Fees unevenly burden those who already face obstacles to accessing credit and other financial services. Due to past and ongoing discrimination, Black and Latino households experience higher interest rates and fees than their white counterparts for the same types of loans.10 They are also more likely to resort to more costly forms of debt, such as credit cards, that leave them with less savings to cover additional expenses.11 In short, Black and Latino households face structural barriers in the financial market that slow their wealth growth and can make it more likely that they incur junk fees. In 2019, customers in majority-Black neighborhoods paid more in credit card late fees than those in majority-white neighborhoods.12 Black and Latino households, respectively, are 1.9 times and 1.4 times more likely to overdraft than white households.13
Financial institutions may employ strategies that exploit vulnerable consumers. The CFPB has noted companies’ reliance on fees to pad profits, finding, for example, that credit card late fees “account for 99 percent of penalty fees and over half of the credit card market’s total consumer fees.”14 And a literature review by the Federal Reserve Bank of Cleveland observes that revenue from overdraft fees “may make low-balance accounts more profitable and thus incentivize banks to open accounts for a wider range of customers.”15 Indeed, while most debit card overdrafts are less than $26, the largest firms charge penalties of $35, generating billions of dollars in revenue annually.16
Moreover, credit card companies or banks may disclose fees improperly, which has negative effects on consumers. A 2012 survey by The Pew Charitable Trusts found, “More than one-third of respondents surveyed were not aware their bank offered overdraft coverage until they incurred a penalty, and many also did not know about the tactics banks use that increase costs to consumers, such as reordering deposits and withdrawals.”17 Reordering, for instance, is an aggressive approach to maximize overdraft charges that reorganizes transactions from highest to lowest instead of chronologically. Since fees are typically charged for each overdrawn transaction, reordering can mean that account holders with lower balances face multiple overdraft fees in a short period of time.18
Congress has long acknowledged the need to shield consumers from harmful practices by financial institutions: Over decades, federal policymakers have passed numerous laws to protect Americans from the hidden costs associated with financial products and ensure fees are set appropriately. The Truth in Lending Act (TILA) of 1969 is a core consumer protection statute that requires lenders to make clear disclosures to borrowers around the costs of credit, such as interest and fees.19 In 2009, the Credit Card Accountability Responsibility and Disclosure (CARD) Act amended TILA, extending transparency provisions to credit card agreements.20 And in 2010, in recognition of the role of predatory financial products in the 2007–2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act created the CFPB and endowed it with the authority to prevent unfair, deceptive, or abusive acts or practices—known as “UDAAP.”21
The financial services industry has long argued that fees have deterrent effects, incentivizing customers to more closely monitor their accounts to avoid these penalties, but has offered little evidence to demonstrate this.22 Conversely, research examining the effects of the 2009 CARD Act—the last major effort to reduce credit card fees—found no impact on the frequency of late payments.23 The same report also states that “regulation of ‘hidden fees’ can bring about a substantial reduction in borrowing costs without necessarily leading to an offsetting increase in interest charges or a reduction in access to credit.”24 These findings run contrary to the industry’s common claims that regulatory attempts to limit fee-setting will make credit more costly and less available to borrowers.25
The CFPB’s 3 policies to fight junk fees
The CFPB is the only federal agency with the sole mission of protecting consumers from rapacious and exploitative practices by financial institutions.26 Since first opening its doors more than a decade ago, the CFPB has been the primary enforcer of consumer finance statutes.
In January 2022, the CFPB launched an initiative to examine junk fees across the financial marketplace, which could save Americans $19.5 billion every year.27 Since then, the CFPB has published several reports carefully documenting junk fees’ costs to individuals and financial actors’ reliance on these charges for profit.28 Through enforcement, it has held financial institutions accountable for illegal fee practices, returning millions of dollars to wronged consumers.29
Over the past year, the CFPB has pursued three policies to curb junk fees, described in detail below.
