risk as possible from their books.
Taxpayers who previously would have qualified for higher limits on their cards or for a credit card, in general, will find it harder to be approved and struggle to meet their increasing financial obligations.
If you caught the president’s State of the Union speech, you might be under the false impression that our economy is fully recovered from the disruption of the COVID-19 pandemic:
“We are the only country that has emerged from every crisis stronger than when we entered it. That is what we are doing again. Two years ago, our economy was reeling. As I stand here tonight, we have created a record 12 million new jobs, more jobs created in two years than any president has ever created in four years. … I ran for president to fundamentally change things, to make sure the economy works for everyone so we can all feel pride in what we do. To build an economy from the bottom up and the middle out, not from the top down. Because when the middle class does well, the poor have a ladder up.”
However, major indicators show us how hollow the president’s words on the economy are. The Federal Reserve Bank of New York tracks the probability of a recession, which as of January, reached its highest probability since 1982. As we continue to see economic indicators that a recession is nearing, now is a particularly terrible time to be making credit less accessible.
The rule also comes when the CFPB’s authority is being called into question. The Supreme Court has announced that it will hear the administration’s appeal of a 5th Circuit Court ruling that the funding mechanism of the CFPB violates the Constitution. This is because the agency’s unique funding stream is funneled through the Federal Reserve instead of being appropriated directly by Congress.
A Supreme Court ruling against the CFPB could call into question the legitimacy of the rules and regulations the agency has made and could even dissolve the CFPB altogether. This would be good news for taxpayers and consumers, as the agency has done more harm than good. The CFPB’s war on “fees” is just the latest example, but re-evaluating the agency’s organizational mission from top to bottom should be a high priority for reformers.