Senate Committee on Banking, Housing, & Urban Affairs: Consumer Protection: Examining Fees in Financial Services and Rental Housing
Senate Committee on Banking, Housing, & Urban Affairs
Consumer Protection: Examining Fees in Financial Services and Rental Housing
Topline
- Democrats lauded the CFPB’s credit card late fee rule for reining in price gouging and emphasized that the rule only applies to the largest credit card issuers.
- Republicans criticized the CFPB’s credit card late fee rule, warning that it would decrease access to credit and drive-up interest rates.
Witnesses
- Adam Rust, Director of Financial Services, Consumer Federation of America
- Karen Madry, President and CEO, Afena Federal Credit Union
- Santiago Sueiro, Senior Policy Analyst, UnidosUS
Opening Statements
Banking Committee Chair Sherrod Brown (D-Ohio)
In his opening statement, Brown blasted corporations for finding more ways to raise costs and boost their profits. He discussed junk fees, which he described as surprise last minute charges that jack up the cost of a product and have no connection to anything other than the quest for profit. Brown explained that when the real price is hidden through undisclosed junk fees, the consumer cannot find the lowest price, and emphasized that no amount of financial literacy will protect Americans from fees that seek to hide the true price of a product. He lauded the Consumer Financial Protection Bureau (CFPB) for taking a major step in combatting these fees by issuing their credit card late fee rule. Brown explained that late fees are supposed to be reasonable and proportional to the costs that a credit card company will incur for late payments, but companies now charge consumers more than five times their cost. He noted the new action by the CFPB will lower credit card late fees down to eight dollars, saving Americans more than $10 billion in fees each year. Brown also discussed junk fees that are added to the advertised rent, which can make the actual rent paid unaffordable. He concluded that Congress needs to expose and crack down on junk fees that are increasing costs.
Banking Committee Ranking Member Tim Scott (R-S.C.)
In his opening statement, Scott criticized the Biden Administration for blaming junk fees instead of taking responsibility for the consequences of its unchecked spending. He urged Democrats to stop playing political games with price controls, especially when the real outcome is reducing access to credit and limiting economic opportunity. Scott discussed his resolution to overturn the CFPB’s credit card penalty fee rule, which he said will result in higher interest rates, add new fees for services that are currently provided for free, and cut off access to credit for those who need it most. Scott warned that actions that sound good as talking points are divorced from economic reality, noting that overdraft and credit card late fees are two of the most transparent and highly regulated business practices in any industry. He emphasized that these fees are not illegal and are heavily regulated.
Scott discussed how the Biden Administration’s regulatory onslaught has cost Americans $1.37 trillion, which is paid by everyday families in the form of higher prices. He said the Committee should be discussing how real, hourly average wages have decreased under this Administration, and warned that the president has vowed to let the TCJA expire next year, which would result in a $2.5 trillion tax increase. He concluded that the Biden Administration has forced the financial services industry into only offering a one-size fits all product.
Testimony
Adam Rust, Director of Financial Services, Consumer Federation of America
In his testimony, Rust noted that large banks and private equity firms that act as corporate landlords have all talked about how junk fees will bring home their earnings. He explained how CFPB tailored these regulations to focus on the largest financial institutions in order to limit the restrictions to the largest credit card issuers and banks. Rust said that consumers often experience overdraft fees by accident, and discussed how the reliance on penalty fees undermines trust in the banking system, with just nine percent of account holders paying 80 percent of all overdraft fees. He said financial institutions have received a privilege due to their charter, and also described the dizzying array of fees that push rent higher than advertised. Rust concluded by warning that junk fees can trap residents in an unaffordable lease, leaving them vulnerable to eviction.
Karen Madry, President and CEO, Afena Federal Credit Union
In her testimony, Madry explained that credit union fee programs are regulated, and warned that the reduction of fee income would result in the reduction of services to her members. She pointed to data that shows that fee income is at a thirty-two year low and said overdraft protection provides a lifeline for their members. Madry discussed how they educate their members on overdraft protection and teach them how to utilize it efficiently. She noted that while they are exempt from the CFPB rule, there will be a trickledown effect as their members will expect them to lower their fees to compete with the bigger banks, which will result in a reduction of services that they can provide. Madry warned that the final rule on credit card late fees will also have a negative impact, explaining that the eight-dollar fee is not enough to cover the cost of collecting on a credit card once that credit card becomes delinquent. She reiterated that the rule would not encourage responsible behaviors from their members, and urged Congress and regulators to stop the rule before it is too late.