1. Rein in excessive credit card late fees
Under the CARD Act, credit card issuers may only charge fees that are “reasonable and proportional to the omission or violation to which the fee or charge relates.”30 When implementing the CARD Act, however, regulators established a safe harbor, allowing firms to charge up to $25 for a first-time missed payment and $35 for subsequent late payments. Over time, these thresholds were adjusted annually for inflation, reaching as high as $30 and $41, respectively.31
These charges add up: The CFPB estimated that credit card late fees cost households around $12 billion every year.32 In 2022 alone, credit card companies charged $14.5 billion in late fees—a 28 percent increase over the prior year.33 A 2023 Consumer Report national survey estimated that 1 in 5 Americans—approximately 52 million—paid a credit card late fee within the past year.34 Compared with other fees, late payment penalties are the most costly and frequently applied.35
Extensive CFPB analysis finds that firms have steadily raised credit card late fee amounts, without evidence that servicing costs have increased at the same pace.36 In March 2024, the CFPB finalized its proposal to lower the safe harbor to just $8 for large issuers.37 In its 2023 proposal, the CFPB stated:
[This new cap] better represents a balance of issuer costs, deterrent effects, consumer conduct, as well as the benefits to issuers that result from relying on a safe harbor amount, like reduced administrative costs, and the possible beneficial effects of lower late fees on subprime cardholders’ repayment behavior.38
The finalized rule eliminates the annual inflation adjustment, meaning that consumers can count on an $8 cap on late fees. If a firm chooses to impose a higher fee, it must demonstrate that the higher fee is necessary to account for the collection costs. These policy changes have the potential to save Americans more than $10 billion annually.39
2. Impose greater consumer protections on checking account overdraft charges
Overdraft fees used to be rare, but over time, they have become common practice for financial institutions, generating $12.6 billion in revenue in 2019 alone.40 About 23 million households are charged overdraft fees annually.41
An overdraft occurs when an individual makes a transaction that exceeds the amount in their checking account. In most cases, the bank covers the transaction and charges the customer a fee. In many ways, this fee is like a short-term loan. However, unlike with other lending products, overdraft loans have historically been exempted from various consumer protection regulations. Forty years ago, when regulators promulgated TILA rules, many payments were made by check and sent through the mail. The exemption was intended to allow time for checks to reach banks: If an individual lacked the funds in their account to make a transaction by the time a check arrived, the bank would manually honor the check as a courtesy.42 At the same time, however, the exemption means that TILA protections, including disclosure requirements, do not apply to overdraft loans.
Earlier this year, the CFPB introduced a proposal that would modernize regulations related to overdraft charges—and that could save consumers up to $3.5 billion annually43—as although automation has made firms’ processes more efficient and economical, overdraft fees have grown in cost and volume. Under the proposal, which applies to large banks and credit unions, firms could choose between two approaches. The first seeks to better align overdraft fees with their proportionate cost to firms:44 Firms would be allowed to extend overdraft services as a courtesy at a break-even cost or a benchmark fee set by the CFPB, which could be as low as $3. The second approach would allow firms to maintain profitable overdraft loans by subjecting these loans to TILA protections, helping ensure that consumers are well informed about the costs associated with overdraft loans.
3. Eliminate NSF fees on instantaneous transactions
A bank may impose an NSF fee after declining a transaction due to a customer’s lack of funds. Unlike overdraft loans, NSF fees are an administrative charge the bank imposes for blocking a transaction; the bank does not provide customers with any product or service.
The CFPB’s latest proposal would consider NSF fees on transactions that are declined instantly—such as those involving debit cards, ATMs, and some person-to-person platforms—unlawful under UDAAP because the practice takes “unreasonable advantage of a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service.”45 The CFPB views this proposal as a preventive measure because person-to-person transactions are increasing—acknowledging that NSF fees from financial institutions have declined in recent years and that NSF fees imposed on instantly declined transactions are currently rare.46
Conclusion
Every year, millions of households are hit with excessive or surprise junk fees that disproportionately affect lower income earners and people of color. Since its inception, the CFPB has been working to ensure that consumer financial products are “fair, transparent, and competitive”47—and in recent years, it has continued to hold financial actors accountable for junk fees, as well as taken action to combat excessive credit card late fees, place greater protections around overdraft services, and eliminate certain NSF fees. These actions have created important safeguards for consumers and will help to level the playing field in consumer financial markets, putting billions of dollars back into the pockets of everyday Americans.
The authors would like to thank Alex Thornton, Anona Neal, Christian Weller, Edwith Theogene, Emily Gee, Marc Jarsulic, Meghan Miller, and Christian Rodriguez for their contributions.