The Consumer Financial Protection Bureau’s (the “CFPB” or the “Bureau”) latest move in its crusade against “junk fees” may hit closer to home for companies charging common fees that are considered, to date, to be lawful and valid. On February 1, the Bureau issued a Notice of Proposed Rulemaking1 (the “Proposed Rule”) targeting credit card late fees that would have substantial implications for the consumer credit card industry across essentially all credit bands and submarkets.
Consumer credit card issuers currently are subject to a statutory prohibition against unreasonable penalty fees such as late fees.2 However, regulations implementing that prohibition provide a safe harbor for card issuers charging fees not in excess of certain inflation-adjusted thresholds for initial and subsequent violations of account terms. The Federal Reserve Board initially set the threshold in 2010 at $25 for a first violation and $35 for a subsequent violation of the same type within the next six billing cycles. The CFPB most recently increased the threshold to $30/$41, respectively, as of January 1, 2022.3 In addition, the regulations tie unreasonableness to the costs borne by the card issuer in avoiding or mitigating the violation resulting in the penalty fee. Current regulations also prohibit a card issuer from charging a penalty fee exceeding the amount of the violation resulting in the fee4 (i.e., a consumer late on a payment of $10 cannot be charged a late fee exceeding $10), even if a greater charge normally would fall within the safe harbor.
The Proposed Rule would:
- reduce the safe harbor value for credit card late fees to $8;
- eliminate the distinction between first and subsequent violations for late-fee purposes;
- end the automatic annual inflation adjustment for a permissible late fee; and
- prohibit late fees that exceed 25% of a consumer’s minimum required payment.
The Bureau also seeks comment on whether card issuers should be subject to a new 15-day grace period before charging late fees, and/or be required to offer automatic payment options or provide notification of the payment due date within a certain number of days before the due date (as a condition of reliance on the safe harbor for late fees). Each of these elements would be notable additions to existing requirements under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) regulations.
The Proposed Rule would not eliminate card issuers’ ability to charge larger late fees if they could demonstrate reasonableness under a periodic cost analysis, though that process imposes such procedural and examination burdens that few card issuers have strayed from the safe harbor historically. It also would not change the current safe harbor regime for penalty fees other than late fees, except that it does solicit comments on whether the inflation adjustment should be eliminated for such fees as well.
In connection with the Proposed Rule, CFPB Director Rohit Chopra asserted that “excessive” credit card late fees cost consumers about $12 billion annually, and alleged that the major credit card issuers profit from late fees because of a “loophole” that increased the late-fee limit every year based on inflation, while the actual cost of collection has not increased to such an extent.5 According to Chopra, the “loophole has morphed into a multi-billion dollar bonanza” in which credit card companies may actually hope for late payments as income from late fees may be up to five times greater than the collection costs that the companies incur. That analysis ultimately drove the reduction on safe harbor late fees in roughly the same 5-to-1 ratio (from a maximum of $41 for subsequent violations to the proposed $8), as well as the focus on late fees as opposed to other penalty fees.
The Proposed Rule follows the Bureau’s earlier request for information on junk fees,6 its June 2022 Advance Notice of Proposed Rulemaking (“ANPR”) on credit card late fees,7 as well as a research report regarding fees in the credit card industry.8 The research report found that 18 of the top 20 credit card issuers impose late fees at or near the maximum level that is adjusted annually for inflation.
The Proposed Rule also follows the Bureau’s departure from historic practice in its annual adjustments rulemaking under the Truth in Lending Act/Regulation Z issued in December 2022. The current safe harbor regulations provide that the safe harbors “will be adjusted annually by the Bureau to reflect changes in the Consumer Price Index.”9 In prior years, the Bureau had issued adjustments along with statements indicating that it is “required to calculate annually the dollar amounts for several provisions in Regulation Z.”10 However, the Bureau’s 2022 adjustments, effective January 1, 2023, omitted safe harbor penalty fees from the adjustments.11 Given an 8.9% increase in the relevant index (CPI-W), the credit card industry might otherwise have anticipated increases in the safe harbor values—for late fees and other penalty fees—to approximately $32 for an initial violation and $44 for a subsequent violation. It remains unclear whether the CFPB will make these changes, seemingly required by its own existing regulations, for Calendar Year 2023.
The deadline to submit comments to the Proposed Rule is April 3, 2023, but the credit card industry has already voiced strong dissent. Several trade groups sent a joint letter to Director Chopra reiterating their Comment Letter to the Bureau’s earlier ANPR on the topic, arguing (among other substantive bases) that the late-fee reduction could increase costs and reduce access to credit by small businesses. Such effects on small business arguably require the CFPB to comply with the Small Business Regulatory Enforcement Fairness Act of 1996 (the “SBREFA”) prior to issuing a rule on this matter. The SBREFA would require the Bureau to convene a Small Business Review Panel to consider advice from small-entity representatives, which the Bureau bypassed with respect to the Proposed Rule. Additionally, a policy research firm representing financial institutions published a report stating that the Proposed Rule was based on incomplete data and, if adopted as is, would burden low-balance lenders and likely face immediate litigation.12
If adopted as is, the Proposed Rule could have substantial impact both within and beyond the credit card industry. As many trade groups have commented, it is unclear whether reduced late fees (and thus less incentive for timely payment) could result in higher consumer delinquencies. If so, card issuers may tighten credit standards or reduce access to credit or credit-related benefits for some consumers. Changes to payment performance or access to credit could then have ripple effects as other creditors underwrite new consumer behavior patterns. Moreover, since credit card portfolios are often securitized, the Proposed Rule could also impact pricing on the secondary market. Despite threats of litigation, if the Proposed Rule is adopted as is, card issuers will have to either implement processes to restrict late fees or prepare periodic cost analyses to support their fees. Card issuers currently relying on the safe harbor might consider submitting additional comments to the Proposed Rule by the Bureau’s April 3 deadline.
3 12 C.F.R. § 1026.52(b)(1)(ii).
4 12 C.F.R. § 1026.52(b)(2)(i).
9 12 C.F.R. § 1026.52(b)(1)(ii)(D) (emphasis added).
10 See, e.g., “Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)”, CFPB, 86 Fed. Reg. 60,357 (Nov. 2, 2021).
11 “Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages)”, CFPB, 87 Fed. Reg. 78,831 (Dec. 23, 2022).