One of the pillars of a free-market economy is the prerogative granted to lenders to set their own conditions. Borrowers then enjoy the discretion to accept or reject them.

No government entity -- and certainly not one outside of congressional oversight -- has a role to play in such negotiations.

Yet the federal Consumer Financial Protection Bureau (CFPB), via a rule change likely to be formally published in October, is proposing sweeping alterations to the late fees collected by credit card companies from delinquent borrowers.

Via Roll Call (emphasis added):

“Credit card late fees are required by law to be ‘reasonable and proportional’ to the cost the companies incur to collect the debt. The Federal Reserve established a threshold at which late fees would be assumed to meet the requirements of the law. 

The CFPB’s February proposal would lower that threshold from $30 for the first late payment and $41 for subsequent late payments to $8….

Republicans criticized the proposal, saying credit card issuers would find other ways to recoup the cost of late payments that would make loans more expensive or elusive for low- and middle-income borrowers.” 

These changes will negatively impact both consumers -- the constituency purportedly helped by the rule change -- and credit lenders.

Credit card companies partially model their businesses on collecting late fees. Should they be capped at $8 by the pending rule change, these companies, like any other, will be forced into a shift in their business model to compensate for the newly incurred risks.

As a result, industry analysts warn that what is likely to happen will be disastrous for consumers: potentially higher Annual Percentage Rates (APRs), greater scrutiny for new borrowers as standard risk assessments are updated, and tighter credit.

In addition to having adverse effects on all borrowers, the rule changes are unfair to responsible borrowers who repay their debts on time. In fact, the CFPB acknowledges in its own report that these borrowers are unlikely to benefit from the $8 late fee cap and, in fact, are likely to be financially injured due to higher maintenance fees intended to offset the revenue lost by the cap.   

As Sen. Tim Scott, ranking member of the Senate Banking Committee, aptly noted, “there is no such thing as a free lunch.” Whatever revenue is lost by the $8 late fee cap, again, will be made up for by structural changes to the credit card companies’ business model.

Fortunately, pending Supreme Court litigation may provide a remedy to the CFPD’s out-of-control usurpation of rulemaking authority outside of the Constitutional confines of Congressional oversight.

Via the Epoch Times (emphasis added):

“While agencies often try to make themselves self-contained governments, sometimes Congress lends them a hand. The Consumer Financial Protection Bureau (CFPB) is the most dramatic example. When Congress created the bureau in 2010, it did everything it could to make sure that the CFPB answered to no one but itself.

Relevant to this lawsuit, Congress created an unusual funding mechanism for the CFPB. Whereas most agencies receive their money from congressional appropriations, the CFPB gets to take as much money as it wants (subject to a loose cap) directly from the Federal Reserve.

This makes the CFPB uniquely immune from congressional control. And like the SEC, the CFPB has both rulemaking and law enforcement powers, which can easily be used to advance the CFPB’s own agenda rather than Congress’. Indeed, the CFPB has faced significant criticism for slipping its congressional leash.”

We’ll see what the Supreme Court rules in the pending case. It may very well end up ruling against the extraconstitutional authority the CFPD has assumed for itself.

In the meantime, House Rep. Patrick McHenry, Chairman of the House Financial Services Committee, should exercise his constitutional oversight role to pump the brakes on the CFPD rule change -- at least until the Supreme Court hands down its ruling.

Rep. Roger Williams, Chairman of the House Committee on Small Business, might also examine the CFPB’s proposed rule change’s potential negative impact on American small businesses, already besieged as they are in the current economy. 

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