Looking around for a credit card deal seems like one of those things that is quite easy. Low, flashy rates are plastered all over websites for those who research 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 taking another, deeper dive into hidden fees, exploitative revenue streams and anticompetitive financial practices that can harm consumers.
What is a junk fairy?
We all know how hidden costs drive up our costs when buying concert tickets online. But some argue that the same can be said about fees related to financial services and products.
“These junk costs make it harder for us to choose the best product or service because the real costs are hidden,” Rohit Chopra, the director of the Consumer Financial Protection Bureau, said in a media interview on Wednesday.
Often, Chopra said, banks and others obscure the true costs consumers pay when selecting a specific mortgage, bank account or credit card by highlighting an attractive offer, but then charging high, back-end fees.
Overdraft fees, late payment fees, check fees, stop payment fees, closing fees, and a wide variety of other fees are covered.
“By promoting competition and ridding the market of illegal practices, we hope to save Americans billions,” Chopra said in a statement.
Chopra’s argument is that a new “fee economy” disrupts free markets and makes it harder to compare if you don’t know how much money will really come out of your pocket.
Chopra said the agency is in the process of ending the banking sector’s reliance on what he called “exploitative” sources of income.
After the financial crisis in 2008-09, we saw increased pressure from Washington to improve disclosures. Rates for late payments are clearly described online in the terms and conditions. Take a look at your credit card bills and you’ll see late fees there too.
But if everyone charges the same fee, how much competition is there really? Or if the fee is much higher than the actual additional cost of a service, how fair is that?
When will 0% cost you a lot of money?
Consider buying a 0% introductory rate credit card. Even if you have a good credit score and qualify for the card, you will still have to pay a high fee to transfer your debt from a high-interest credit card to a card with a temporary 0% rate for, say, nine months or more. .
Balance transfer fees are fairly easy to find if you read the terms of an offer carefully. They aren’t hidden per se, but many consumers may not easily recognize them if they don’t look or understand the true cost.
Nearly every company charges between 3% and 5% of the balance you transfer, according to the CFPB, which has raised concerns about balance transfer fees.
In other words, you could pay $90 to $150 in fees if you transfer $3,000 from one credit card to another with the 0% limited offer for the next year or so. Is it worth your money? It may depend on how quickly you would pay off that balance and what rate you are paying now.
The idea that balance transfer fees are so similar from one institution to another — typically 3% or 5% — is a sign that the market itself isn’t competitive, according to a senior CFPB official.
According to the CFPB, consumers transferred $35 billion in credit card balances in 2020, and banks were counting on that volume to cost from 3% to 5%.
Consumers cannot negotiate a lower fee or avoid a balance transfer fee if you want the service.
As a result, consumers face barriers when trying to make smart decisions with their money, CFPB officials said.
CFPB officials were unable to say what action might be taken or even what the timing might be for next steps. Some announcements may be made this year and later.
Small businesses, experts, consumers asked for feedback
The CFPB is seeking feedback through March 31 that can guide the agency in creating new rules, providing guidance and coordinating concerns with other banking regulators to boost transparency and competition.
Comments must be identified by “Docket No. CFPB-2022-0003” in the subject line and may be emailed to FederalRegisterComments@cfpb.gov.
The CFPB seeks feedback from small business owners, nonprofits, legal aid attorneys, academics and researchers, state and local government officials, and financial institutions.
The agency wants to learn more about “fees for things people thought were covered by the base price of a product or service; unexpected fees for a product or service; fees that seemed too high for the service claimed and fees that were unclear why.” they were charged.”
Consumers who wish to alert regulators to other issues with a consumer financial product or service may submit an online complaint at any time to ConsumerFinance.gov or call the Consumer Financial Protection Bureau at 855-411-2372.
What are some tricky fees?
The consumer agency could target several areas where fees obscure the true costs passed on to consumers, including:
Late Fees: According to the CFPB, major credit card companies charged more than $14 billion in late fees in 2019. The average price was about $35.
According to the CFPB, nearly every bank charges the same for 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 payment fee has risen to $31, close to the $33 average before the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.
Overall, the CFPB noted that all types of fees, including those late payment fees, account for about 20% of the total cost of credit cards.
Mortgage Closing Fees: The CFPB notes that most mortgages often “involve thousands of dollars in application and closing fees, which few people are well positioned to shop for.”
Often, Chopra said, consumers feel “stuck.”
Such fees may deter some homeowners from refinancing to a better, lower rate.
In addition, the CFPB said that “borrowers facing financial difficulties and struggling to pay their mortgages are unable to catch up because of the snowball effect of a plethora of fees associated with the mortgage delinquency,” it said. request from the agency for information.
“Monthly property inspection fees, new title fees, legal fees, appraisals and appraisals, real estate agents’ advice, enforced insurance, foreclosure fees, and miscellaneous unspecified ‘business advances’ can all price a homeowner out of a home.”
Overdraft charges: Banks and credit unions generated more than $15 billion in overdrafts and underfunded or NSF fees in 2019, sometimes referred to as an underfunded fee. The average fee charged was between $30 and $35.
The insufficient balance fee is activated when you do not have enough money in your account to cover the check you just wrote or the automatic payment. The bank or credit union declines the transaction, but then charges the fee.
What do banks do?
Some of the outrage about overdrafts did lead to some major changes. For example, Chase created a larger buffer for deficits and eliminated an underfunded fund fee. But Chase will keep its overdraft fee of $34, and Chase customers can be charged up to three overdraft fees per day.
Detroit-based Ally Financial, an online-only bank, announced last summer that its Ally Bank would end all overdrafts.
Capital One announced plans in December to eliminate all overdrafts and underfunded fund fees for its consumer banking. Customers can choose whether or not they want to make use of the overdraft protection. Capital One’s No-Fee Overdraft product was officially launched and became available to all consumer bank customers on January 13.
Bank of America announced in January that it would reduce overdraft fees from $35 to $10 from May. And in February, Bank of America will eliminate underfunding fees and the ability for customers to close their accounts. to withdraw from the ATM.
Such steps are important for consumers, but it is clear that the consumer agency has more to do here.
“This is progress, but it is not enough,” Chopra said in the media call.
The CFPB is examining the fees. Expect banks to push back.
An industry statement from the American Bankers Association, the Consumer Bankers Association, Credit Union National Association and others was highly critical of the CFPB’s new request for information about fees.
The banking groups called the agency’s move “a misguided attempt 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 much change lies ahead. However, I have no doubt that further progress can be made to give more consumers a price break.