In an effort to protect consumers from excessive fees, the Biden administration has proposed a new limit on credit card late fees. However, the move has sparked a debate between the consumer credit and banking industry and consumer advocates over its potential repercussions.

The Consumer Financial Protection Bureau (CFPB) announced on Tuesday that it is considering imposing an $8 cap on typical late fees charged by credit card companies. According to the CFPB, this proposed cap could potentially save consumers a staggering $10 billion.

Director of the CFPB, Rohit Chopra, expressed his support for the proposed rule, stating that credit card companies have taken advantage of a loophole to profit from "junk fees" for far too long. He emphasized that this new rule puts an end to the era of credit card companies increasing fees on borrowers under the pretense of inflation, thereby boosting their own profits.

President Joe Biden has consistently emphasized his commitment to addressing excessive fees, with the creation of a task force specifically dedicated to targeting unfair and illegal pricing schemes. This proposed rule aligns with his objective of combatting what he refers to as "junk" fees.

However, the credit card industry and financial associations have already voiced their concerns regarding the potential consequences of this proposed rule. Rob Nichols, President and CEO of the American Bankers Association (ABA), labeled the proposal as "flawed," arguing that it could lead to an increase in late payments and lower credit scores for consumers. He also warned that the rule could result in reduced credit lines, stricter standards for new accounts, and higher annual percentage rates (APRs) for all consumers, including those who consistently pay on time.

The Consumer Bankers Association echoed these concerns, with its President and CEO, Lindsey Johnson, noting that the rule's policy goals seem to be more focused on consumer redistribution rather than consumer protection.

In response to the proposed rule, the U.S. Chamber of Commerce has taken legal action by filing a lawsuit against the CFPB, stating that the agency has exceeded its authority. The Chamber argues that the rule would unfairly penalize credit card users who consistently pay their bills on time, potentially resulting in fewer card offerings and limited access to affordable credit for many consumers.

It's important to note that the proposed rule only applies to large credit card companies. Currently, under the law enacted after the 2008-2009 financial crisis, credit card companies can charge up to $30 for a first late payment.

The CFPB defended its decision to set the $8 cap, stating that it carefully reviewed market data to arrive at this figure. While the proposed rule includes a provision that allows banks to charge a higher late fee with proper justification, the ABA argues that the $8 level falls significantly below the actual cost incurred by banks in managing late fees. As a result, the ABA is likely to challenge the final rule.

The battle between the Biden administration and the financial industry regarding credit card late fees is poised to continue as stakeholders analyze the potential impacts, considering both the benefits to consumers and the concerns of the industry.