Latest Credit Card Rules Hurt Black Businesses the Most

Roy Hodge

By Roy Hodge, President of the Toledo African-American Chamber of Commerce
Guest Column

Nothing can transform a community like thriving small businesses. When those businesses are successful, they create jobs, brighten neighborhoods, and reinvest and grow in the communities they serve. But businesses don’t just magically appear. They require hard work and, just as importantly, capital and investment. Today, access to credit is under threat by new banking rules proposed in Washington, D.C. – and Black entrepreneurs will be hit harder than most.

The rule in question is a reduced cap on credit card late fees, which have been lumped in the same bucket as hidden junk fees targeted by the Biden administration’s Consumer Financial Protection Bureau (CFPB). There is already a reasonable cap on these fees, $30 for the first late payment and $41 for a second, but the CFPB wants to cut them to $8. While junk fees simply exist to extract more money from customers, credit card late fees serve an important purpose: they incentivize people to pay their bills on time. When more people pay their bills on time, credit becomes less expensive and more widely available. When fewer people pay their bills on time, credit becomes more expensive, and banks are less willing to extend credit and loans. It’s as simple as that.

For Black entrepreneurs in Toledo and across Ohio, the peril in this policy is evident. A recent study from the Joint Center for Political and Economic Studies found that approximately 60 percent of black business owners had trouble obtaining capital. There are numerous reasons for this, ranging from stricter lending rules to less available collateral to a lack of banking options and relationships in Black communities.

The reduced late fee cap would only exacerbate each of these issues, making it even harder for Black business owners to get the credit they need to start and expand their businesses. Lending standards would become even more stringent and risk-averse. Collateral requirements would become even higher. Black businesses that do have access to credit will see their costs increase dramatically and likely have to cut expenses elsewhere by limiting employee hours or raising costs for customers. Those who don’t have access to credit may never get off the ground. And those who use credit cards to cover both day-to-day expenses and unexpected expenses could be forced to turn to other funding sources, such as payday lenders who target minority communities. In Ohio, these lenders demand the highest interest rate in the country, at 591 percent.

Lowering the cap on late fees would be bad enough if the consequences stopped there, but they don’t. The small banks that actually do serve Black communities and businesses in Toledo would have a harder time extending credit – both to businesses and to everyday customers throughout northwest Ohio. Unlike the big banks, these community-based institutions simply don’t have the resources to absorb the losses that accumulate when people fail to pay their bills on time. They will be forced to tighten credit lines, raise interest rates, and eliminate basic services like free checking accounts.

The CFPB thinks its rules would protect consumers, but they are completely wrong in this case. Lowering the cap on late fees would only serve to shift costs from those who fail to play by the rules to those who do. Black businesses, which already face numerous hurdles to credit and capital, will only face more obstacles. Black-owned banks will be at an even greater disadvantage to the big banks who too often ignore us. And the Black community in Toledo and throughout Ohio will ultimately pay the steepest price for this politically motivated rule that policymakers in Washington, D.C. would be better off abandoning.

Roy Hodge is the President of the Toledo African-American Chamber of Commerce