Finance

Banks raise costs in response to CFPB rule

Published

1 week ago

December 3, 2024

Business Finance News

A customer uses a credit card to pay for items January 28, 2022 at a retail shop in New York City.

Robert Nickelsberg | Getty Images

Banks that issue credit cards used by millions of consumers raised interest rates and introduced new fees over the past year in response to an impending regulation that most experts now believe will never take effect.

Synchrony and Bread Financial, which specialize in issuing branded cards for companies including Verizon and JCPenney, have said that the moves were necessary after the Consumer Financial Protection Bureau announced a rule slashing what the industry can charge in late fees.

“They’re the two banks that have been most vocal about it, because they were going to be the most impacted by it,” said Sanjay Sakhrani, a KBW analyst who covers the card industry. “The consensus now, however, is that the rule isn’t going to happen.”

The effect is that proposed regulation intended to save consumers money has instead resulted in higher costs for some.

On Nov. 22, CNBC reported that rates on a wide swath of retail cards have jumped in the past year, reaching as high as 35.99%. Synchrony and Bread raised the annual percentage rates, or APRs, on their portfolios by an average of 3 to 5 percentage points, according to Sakhrani.

On top of that, customers of the two banks have been given notice of new monthly fees of between $1.99 and $2.99 for receiving paper statements.

Customers of Synchrony bank have received notices for new monthly fees for receiving paper statements, part of the industry’s response to a CFPB rule capping late fees.

Source: Synchrony

Bread, which issues cards for retailers including Big Lots and Victoria’s Secret, began boosting the rate on some of its cards in late 2023 “in anticipation” of the CFPB rule, Bread CFO Perry Beberman told analysts in October.

“We’ve implemented a number of changes that are in market, including the APR increases and paper statement fees,” Beberman said at the time.

Some pain, no gain

The CFPB says the credit card industry profits off borrowers with low credit scores by charging them onerous penalties.

In March, the agency introduced a rule to cap late fees at $8 per incident, down from an average of about $32. The rule would save consumers $10 billion annually, the regulator said.

But banks and their trade groups have argued that late fees are a necessary deterrent to default and that capping them at $8 per incident would shift costs to those who pay their bills on time.

The U.S. Chamber of Commerce, which calls itself the world’s largest trade group, sued the CFPB in March to halt the rule, arguing that the agency exceeded its authority. In May, days before the rule was set to take effect, a federal judge granted the industry’s request to halt its implementation.

While the rule is currently held up in courts, card users are already dealing with the higher borrowing costs and fees attributed to the regulation.

The higher APRs kick in for new loans, not old debts, meaning the impact to consumers will rise in coming months as they accumulate fresh debts to fund holiday spending. Americans owe a record $1.17 trillion on their cards, 8.1% higher than a year ago, according to the Federal Reserve Bank of New York.

“Due to changes in regulatory conditions, we adjusted rates and fees to ensure that we can continue to provide safe and convenient credit to our customers,” said a spokeswoman for Stamford, Connecticut-based Synchrony.

Customers can avoid interest and fees by paying off balances in full and opting out of paper statements, the spokeswoman said.

Citigroup, Barclays

The surge in borrowing costs will have a bigger impact on consumers with lower credit scores who are more likely to have store cards issued by Synchrony and Bread.

Customers with poorer credit may be considered too risky to qualify for popular rewards cards from issuers including JPMorgan Chase and American Express, and are therefore more likely to turn to co-branded cards as alternatives.

That’s why Synchrony and Bread were eager to mitigate the hit to their operations by increasing rates and introducing fees, according to analysts. The concern was that more of their customers would simply default on loans if late penalties shrank to $8, and the profitability of their businesses would take a dive.

But other, larger banks have moved rates higher as well.

Cards from Banana Republic and Athleta issued by Barclays each saw an APR jump of 5 percentage points in the past year. The Home Depot card from Citigroup had a rise of 3 percentage points, while the bank raised the APR on its Meijer card by 4 percentage points.

