The top U.S. consumer watchdog on Tuesday defended a proposal to limit late fees charged on credit card balances, a move that has faced fierce opposition from the banking industry.

In testimony before the Senate, Consumer Financial Protection Bureau Director Rohit Chopra rejected arguments by banks that capping late fees would force them recover the lost revenue by charging higher interest rates or cutting access to credit for some.

"They are fully allowed to capture their costs," Chopra said under questioning from Senator Tim Scott, the top Republican on the Senate Banking Committee, who recently announced his 2024 presidential bid.

"One of the things that our issuers tell us is that they don't want to profit off of late fees. That's exactly the goal here because the law says those penalty fees are supposed to be reasonable and proportional."

The CFPB in February rolled out a regulatory proposal that would cap late fees at $8, far lower than the current $30-$41, unless credit card issuers could justify charging more, part of the Biden administration's attack on what it calls consumer "junk fees."

Lobbyists and industry advocates have assailed the term, claiming it mischaracterizes legitimate charges, and warned of unintended consequences in the banking sector.

"When you don't consider the overall cost of collecting something, that becomes embedded in the overall structure of he organization," Scott said Tuesday.

(Reporting by Douglas Gillison, editing by Deepa Babington)