Finance

Banks raise costs in response to CFPB rule

Published

1 month 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

Fed Governor Bowman says December interest rate cut should be the last

Published

14 hours ago

January 9, 2025

Business Finance News

Michelle Bowman, governor of the U.S. Federal Reserve, speaks during the Exchequer Club meeting in Washington, D.C., on Feb. 21, 2024.

Kent Nishimura | Bloomberg | Getty Images

Federal Reserve Governor Michelle Bowman said Thursday she supported the recent interest rate cuts but doesn’t see the need to go any further.

In a speech to bankers in California that was part monetary policy, part regulation, Bowman said concerns she has that inflation has held “uncomfortably above” the Fed’s 2% goal lead her to believe that the quarter percentage point reduction in December should be the last one for the current cycle.

“I supported the December policy action because, in my view, it represented the [Federal Open Market Committee’s] final step in the policy recalibration phase,” the central banker said in prepared remarks. Bowman added that the current policy rate is near what she thinks of as “neutral” that neither supports nor restrains growth.

Despite the progress that has been made, there are “upside risks to inflation,” Bowman added. The Fed’s preferred inflation gauge showed a rate of 2.4% in November but was at 2.8% when excluding food and energy, a core measure that officials see as a better long-run indicator.

“The rate of inflation declined significantly in 2023, but this progress appears to have stalled last year with core inflation still uncomfortably above the Committee’s 2 percent goal,” Bowman added.

The remarks come the day after the FOMC released minutes from the Dec. 17-18 meeting that showed other members also were concerned with how inflation is running, though most expressed confidence it will drift back towards the 2%, eventually getting there in 2027. The Fed sliced a full percentage point off its key borrowing rate from September through December.

In fact, other Fed speakers this week provided views contrary to that of Bowman, who is generally regarded as one of the committee’s more hawkish members, meaning she prefers a more aggressive approach to controlling inflation that includes higher interest rates.

In a speech delivered Wednesday in Paris, Governor Christopher Waller had a more optimistic take on inflation, saying that imputed, or estimated, prices that feed into inflation data are keeping rates high, while observed prices are showing moderation. He expects “further reductions will be appropriate” in the Fed’s main policy rate, which currently sits in a range between 4.25%-4.5%.

Earlier Thursday, regional presidents Susan Collins of Boston and Patrick Harker of Philadelphia both expressed confidence the Fed will be able to lower rates this year, if it a slower pace than previously thought. The FOMC at the December meeting priced in the equivalent of two quarter-point cuts this year, as opposed to the four expected at the the September meeting.

Still, as a governor Bowman is a permanent voter on the FOMC and will get a say this year on policy. She is also considered one of the favorites to be named the vice chair of supervision for the banking industry after President-elect Donald Trump takes office later this month.

Speaking of the incoming administration, Bowman advised her colleagues to refrain from “prejudging” what Trump might do on issues such as tariffs and immigration. The December minutes indicated concerns from officials over what the initiatives could mean for the economy.

At the same time, Bowman expressed concern about loosening policy too much. She cited strong stock market gains and rising Treasury yields as indications that interest rates were restraining economic activity and tamping down inflation.

“In light of these considerations, I continue to prefer a cautious and gradual approach to adjusting policy,” she said.

Finance

Slower pace ahead for rate cuts

Published

2 days ago

January 8, 2025

Business Finance News

Federal Reserve officials at their December meeting expressed concern about inflation and the impact that President-elect Donald Trump‘s policies could have, indicating that they would be moving more slowly on interest rate cuts because of the uncertainty, minutes released Wednesday showed.

Without calling out Trump by name, the meeting summary featured at least four mentions about the impact that changes in immigration and trade policy could have on the U.S. economy.

Since Trump’s November election victory, he has signaled plans for aggressive, punitive tariffs on China, Mexico and Canada as well as the other U.S. trading partners. In addition, he intends to pursue more deregulation and mass deportations.

However, the extent of what Trump’s actions will be and specifically how they will be directed creates a band of ambiguity about what is ahead, which Federal Open Market Committee members said would require caution.

“Almost all participants judged that upside risks to the inflation outlook had increased,” the minutes said. “As reasons for this judgment, participants cited recent stronger-than-expected readings on inflation and the likely effects of potential changes in trade and immigration policy.”

FOMC members voted to lower the central bank’s benchmark borrowing rate to a target range of 4.25%-4.5%.

However, they also reduced their outlook for expected cuts in 2025 to two from four in the previous estimate at September’s meeting, assuming quarter-point increments. The Fed cut a full point off the funds rate since September, and current market pricing is indicating just one or two more moves lower this year.

Minutes indicated that the pace of cuts ahead indeed is likely to be slower.

“In discussing the outlook for monetary policy, participants indicated that the Committee was at or near the point at which it would be appropriate to slow the pace of policy easing,” the document said.

Moreover, members agreed that “the policy rate was now significantly closer to its neutral value than when the Committee commenced policy easing in September. In addition, many participants suggested that a variety of factors underlined the need for a careful approach to monetary policy decisions over coming quarters.”

Those conditions include inflation readings that remain above the Fed’s 2% annual target, a solid pace of consumer spending, a stable labor market and otherwise strong economic activity in which gross domestic product had been growing at an above-trend clip through 2024.

“A substantial majority of participants observed that, at the current juncture, with its policy stance still meaningfully restrictive, the Committee was well positioned to take time to assess the evolving outlook for economic activity and inflation, including the economy’s responses to the Committee’s earlier policy actions,” the minutes said.

Officials stressed that future policy moves will be dependent on how the data unfolds and are not on a set schedule. The Fed’s preferred gauge showed core inflation running at 2.4% rate in November, and 2.8% when including food and energy prices, compared with the prior year. The Fed target’s inflation at 2%.

In documents handed out at the meeting, most officials indicated that while they see inflation gravitating down to 2%, they don’t forecast that happening until 2027 and expect that near-term risks are to the upside.

At his news conference following the Dec. 18 rate decision, Chair Jerome Powell likened the situation to “driving on a foggy night or walking into a dark room full of furniture. You just slow down.”

That statement reflected that mindset of meeting participants, many of whom “observed that the current high degree of uncertainty made it appropriate for the Committee to take a gradual approach as it moved toward a neutral policy stance,” the minutes said.

The “dot plot” of individual members’ expectations showed that they expect two more rate cuts in 2026 and possibly another one or two after, ultimately taking the long-run fed funds rate down to 3%.