Citigroup and Barclays representatives declined to comment.

Capital One, which had warned earlier in the year that it would take steps to offset the hit from the CFPB rule, said that instead of changing its customer pricing it opted to hold back on making certain unspecified investments. The bank is in the process of acquiring rival card issuer Discover Financial.

Even before it was set to take effect in May, the fate of the CFPB rule was considered murky, because litigation fighting it was filed in a venue widely seen as favorable to corporations seeking to beat back federal regulation.

But after the election victory of Donald Trump, who has broadly pushed for deregulation across industries, the expectation is that the next CFPB head isn’t likely to keep the effort alive, according to policy experts.

When asked if they would reverse the higher APRs and fees if the CFPB rule went away, Synchrony managers were noncommittal. The bank has to proceed as though it were happening, CFO Brian Wenzel told analysts in October.

“People use the term ‘rollback,'” Wenzel said. “As a company, we haven’t spent any real time thinking about that.”

— CNBC’s Gabrielle Fonrouge contributed to this report.

Finance

CFPB announces rule limiting bank overdraft fees

Published

39 minutes ago

December 12, 2024

Business Finance News

Rohit Chopra, director of the CFPB, testifies during a House Financial Services Committee hearing on June 14, 2023.

Tom Williams | Cq-roll Call, Inc. | Getty Images

The Consumer Financial Protection Bureau on Thursday announced the final version of a rule limiting banks’ ability to charge overdraft fees. It says the rule will save American consumers $5 billion annually.

The regulator said that banks could opt to charge $5 for overdrafts — a steep drop from the average fee of around $35 per transaction — or limit the fee to an amount that covers the lenders’ costs, or charge any fee while disclosing the interest rate of the loan.

“For far too long, the largest banks have exploited a legal loophole that has drained billions of dollars from Americans’ deposit accounts,” CFPB Director Rohit Chopra said in a statement. “The CFPB is cracking down on these excessive junk fees and requiring big banks to come clean about the interest rate they’re charging on overdraft loans.”

The effort, part of a flurry of activity from the CFPB in the waning days of the Biden administration, faces stiff opposition from U.S. banking groups that have successfully stymied other efforts from the regulator. For instance, a rule capping credit card late fees at $8 per incident that was set to take effect in May has been held up in federal court.

The CFPB said that its overdraft rule will take effect Oct. 1, 2025, though its ultimate fate is unclear.

Even before the election victory of Donald Trump last month, the fate of the overdraft rule would’ve been murky, thanks to industry pushback. But Trump is expected to install a new CFPB head next month that is unlikely to support Biden-era efforts to rein in banking activity.

Bank lobbying groups have argued that the overdraft rule, first proposed in January as part of Biden’s war on junk fees, would reduce access to overdraft services and could send customers to worse alternatives like payday loans.

The Consumer Bankers Association said Thursday it was “exploring all options” to push back against the rule.

This story is developing. Please check back for updates.

Finance

Stocks making the biggest moves after hours: ADBE, CHWY, OXM

Published

15 hours ago

December 11, 2024

Business Finance News

Finance

November inflation increase won’t derail Fed interest rate cuts

Published

18 hours ago

December 11, 2024

Business Finance News

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Sticky inflation numbers for November show the Fed still has more work to do. (iStock)

Annual inflation increased to 2.7% in November, rising modestly above the 2.6% annual inflation rate of the previous month, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).

Inflation increased 0.3% on a monthly basis in November following four months of registering 0.2% monthly increases, according to BLS. The cost of housing was the most significant contributor to the monthly increase in November, accounting for nearly 40% of the monthly increase in all items. The price of food also increased by 0.4% in November. Energy prices rose 0.2% after being unchanged in October.

