New study shows that banks don’t price penalty fees for risk.
By Consumers Union on Friday, June 11th, 2010
Credit card issuers have always said that they set the amount of their penalty fees based on the risk of the customer. This would mean that higher risk customers, or banks that tend to lend to riskier customers, would charge higher fees when someone makes a late payment. The Center of Responsible Lending debunked this assertion in its study called, “A Just Fee or Just a Fee? An Examination of Credit Card Late Fees” The study finds that fees are defined mainly by an issuer’s profile rather that cost or deterrence.
The study makes the following interesting findings:
– Credit Unions charge half of what banks charge for late fees.
– Large banks that securitize much of their receivables tend to charge higher fees.
– Issuers that engage in aggressive account solicitation and collections charge highers fees.
– Issuers that repy on deceptive pricing gimmicks, rather than up front pricing, charge higher fees.
– Credit losses have absolutely no positive relationship with fee levels when other factors are taken into account.
Starting August 22, 2010, penalty rates must be reasonable and proportional under an important CARD Act provision. The significant findings in this CRL study come while we wait for the Federal Reserve to finalize its definition of what a reasonable and proportional penalty fee is. Its proposal left a lot to be desired and we hope the thousands of comments from individual consumers and organizations like Consumers Union convinced the Fed to make this provision strong.
We want the Fed to force issuers to base their fees on legitimate justifications like cost or deterrence. This study shows that current fee amounts are not based on this type of analysis and so we feel that fees should come drastically down once the law goes into effect.