Santiago Sueiro, Senior Policy Analyst, UnidosUS
In his testimony, Sueiro explained that while the costs of overdraft fees and small dollar loans are decreasing, working class consumers are paying more in late fees than wealthier consumers. He noted that industry progress on reducing overdraft fees has stalled and highlighted that the CFPB’s credit card late fee rule is projected to save Americans more than $10 billion. Sueiro explained that people in the poorest neighborhoods pay more than double in total late fees when compared to wealthy areas, while one in four Latinos have made a credit card late fee in the last year. He outlined how these fees harm financial health and access to credit by making it harder to get an account out of delinquency and increasing the chances of losing an account.
Sueiro noted that late fees do not effectively deter late payment and undermine the lender’s relationship with borrowers. He described high late fees as counterproductive because they pile onto existing debt. Sueiro urged Congress and financial institutions to respect efforts by financial regulators to improve affordability while supporting innovation to better meet the needs of working-class people. He encouraged financial institutions to reimagine the relationship between consumers and themselves to promote long-term customer loyalty. Sueiro concluded that if we create a banking system that invests in trust and loyalty, we will be one step closer to achieving a fair, inclusive, and thriving economy.
Question & Answer
CFPB’s Credit Card Penalty Fees Rule
Brown asked whether the CFPB’s rule only covers the largest credit card issuers. Sueiro said yes, explaining it only applies to issuers with over one million open accounts. Brown reiterated that the rule does not apply to small card issuers, and Sueiro again confirmed that it did not.
Scott said he was concerned that even if the CFPB saves the average person $200 a year through the rule, inflation costs the average person over $15,000 per year. He asked whether Madry’s members are more concerned about inflation or late fees. Madry said they have members come in and express how hard it is to make ends meet every day. She explained they do what they can to help them overcome their challenges with empathy and can provide them with a loan if it is in their best interest. She noted members can borrow money at an affordable rate when their debt is consolidated, which makes them less prone to late fees.
Scott said there are no changes to a fee structure that does not require a tradeoff. He explained that if a fee goes away, interest rates will go up or the cost of products will go up. Madry agreed and said that if the overdraft protection law is passed, they would have to cut their services and potentially lay off staff. Scott reiterated that even though the fees under discussion do not apply to her institution, it would trickle down and affect her anyway.
Sen. J.D. Vance (R-Ohio) asked what the CFPB’s proposal would mean for Madry’s ability to offer debt and credit services to low-income people, particularly within the context of higher interest rates. Madry explained that they are capped at eighteen percent interest rates, with extreme market pressures to have low rates to attract members. She said that as a credit union, they are reliant on the deposits that their members make in order to lend out. Madry explained how fee income helps to offset the operating costs that go along with collecting on overdrafts. She concluded that if a member’s account is overdrawn, they will do whatever they can to help them get back into good standing.
Vance asked whether consumers, especially lower income consumers, would have less access to credit if the credit card junk fee rule becomes law. Rust said credit cards are among the most profitable sources of business for financial institutions, and predicted the CFPB’s proposal would make them a little less profitable than they once were. Vance explained that if you take a very profitable product and turn it into a moderately profitable product, it becomes less likely that people will offer those services.
Sen. Katie Britt (R-Ala.) criticized the Biden Administration for failing to justify their regulatory actions with any adequate cost-benefit analysis or assessment of how these rulemakings impact the end user. She asked Madry what would happen to the services her credit union provides if the CFPB’s junk fee rules are finalized. Britt specifically asked about the impact on free checking accounts or affordable small business loans. Madry said they would have to rethink their interest rate structure and eliminate things like free checking accounts.
Sen. Elizabeth Warren (D-Mass.) congratulated the CFPB for reigning in price gouging, including by capping most late fees at eight dollars. She asked the witnesses whether they knew anyone who loves junk fees. Rust said he had never heard of someone who paid an overdraft fee and loved it. Sueiro said no and noted the CFPB received 57,000 comments on their proposed rule, a large number of which were from consumers that were fed up with those fees.
Sen. Chris Van Hollen (D-Md.) asked Rust to describe what the CFPB’s rule does and does not do. Rust said the rule sets a benchmark rate for courtesy overdraft fees, while also creating an overdraft line of credit that comes with consumer protections, which fosters financial inclusion.
Overdraft Fees & Financial Services Industry Fees
Sen. Bob Menendez (D-N.J.) asked Sueiro to discuss the vulnerabilities of minority communities to junk fees. Sueiro said low-income communities pay more in overdraft and late fees across the board, while minorities pay even higher rates of overdraft and junk fees.
