Shopping around for a deal on a credit card seems like one of those things that's pretty straight forward. Low, eye-catching rates are plastered all over websites for those doing research online and paper envelopes with special credit card offers pop up in the mail.
But are credit card issuers, really, all that competitive?
The Consumer Financial Protection Bureau is taking a new, deeper dive into hidden fees, exploitative income streams, and anticompetitive financial practices that can hurt consumers.
What's a junk fee?
We all know how hidden fees drive up our costs when buying concert tickets online. But some argue that the same can be said about fees relating to financial services and products.
"These junk fees make it harder for us to choose the best product or service since the true cost is hidden," Rohit Chopra, the director of the Consumer Financial Protection Bureau, said in a call with the media Wednesday.
Many times, Chopra said, banks and others obscure the actual cost that consumers pay when selecting a specific mortgage, bank account or credit card by highlighting an attractive offer but then charging inflated, back-end fees.
Overdraft fees, late fees, check image fees, stop payment fees, closing costs and a wide variety of other fees will be under scrutiny.
"By promoting competition and ridding the market of illegal practices, we hope to save Americans billions," Chopra said in a statement.
The argument being made by Chopra is that a new "fee economy" is distorting free markets and making it harder to comparison shop 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 industry's reliance on what he called "exploitative" sources of income.
After the financial crisis in 2008-09, we saw more push by Washington to improve disclosures. Late fees are clearly spelled out online in terms and conditions.Take a look at your credit card bills and you can spot the late fee there, too.
But if everyone is charging the same fee, well, how much competition is there really? Or if the fee represents far more than the actual extra cost of a service, how fair is that?
When will 0% cost you big money?
Consider shopping for a 0% introductory rate credit card. Even if you have a good credit score and qualify for the card, you're still facing steep fees to transfer your debt from a high rate credit card onto a card that offers a temporary 0% rate for say nine months or longer.
Balance transfer fees can be found fairly easily if you carefully read the terms and conditions of an offer. They're not necessarily hidden but many consumers might not easily spot them if they don't look or understand the real cost.
Nearly every company will charge between 3% and 5% of the balance you transfer, according to the CFPB, which has expressed concern about balance transfer fees.
In other words, you could pay $90 to $150 in fees, if you're transferring $3,000 from one credit card to another with the limited 0% offer for the next year or so. Is it worth your money? It can depend on how soon you'd pay off that balance and what rate you're paying now.
The notion that the balance transfer fees are so similar from one institution to the next — typically either 3% or 5% — is a sign that the marketplace itself isn't competitive, according to a senior CFPB official.
Consumers transferred $35 billion in credit card balances in 2020, according to the CFPB, and banks charged fees of 3% to 5% on that volume.
Consumers can't negotiate a lower fee or avoid a balance transfer fee if you want the service.
Consumers, as a result, face barriers when they're trying to make smart decisions with their money, according to CFPB officials.
CFPB officials couldn't say what action might be taken or even what the timing could be for the next steps. Some announcements could 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 as it makes new rules, issues guidance and coordinates concerns with other banking regulators to spur transparency and competition.
Comments need to be identified by "Docket No. CFPB-2022-0003" in the subject line and can be sent by email by to FederalRegisterComments@cfpb.gov.
The CFPB wants feedback 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 "fees for things people believed were covered by the baseline price of a product or service; unexpected fees for a product or service; fees that seemed too high for the purported service and fees where it was unclear why they were charged."
Consumers who want to alert regulators to other concerns with a consumer financial product or service can file an online complaint at ConsumerFinance.gov or call the Consumer Financial Protection Bureau at 855-411-2372 at any time.
What are some troublesome fees?
The consumer agency could be targeting several areas where fees obscure the true cost passed along 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.
Nearly every bank, according to the CFPB, 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 fee has increased to $31, nearing the average of $33 before the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009.
Overall, the CFPB noted that all sorts fees, including these late fees, represent about 20% of the total cost of credit cards.
Closing costs for mortgages: The CFPB notes that most mortgages often involve "thousands of dollars in application fees and closing costs, which few people are well-positioned to shop on."
Many times, Chopra said, consumers feel "gouged."
Such fees can deter some homeowners from refinancing into a better, lower rate.
In addition, the CFPB said, "borrowers who face financial hardship and struggle to make mortgage payments can find themselves unable to catch up due to the snowballing of a plethora of fees related to the 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, force-placed insurance, foreclosure fees and miscellaneous, unspecified 'corporate advances' can all price a homeowner out of a home."
Overdraft fees: Banks and credit unions generated more than $15 billion in overdraft fees and non-sufficient funds or NSF fees, sometimes called an insufficient funds fee, in 2019. The average fee being charged was between $30 and $35.
The insufficient funds fee is triggered when you don't have enough money in your account to cover the check that you just wrote or the automatic payment. The bank or credit union will deny the transaction but then charge the fee.
What are banks doing?
Some of the outcry about overdraft fees did lead to some major changes. Chase, for example, has created a bigger buffer for shortfalls and eliminated a non-sufficient funds fee. But Chase is keeping its $34 overdraft fee, and Chase customers may 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 non-sufficient fund fees for its consumer banking customers. Customers can choose whether or not to access overdraft protection. Capital One's No-Fee Overdraft product officially launched and became available to all consumer bank customers on Jan. 13.
Bank of America announced in January that it would reduce overdraft fees from $35 to $10 beginning in May. And in February, Bank of America will eliminate non-sufficient funds fees and remove the ability of clients to overdraw their accounts at the ATM.
Such steps are important to consumers, but it's clear that the consumer agency sees more to do here.
"This is progress, but it is not enough," Chopra said in the media call.
The CFPB is putting fees under the microscope. Expect banks to push back.
An industry statement issued by 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 on fees.
The banking groups called the agency's move "a misguided effort that paints a distorted and misleading picture of our country's highly competitive financial services marketplace."
The groups said consumers have a wide range of choices and businesses compete every day, including on fees.
We'll see how much change could be ahead. I don't doubt, though, that even more progress can be made to give more consumers a price break.
