Credit cards are a risky business. They allow consumers to decide when, where, and for what purpose their bank will lend them money. And consumers then choose when they repay their bank. That kind of lending results in high default rates, not to mention significant fraud. Banks and other financial institutions have suffered massive losses on credit cards over the past half-century as they struggled to balance the economic risks and benefits of these relatively novel financial tools. Regulators love the convenience credit cards provide, but they abhor how consumers often spend money they can’t or won’t repay. It’s a tough business.
In the aftermath of the bungled 2008 financial crisis, Congress created the Consumer Financial Protection Bureau, disturbing the delicate balance in the credit-card market among banks, consumers and regulators. Many feared that consumer interests would be pushed too far by this new bureau because of its limited understanding of the financial industry, virtually unlimited funding from the Federal Reserve and minimal Congressional oversight. Under these circumstances, we believed banks would make fewer consumer loans. And we were right. Today, nonbank lenders and fintech firms, which are more lightly regulated, account for about half of the U.S. consumer loan market.
Ignoring this important history, President Biden, in his recent State of the Union address, sought to bolster his zealous CFPB’s attempts to limit what he described as “junk fees.” Mr. Biden said these fees, which are assessed when consumers fail to make a payment on time, are an example of “when a company overcharges you and gets away with it.” That is a particularly peculiar assertion given that federal rules specifically allow such fees.
We participated in drafting or approving many of the consumer-protection rules that govern credit cards today. Since the 1970s, credit cards have been the most regulated financial product in the country. It seems impossible that abusive tactics regarding late fees could have been going on under the watchful eyes of the Fed, the Federal Deposit Insurance Corp., the comptroller of the currency, the National Credit Union Administration and 50 state regulators for nearly 50 years.
Nevertheless, the president wants to reduce the current $41 cap on late fees to $8. The CFPB provided empirical support for an $8 cap in its recent
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