Finding an offer on a credit card seems like one of those pretty simple things. Low, eye-catching rates are posted on every website for those who search online, and paper envelopes with special credit card offers appear in the mail.
But are credit card issuers really that competitive?
The Consumer Financial Protection Bureau is once again looking deeper into hidden fees, abusive revenue streams and anti-competitive financial practices that can harm consumers.
What is a junk fee?
We all know how much hidden fees add to our costs when buying concert tickets online. But some argue that the same can be said of fees for financial services and products.
“These unwanted fees make it harder for us to choose the best product or service since the true cost is hidden,” Rohit Chopra, director of the Consumer Financial Protection Bureau, said on a media call on Wednesday.
Often, Chopra said, banks and others obscure the true cost consumers pay when selecting a specific mortgage, bank account or credit card by highlighting an attractive offer, but then charging inflated fees.
Overdraft fees, late fees, check image fees, stop payment fees, closing fees, and a wide variety of other fees will come under scrutiny.
“By promoting competition and ridding the marketplace of illegal practices, we hope to save Americans billions,” Chopra said in a statement.
Chopra’s argument is that a new “fee economy” distorts free markets and makes it harder to compare prices if you don’t know how much money will actually come out of your pocket.
Chopra said the agency is ending the banking industry’s reliance on what he called “exploitative” revenue streams.
After the 2008-09 financial crisis, we saw more pressure from Washington to improve disclosures. Late fees are clearly defined online in the terms and conditions. Take a look at your credit card statements and you can also spot late fees there.
But if everyone charges the same fees, well, how much competition is there really? Or if the fee is much more than the actual additional cost of a service, is that fair?
When will 0% cost you a lot of money?
Consider buying a 0% introductory rate credit card. Even if you have a good credit rating and qualify for the card, you still face high fees to transfer your debt from a high-rate credit card to a card that offers a temporary rate of 0. % for, say, nine months or more.
Balance transfer fees can be found quite easily if you carefully read the terms and conditions of an offer. They aren’t necessarily hidden, but many consumers might not spot them easily if they don’t look or understand the true cost.
Almost all companies will charge between 3% and 5% of the balance you transfer, according to the CFPB, which expressed concern about balance transfer fees.
In other words, you could incur a fee of $90-150 if you transfer $3,000 from one credit card to another with the 0% limited offer for the next year. Is it worth your money? This may depend on how soon you pay off that balance and the rate you are currently paying.
The idea that balance transfer fees are so similar across institutions — typically 3% or 5% — is a sign that the market itself isn’t competitive, says a senior CFPB official .
Consumers transferred $35 billion in credit card balances in 2020, according to the CFPB, and banks charged 3% to 5% fees on that volume.
Consumers cannot negotiate a lower fee or avoid a balance transfer fee if you want the service.
As a result, consumers face obstacles when trying to make smart decisions with their money, according to CFPB officials.
CFPB officials could not say what steps might be taken or even what the timing of next steps might be. Some announcements could be made this year and later.
Small businesses, experts and consumers have asked for feedback
The CFPB is seeking comments through March 31 that can guide the agency as it develops new rules, issues guidance and coordinates concerns with other banking regulators to boost transparency and competition.
Comments should be identified by “Docket No. CFPB-2022-0003” in the subject line and can be emailed to [email protected]
The CFPB welcomes input from small business owners, nonprofit organizations, legal aid attorneys, academics and researchers, state and local government officials, and financial institutions.
The agency wants to know more about “charges for things people thought were covered by the base price of a product or service; unexpected charges for a product or service; charges that seemed too high for the alleged service and charges for which it was unclear why they were charged.”
Consumers who wish to alert regulators of further concerns about a consumer financial product or service can file a complaint online at ConsumerFinance.gov or call the Consumer Financial Protection Bureau at 855-411-2372 at any time.
What are the inconvenient costs?
The consumer protection agency could target several areas where fees obscure the true cost passed on to consumers, including:
Late fees: Major credit card companies charged more than $14 billion in 2019 in late fees, according to the CFPB. The average charge was around $35.
According to the CFPB, nearly all banks charge the same late fees on credit cards — the maximum currently allowed by law of $30 for the first late payment and $41 for subsequent late payments. The average late fee has risen to $31, approaching the average of $33 before the Credit Card Accountability and Disclosure Act of 2009 (CARD).
Overall, the CFPB notes that fees of all kinds, including these late fees, account for around 20% of the total cost of credit cards.
Mortgage closing costs: The CFPB notes that most mortgages often involve “thousands of dollars in application fees and closing costs, which few people are in a good position to shop around for.”
Many times, Chopra said, consumers feel “cheated.”
These fees may deter some homeowners from refinancing at a better, lower rate.
Further, the CFPB stated that “borrowers who face financial hardship and struggle to make mortgage payments may find themselves unable to catch up due to the snowball of a plethora of related fees. to mortgage delinquency,” according to the agency’s request for information.
“Monthly Property Inspection Fees, New Title Fees, Legal Fees, Appraisals and Valuations, Broker Price Opinions, Compulsory Insurance, Foreclosure Fees and Miscellaneous” Corporate Advances “unspecified can all cause an owner to lose a house.”
Overdraft fees: Banks and credit unions incurred more than $15 billion in overdraft fees and insufficient funds or NSF fees, sometimes referred to as insufficient funds fees, in 2019. The average fees charged were between 30 and 35 dollars.
The insufficient funds charge is triggered when you don’t have enough money in your account to cover the check you just wrote or automatic payment. The bank or credit union will decline the transaction but then charge the fee.
What are the banks doing?
Some of the outcry over overdraft fees has led to major changes. Chase, for example, created a larger buffer for deficits and eliminated the insufficient funds fee. But Chase keeps its $34 overdraft fee, and Chase customers can be charged a maximum of three overdraft fees per day.
Detroit-based Ally Financial, an online-only bank, announced last summer that its Ally Bank would end all overdraft fees.
Capital One announced plans in December to eliminate all overdraft fees and insufficient funds fees for its retail banking customers. Customers can choose whether or not to access overdraft protection. Capital One’s no-fee overdraft product was officially launched and became available to all mainstream bank customers on January 13.
Bank of America announced in January that it would reduce overdraft fees from $35 to $10 starting in May. And in February, Bank of America will eliminate the insufficient funds fee and remove the ability for customers to withdraw their accounts at ATMs.
These steps are important for consumers, but clearly the consumer agency sees more to do here.
“It’s progress, but it’s not enough,” Chopra said on the media call.
The CFPB scrutinizes fees. Expect the banks to back down.
An industry statement released by the American Bankers Association, Consumer Bankers Association, Credit Union National Association and others sharply criticized the CFPB’s new fee information request.
The banking groups called the agency’s decision “a misguided effort that paints a distorted and misleading picture of our country’s highly competitive financial services market.”
The groups said consumers have a wide range of choices and businesses compete every day, including on fees.
We’ll see how many changes could be coming. I have no doubt, however, that even greater progress can be made in offering a price reduction to more consumers.