Menendez asked how junk fees drive low-income families away from traditional financial institutions, and how this impacts their financial well-being. Rust cited FDIC research which found that people are afraid to have bank accounts due to surprise fees, specifically overdraft fees. Sueiro discussed similar findings with credit cards, noting that surveys have shown that interest rates and late fees prevent consumers from getting credit cards.
Brown asked Rust to discuss the most troubling junk fees in financial services and rental housing, and to explain how these fees impact the ability to find the lowest price and stifle competition. Rust explained that junk fees make it difficult to comparison shop because consumers do not know all of the costs ahead of time. Brown noted that according to the law, credit card late fees are not meant to generate profits, yet on average, they generate profits that are five times greater than relevant costs.
Britt asked whether current regulations require credit unions and banks to disclose fees to their members and customers. Madry said current regulations require credit unions to disclose fees. Britt asked whether financial institutions proactively made changes to their late and overdraft programs without legislative action. Madry said they educate their members who have overdraft protection and encourage them to come in so they can consolidate their fees.
Sen. Tina Smith (D-Minn.) cited the argument that high fees are an incentive to get people to pay their bills on time but noted that rationale assumes that people are simply choosing not to pay their bills.
Sueiro said people do not pay because they do not have the funds. He emphasized that high fees disproportionately impact poor people, and cited the comments received by the CFPB from consumers that paid late fees, where people working multiple jobs missed their payment window just by working.
Warren explained that 2009, Congress passed the Credit CARD Act, which slashed average late fees by one third, but noted that by 2022, credit card companies used loopholes in the law to raise their fees and generate $14.5 billion in profits. She discussed how credit card companies have grown their profits through interests and fees while becoming more consolidated. Warren noted the ten largest credit card companies in 2022 accounted for 83 percent of all credit card loans.
Warren asked how smaller credit card issuers compare to the larger issuers in terms of how much they charge consumers. Rust said interest rates at smaller institutions are lower. He explained that smaller issuers are at a disadvantage because the credit card market is broken, and comparison shopping sites direct consumers to the cards that have the highest rates. Rust noted that large issuers charge interest rates that are eight to ten percentage points higher.
Warren asked who is paying the bulk of the interest and fees that are driving credit card companies’ profits. Sueiro said people with subprime credit scores are paying a disproportionately high amount of fees.
Sen. John Fetterman (D-Pa.) asked who has an interest in charging charge late fees. Rust said late fees are in the interest of institutions that want to pad their profits with huge fees. Fetterman asked whether these fees are profit centered. Rust said yes and explained that the data shows that fees coming in account for between twenty and forty percent of an issuer’s income. Fetterman said he is disturbed that something that was supposed to be a penalty has now become a source of profit for these companies.
Sen. Laphonza Butler (D-Calif.) discussed how consumers of color are often pushed out of mainstream financial products into fringe services like high-cost loans and credit cards. She asked how junk fees perpetuate existing wealth gaps and hinder generational wealth building. Sueiro said high costs are big barriers to obtaining bank accounts and credit cards, since overdraft fees and late fees are too high. He explained how people of color are paying large amounts of their money back to the financial institutions.
Private Equity in Housing
Sen. Jon Tester (D-Mont.) noted a lot of wealthy individuals and outside groups are coming into Montana and buying single-family homes and buildings. He warned that out of state investors are taking advantage of Montanans by jacking up the rent and adding more basic fees that had traditionally been included as part of the rent. Tester asked how these fees have impacted folks in manufactured home parks that do not have a lot of flexibility. Rust noted that from 2015 to 2018, a group of private equity investors bought over 150,000 lots. He explained that when a person lives in these manufactured home communities, it is very difficult to move. Rust warned that fees are being added to these places, which is largely workforce housing that is vital in rural areas.
Tester asked if manufactured homes are being sold due to infrastructure issues or because of out of state investors. Rust said the cash flow in these communities is very certain, which makes them appealing for purchase. He noted consultancies have said that these lots are prime opportunities to make a lot of money.
Sen. Catherine Cortez Masto (D-Nev.) said there shouldn’t be a stigma around manufactured home communities and discussed her concerns about private equity purchasing housing. Cortez Masto asked how additional fees imposed on renters exacerbate the high cost of rent. Rust said if consumers are going to comparison shop, fees put well-intentioned landlords who are being fair at a disadvantage. He cited cases where consumers pay rent on time in manufactured home communities, but private equity comes in and adds $400 in fees, which forces consumers to choose between paying rent, groceries, or even staying in that community.
For more information on this meeting, please click here.
For an archive of past SIFMA hearing coverage, please click here.