By Doug Miller

Are credit card penalties meant to serve as insurance against late payments, or are they just meant to serve bigger portions to money-hungry financial services companies? Despite industry claims to the contrary, a recent study by the Center for Responsible Lending (CRL) suggests that higher late fees do relatively little to deter late payments, and instead are designed to deliver greater profits to card issuers.

Joshua Frank, author of a recently published CRL study called “A Just Fee Or Just a Fee?” says large credit card issuers “claim they use these fees as a deterrent to late payments or to cover their losses. But the evidence shows late fees are just another way to charge customers more.”

The report goes on to state that credit card issuers charging high late fees often exhibit nine out of ten characteristics generally associated with companies engaged in unfair or deceptive practices. Some of those practices include the imposition of wallet-busting interest rate increases when a payment is just one day late, high-pressure collection tactics and the aggressive marketing of high-interest cash-advance checks.

The study comes just four months after several provisions of the Federal Credit CARD Act of 2009 went into effect, including a clause that says card issuers no longer can increase interest rates on an existing balance unless a cardholder is 60 days late or has agreed up front to a variable rate. One part of the act, however, still has not been implemented: a requirement that penalty fees be reasonable and proportional to a borrower’s payment violation. The Federal Reserve currently is looking at what constitutes “reasonable and proportional.”

Specifically, the CRL study found that:

Card issuers that employ deceptive or aggressive pricing practices generally tend to charge higher late fees. Deceptive practices are described by the center as including hidden back-end pricing strategies that are poorly understood by consumers. Issuers that impose penalty interest rates for minor infractions like being one day late with a payment, for instance, were more likely to charge higher late fees.

Card companies that send out a lot of blank, high-interest cash advance checks or are aggressive in recovering loses also charge higher late fees.

Late fees are strongly associated with a certain type of card issuer. Credit unions, for example, charge a median late fee of $20 compared to $39 fees routinely charged by banks. The study also found that credit card companies that securitized a higher proportion of their receivables (bundled them for sale in worldwide financial markets) are more apt to charge higher late fees.

Despite the exact opposite rationale offered by card issuers, credit losses are only weakly associated with high late fees. When other variables were included in the statistical analysis, higher risk was not correlated with higher late fees. CRL research revealed that when other factors were controlled using multiple regressions, supporting relationships between credit card company losses and late fees disappeared. In other words, issuers don’t price penalty fees as a function of risk.

Requests to the American Bankers Association for a response to the CRL study went unanswered, but when asked how it should influence Federal Reserve officials assigned to adjudicate just what “reasonable” and “proportional” mean when it comes to credit card late penalties, CRL spokesperson Kathleen Day was blunt. “It should tell them they need to rein in these fees.”

She suggested the Fed take into account that credit card companies have, in essence, been misrepresenting disproportionately high late fees as a necessary tool to insure against the risk of non-payment, when in fact they’re just another, often egregious way to enhance revenue.

Doug Miller is a writer living in Westchester County, New York.