In keeping with its mandate to protect the collective wallets of U.S. consumers, the Consumer Financial Protection Bureau (CFPB) is seeking information on late fees assessed by credit card issuers. Specifically, how late fee amounts are calculated, what are issuers doing to mitigate those late fees and what kind of revenue and expenses do they derive from said late fees.
The CFPB wants to ensure that card issuers are doing everything they can to encourage on-time payments, and also that the fees assessed on late payments are “reasonable” and “proportional” as required by the CARD Act (Section 149(a)).
Based on call report data, we believe that “most” people holding bank-issued credit cards are being assessed fairly. Just over 830 banks reported they had any credit card loans on their books at March 31, 2022. Of those, fewer than half reported an amount outstanding of $1 million or greater. Interestingly, about 8% reported zero dollars in interest and fee income on their credit card loans in the first quarter.
Given that, it would appear that abuses, if any, would be few.
But, even one is too many. So, to determine which banks “potentially” charge excess amounts, we began with banks where credit card loans account for 2.5% or more of their loan portfolio (i.e. credit cards are a real business for the bank).
Then, we eliminated any where credit card interest and fee income during the first quarter was zero (as there is no need to look for predatory behavior at these banks). This got us the 51 banks listed on page 7. (Interest and fee income are combined on the income statement, so we cannot determine exactly what spurred the income, only that it was attributed to credit card loans.)
We then added the delinquent credit card rate to determine if there was a correlation between the delinquency rate and the amount of interest and fee income derived from these loans. (The list is in descending order by the ratio of credit card income to credit card loans.)
We are pleased to report that fewer than half of the listed banks reported interest and fees in excess of 13% and fewer than a third exceeded 20%. But there is another extreme.
The banks at the top of the list, for example, look quite suspicious. But, there is more than meets the eye. 5-Star Green Dot Bank, Provo, UT’s annualized income on credit cards is over half the amount of its credit card portfolio and its credit card portfolio is one-third of its loan portfolio. That sounds unthinkable. But here’s the rest of the story.
We have reported on Green Dot before (most recently in a blog post (April 2022):
In 2011, 5-Star Green Dot Bank purchased Bonneville Bank, Provo, UT, and became the first Fintech Bank in the United States. In fact, the Bonneville Bank branch on North Freedom Boulevard in Provo still operates much the same as it did prior to the purchase. It still has the same name (although that is now a DBA) and the same tagline: “Your Hometown Community Bank”.
While Green Dot may seem like a hometown bank in Provo, it is known to the rest of the country as a leading online Fintech. Its lending business is minimal as evidenced by a loan to deposit ratio of less than 1%. Its deposits, on the other hand, are booming. Green Dot’s primary business? Prepaid debit cards (considered deposits to the bank) for the likes of WalMart, AARP, etc.
That being said, yes, its fee and interest income on credit cards is quite high, but so is its delinquency rate on those accounts. Perhaps loan underwriting is not its forte, but with such a small loan portfolio, and an even smaller credit card loan portfolio, just a couple of bad loans can skew those ratios. For a $4 billion bank, the income derived from credit card loans is minuscule.
5-Star Capital Bank, N.A., Rockville, MD is another unusual case. Its secured credit cards enable customers to rebuild their credit. Costs may be higher, but it is helping consumers get their credit back on track. This M.O. lends itself to higher fees and interest.
Another page 7 bank no longer exists as a separate entity. On July 1st, 4-Star CitiBank, N.A., acquired its affiliate, 5-Star Department Stores National Bank (DSNB). For years, DSNB’s sole purpose was to provide credit cards for store brands such as Macy’s and Bloomingdale’s. Rolling it into the much better-known CitiBank brand name should serve to enhance those cards’ reputations.
While credit card fees and interest rates are already regulated by the Truth in Lending Act (1968) and the aforementioned Credit Card Act (Credit Card Accountability, Responsibility and Disclosure Act of 2009), the CFPB is questioning whether those existing regulations are sufficient given the level of inflation we are currently facing. Will credit card interest and fees follow suit?