For now, the modest jump in inflation isn’t expected to dissuade the Federal Reserve from cutting interest rates later this month. However, it does signal that the central bank may face an uphill battle in getting inflation to the 2% target rate, which may impact rate cuts in the New Year, according to Jim Baird, chief investment officer with Plante Moran Financial Advisors.

“The real questions relate to what comes next,” Baird said in a statement. “The path for 2025 is less clear, but a course correction by the Fed toward holding rates a bit higher for a bit longer appears increasingly probable.”

Last month, the Fed announced a highly anticipated quarter-point cut, lowering interest rates to 4.5% to 4.75%. Although inflation has moderated substantially over the last two years from a peak of 7% to 2.6%, Fed Chair Jerome Powell said that the Fed remains committed to returning inflation to its 2% goal.

“Inflation continues to weigh down the wallets of the average American family, along with persistently high interest rates impacting everything from credit card spending to mortgage refinancing,” Gabe Abshire, CEO of Move Concierge, said in a statement. “While the Fed will likely cut interest rates again next week, it will still take time before this will bring household costs down. If consumer prices don’t start dipping down soon, and inflation remains stubborn, the Fed likely won’t substantially cut interest rates in the near term.

If you are struggling with high inflation, you could consider taking out a personal loan to pay down debt at a lower interest rate, reducing your monthly payments. Visit Credible to find your personalized interest rate without affecting your credit score.

THE FED JUST CUT INTEREST RATES AGAIN, THIS TIME BY A QUARTER OF A PERCENTAGE POINT

Mortgage rates dip

For housing, it’s more of the same. High mortgage rates and home prices have kept buyers away. Mortgage rates have decreased in sync with the Fed’s interest rate cut. Last week, according to Freddie Mac, they decreased to their lowest level in over a month.

The Fed is not likely to put the brakes on rate cuts, and that is good news for the mortgage market, according to Realtor.com Chief Economist Danielle Hale.

“In the Fed’s most recent September projections, members anticipated a policy rate of 3.4% by the end of 2025, but the typical investor has currently priced in just 3.9%–two fewer cuts by the end of 2025,” Hale said in a statement. “The upside of this positioning is that there may be room for market interest rates to move lower if the Fed’s projection winds up closer to reality.”

Hale said Realtor.com anticipates that market mortgage rates will decrease to 6.2% by the end of 2025, which, combined with other factors, should help buyers access housing.

“This will help sales eke out a small gain in 2025 of 1.5% even as price increases of 3.7% keep monthly payments relatively steady for homebuyers,” Hale said. “Steady monthly payments and income gains from a still robust economy and healthy labor market will help affordability improve marginally in the year ahead.”

If you’re looking to purchase a home in today’s market, you can explore your mortgage options by visiting Credible to compare rates and lenders in minutes.

THE U.S. ADDED 227,000 JOBS IN NOVEMBER, SETTING IN MOTION POTENTIAL FED RED CATS IN DECEMBER

Car insurance prices ease

Car insurance decreased again in November with the rate of annual increase dropping for a seventh straight month, according to today’s CPI report. The 12.7% annual rise was the smallest since September 2022.

Insurance costs are still high, but the signs are that the worst rate hikes may be over, according to Josh Damico, VP for insurance operations at Jerry. Damico said that repair costs are still rising fast, but most claims-related costs that have driven insurers’ rate increases, including vehicle prices and parts and equipment, have fallen or flatlined in recent months. Prices of used cars and trucks are down 16% from their early 2022 peak.

“Today’s data aligns with what we’re hearing from carriers,” Damico said. “They’re starting to see some relief in the cost of claims, so they’re pausing rate increases and reassessing the situation, and in some cases looking to roll back a bit of those recent rate hikes.”

If you are looking to save money on your car costs, you could consider changing your auto insurance provider to get a lower monthly rate. Visit Credible to shop around and find your personalized premium.

FHFA ANNOUNCES HIGHER MORTGAGE LOAN LIMITS FOR 2025

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