Biden Plays Whack-a-Bank With ‘Junk Fee’ Rules

The political price controls will merely shift costs somewhere else and reduce access to credit.

WSJ editorial. 

"President Biden vowed in his State of the Union speech to banish bank and credit-card “junk fees”—i.e., charges that progressives don’t like. If Americans see their credit costs increase, access to credit decline, or card rewards disappear, blame the Administration’s new price controls.

The Consumer Financial Protection Bureau (CFPB) last week finalized a rule effectively capping credit-card late fees at $8, which is about 75% less than the typical past-due charge. Director Rohit Chopra calls these “junk fees”—never mind that governments impose hefty penalties for late tax filings, parking tickets and other things. Are those junk too?

Fifteen years ago, Democrats in Congress authorized financial regulators to limit credit-card late fees at a sum that is “reasonable and proportional” to a borrower’s violation. The Federal Reserve in 2010 capped penalties at $25 ($35 for repeat tardy payments), which are adjusted for inflation. The maximum penalty is now $41.

The CFPB’s rule slashes the cap to $8 and eliminates the annual inflation adjustment. Yet as even the CFPB acknowledges, the lower penalty may cause more borrowers to pay late, and as a result incur higher “interest charges, penalty rates, credit reporting, and the loss of a grace period.” This would make it harder to qualify for an auto loan or mortgage.

The agency concedes that credit-card issuers may also raise interest rates, reduce rewards, “increase minimum payment amounts or adjust credit limits to reduce credit risk associated with consumers who make late payments.” Because some states cap credit-card interest rates, “some consumers’ access to credit could fall.” Thanks, Mr. President.

By the way, the rule comes as credit-card delinquencies have risen to the highest level in more than a decade. Issuers are tightening credit to reduce charge-offs. The rule could force more borrowers to turn to higher-cost credit such as payday loans. Businesses that contract with banks to offer credit cards will also take a hit. Late fees account for between 14% and 30% of department store credit-card revenue. They’ll have to offset the rule’s impact somehow, perhaps with higher prices.

The sprawling damage will be compounded by the CFPB’s proposal in January to cap bank overdraft fees as low as $3. Banks provide overdraft protection up to a limit for a fee as a courtesy to customers. This helps borrowers avoid penalties for late payments. Overdraft protection typically costs less than other forms of short-term credit.

In recent years the biggest banks have eliminated or reduced overdraft fees to compete with fintech firms. Overdraft fees account for less than 2% of U.S. commercial banking revenue. According to the CFPB, market-wide overdraft revenue fell in real terms by 37% between 2019 and 2022. What do you know? Market competition helps consumers.

The cap on overdraft fees could spur banks to raise other charges, the CFPB acknowledges. Some might impose “nonsufficient fund fees” when they reject debit-card purchases and ATM withdrawals that overdraft accounts. So the agency proposes banning those too.

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The big picture here is that the Administration is playing whack-a-bank, hitting this and that revenue stream as another arises, and turning banks into regulated utilities. Consumers are the biggest losers, as we’ve learned from other such price controls.

The Durbin Amendment to Dodd-Frank directed the Fed to limit fees charged to retailers for debit-card processing. A 2017 Federal Reserve staff study found that as a result larger banks reduced free checking and raised minimum balance requirements. Small banks not subject to the cap also limited free checking because they faced less competition. Rather than lower prices, retailers pocketed the savings.

Now the Fed has proposed a rule that would reduce the maximum debit interchange fee banks can charge merchants—to 17.7 cents from 24.5 cents on a $50 debit transaction. As Fed Governor Michelle Bowman noted, “one consequence may be that banks discontinue their lowest-margin products” designed to increase banking access for lower-income Americans.

The Biden Administration is playing up its price controls as an election-year gambit, but it never explains the unseen effects down the road. The forgotten man always pays."