Overview: In February, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would significantly reduce the late fees credit card issuers may charge cardholders (the “Proposed Rule”). The Proposed Rule is the latest step in the CFPB and Biden administration’s push to reduce or eliminate so called “junk” fees.
Background
In September 2022, President Biden announced an administration-wide initiative to address so called “junk” fees that may conceal the actual cost of a product for consumers or that exceed the actual cost of providing a service, such as paperwork processing, associated with the fee. One month later, the CFPB issued guidance stating that charging certain overdraft and non-sufficient funds fees may be an illegal unfair practice. Other executive agencies, including the Federal Trade Commission, have also joined the effort to eliminate or reduce certain so-called junk fees. The CFPB’s credit card fee proposal is the latest step in the administration’s junk fee initiative.
The CARD Act Requires Late Payment Fees to be Reasonable and Proportional
In 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act (“CARD Act”) which, among other things, required that credit card late payment fees be “reasonable and proportional” to the costs a card issuer incurs in connection with a late payment. The CARD Act directed the Federal Reserve Board of Governors (the “Board”) to issue rules establishing standards for assessing the reasonableness and proportionality of late fees. In 2010, the Board finalized a rule that creates two options for compliance. First, credit card issuers can make a determination that the dollar amount they charge for a late payment fee represents a reasonable proportion of the total costs incurred in connection with the late payment. As an alternative, the Board set safe-harbor fee maximums t of $25 for the first late payment and $35 for additional late payments. Credit card issuers are presumed compliant with the law if they charge no more than these maximum late fee amounts and today, nearly all such issuers rely on these safe harbor limits.
The Dodd-Frank Act transferred responsibility for CARD Act rulemaking from the Board to the CFPB. The CFPB has continued to adjust the safe harbor limits based on the inflation index, and they are now $30 for the first late payment and $41 for additional late payments.
The CFPB Rule Proposal Would Substantially Limit Credit Card Late Fees
The CFPB has been assessing the fees credit card issuers charge consumers, including by seeking public comment through an advance notice of proposed rulemaking issued in June 2022 and conducting a series of studies based on data collected by the Board and the CFPB. According to information the Bureau published with the Proposed Rule, the income generated by the largest credit card issuers from late fees is approximately five times greater than the collection costs that the companies incur for late payment violations. The CFPB relied on that conclusion in proposing to reduce the amount of the safe harbor limits by a factor of five.
The CFPB issued the Proposed Rule on February 1, 2023. The Proposed Rule has three primary components. If finalized, it would:
- Lower the safe-harbor maximums from $30 for the first late payment and $41 for additional late payments to $8 for both initial and subsequent late payments.
- Eliminate the automatic annual inflation adjustment for the safe harbor limit. The CFPB would instead monitor market conditions and the safe harbor amount for potential adjustments as necessary.
- Cap late fees at 25% of the required minimum payment. The current rule allows a card issuer to potentially charge a late fee that is 100% of the minimum payment owed by the cardholder.
Under the Proposed Rule, credit card issuers could still charge late payment fees that exceed the $8 safe harbor if they can justify their fees’ reasonableness with a supporting cost analysis. However, the CFPB stated in its proposal that it believes the $8 amount “would cover most issuer’ costs from late payments.” This suggests that the CFPB would closely scrutinize any issuers that attempt to support a higher fee structure, and card issuers charging more than an $8 fee could be exposed to significant risk of a CFPB investigation or enforcement.
The proposal also seeks comment on other potential changes to CARD Act regulations, including whether the proposed changes should apply to all credit card penalty fees, whether the safe harbor provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer auto pay in order to make use of the immunity provision.
Several banking trade associations have criticized the CFPB’s proposal as misguided and questioned the CFPB’s conclusion that issuers’ income from late payment fees is five times greater than the costs they incur in connection with late payment fees. In particular, industry stakeholders contend that the strict new limitations could significantly impact the extent to which smaller institutions can offer credit cards to their customers.
Comments on the Proposed Rule will be due 30 days after the Proposed Rule is published in the Federal Register. Trade associations have petitioned the CFPB to extend the comment period because of the potential significance of this rule, but to date the CFPB has declined to officially do so.
Outlook: CFPB Director Rohit Chopra stated in comments to the media on the date that the CFPB issued the Proposed Rule that his goal is to issue a final rule later this year so it can take effect in 2024. This is an aggressive timeline for such a significant rulemaking and institutions impacted by the Proposed Rule should be assessing how this potentially significant change would impact their operations. Impacted institutions should also consider submitting comments to the CFPB.
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AUTHOR INFORMATION:
Craig Saperstein, a member of Nacha’s Government Relations Advisory Group, is a partner in the Public Policy practice of Pillsbury Winthrop Shaw Pittman LLP in Washington, D.C. In this capacity, he provides legal analysis for clients on legislative and regulatory developments and lobbies congressional and Executive Branch officials on behalf of companies in the payments industry. Deborah Thoren-Peden is a partner and member of the Financial Institutions Team at Pillsbury Winthrop Shaw Pittman LLP. She provides advice to financial institutions, bank and non-bank, and financial services companies. Daniel Wood is a Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. Brian Montgomery is a Senior Counsel and member of the Financial Services Regulatory Team. He provides analysis for financial institutions, technology companies, and clients that offer consumer financial products. The information contained in this update does not constitute legal advice and no attorney-client relationship is formed based upon the provision thereof.