Promises of government programs to fix everyone’s problems certainly abound these days — but what about when programs promise to make everyone’s life more problematic?
That’s certainly the impression this writer gets every time something comes out of the Consumer Financial Protection Bureau (CFPB).
In February, the CFPB floated a rule to "curb excessive credit card late fees," claiming they cost Americans about $12 billion annually, according to their official press release.
When someone misses a credit card payment, the financial companies that extended this credit, charge a fee for the inconvenience — something we’ve probably all had to pay at some point.
Such fees can start at $30 for a first missed payment and go as high as $41 for subsequent ones, and rise automatically with inflation.
The regulation for this kind of penalty is controlled by the CARD Act of 2009 — or Credit Card Accountability Responsibility and Disclosure Act — one of many responses to the financial crisis.
Whether that act achieved its goals is up for debate, but the CFPB’s proposed new policy will only backfire.
These include:
- Lower the maximum dollar amount for late fees from $41 to $8
- End automatic inflation adjustment
- Cap late fees at 25% of the required minimum payment
More details are here.
With these new policies, CFPB could save Americans up to $9 billion, based on the CFPB’s own estimates.
That sounds good, right?
Well. . .
Penalties exist for a reason, to deter bad behavior.
This will benefit people who pay their credit card bills back late rather than those who pay them on time.
When creditors don’t get their money back in a timely fashion, it creates a disincentive for them to loan it out to us.
Not to get into a "corporations are people" discussion, but everyone responds to incentives— that’s the whole premise of Freakonomics.
Furthermore, a missed payment is not a new loan — it’s just a missed payment.
If there’s no "opportunity cost" for not paying back on time, people won’t do it.
Late fees are a motivating deterrent.
In order to cover this, interest rates will have to go up for everyone as a result which penalizes everyone including people who pay on time.
If there is no financial incentive fee to extend a monthly credit card float, they will stop doing it — then some people who need access to credit won’t get it at all.
The harder it is to get credit, the more desperate people become.
The South Korean government tried that — that’s the whole premise of Squid Game.
Another possibility is that by opening the door to the moral hazard of lowering a penalty will cause even more late payments by disincentivizing people to pay on time — hurting the people this is supposed to be helping.
For many credit-card users, the higher the late fee, the more strongly they’re encouraged to use their card more sagaciously.
With fee income potentially higher, and the credit risk to banks thus diminished, the lower baseline APR they’d be able to charge.
Lastly, banning the automatic inflation adjustment is inexcusable.
Devastating inflation has been the Biden administration’s signature domestic achievement, eroding Americans’ savings with out-of-control wasteful spending, terrible energy policies, and self-destructive commitment to Environmental, Social, and Governance (ESG).
If the administration were genuinely concerned about inflation hurting normal people, then they could stop feeding the inflation beast with their nightmarish economic policies.
The bureau offers no serious consideration of these obvious incentives, merely the nine billion dollars savings as a worm on their hook.
This writer understands we’re talking about the party that has driven crime up by as much as 50% in their cities and admits their own student loan forgiveness "plan" is unfair, so maybe that’s a lost cause.
The Democrats have basically become the "Cool Mom" from Mean Girls who doesn’t want anyone to follow any rules at all.
Everyone’s leaned into debt more than they would like.
Many hadn’t even recovered from the economic damage of the COVID-19 lockdowns before getting hammered by "Bidenflation."
There is no magic wand to fix debt problems — and the CFPB’s new policy has the potential to do more harm than good.
Jared Whitley is a longtime politico who has worked in the U.S. Congress, White House and defense industry. He is an award-winning writer, having won best blogger in the state from the Utah Society of Professional Journalists (2018) and best columnist from Best of the West (2016). He earned his MBA from Hult International Business School in Dubai. Read Jared Whitley's reports — More Here.
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