The CFPB announced a plan to cap late fees at $8 as soon as 2024. Current late fee maximums are $30 for initial offense, $41 for multiple offenders. So this would represent a 75% plus reduction in total late fees. Late fees make up about 10% of total credit card portfolio revenue, for retailers, the portfolios we have seen have more like 15% to 35% of revenue from late fees. It’s nearly 100% flow through on fee revs, so the portfolio EBIT impact is much greater than the revenue reduction. Retailers with material private label card programs have Credit EBIT making up 15% to 70% of EBIT back in 2019. Late fees are cyclical, i.e. they build into the peak of the cycle as consumers become overleveraged (what’s happening now) so contribution is likely looking peaky. Punchline is we could have 5% to 30% risk on “normalized” (2019) EBIT for certain retailers given how big their credit exposure is from this change in fees. It’s also interesting because the old limit was and inflation adjusted number, so it was a big tailwind to portfolio profits as the limit has been rapidly rising from $35 for repeat offenders a few years ago to $41, with still inflation in the CPI to take it higher on a forward basis. So a tailwind has suddenly become a big headwind risk. The CFPB can act unilaterally here, no regulatory approval is needed, and addressing these type of fees on consumers are part of the Biden administrations agenda. Relevant tickers with sizeable credit income are KSS, M, GPS, JWN, BBY, DDS, and TGT. Many more companies have private label programs where profit contribution is small or not really disclosed.
