Payments Report: News from Washington, Brought to you by NEACH
Overview: On March 5, 2024, the Consumer Financial Protection Bureau (“CFPB”) finalized a rule that will significantly reduce the late fees large credit card issuers may charge cardholders (the “Final Rule”). The Final Rule is the latest step in the Biden administration’s efforts to reduce or eliminate so-called “junk” fees.
Background
In January 2022, the CFPB launched an initiative to review junk fees, which it characterized as fees that may conceal the actual cost of a product or that exceed the actual cost of providing a service. Later in 2022, President Biden announced an administration-wide initiative to address junk fees. Other executive agencies, including the Federal Trade Commission, have also joined the effort to eliminate or reduce certain so-called junk fees, and President Biden touted the Final Rule in his 2024 State of the Union address.
The CARD Act’s Requirement that Late Fees be Reasonable and Proportional
The 2009 Credit Card Accountability Responsibility and Disclosure Act (“CARD Act”) includes a requirement that credit card late payment fees be “reasonable and proportional” to the costs a card issuer incurs in connection with a consumer’s late payment. The Federal Reserve originally promulgated regulations implementing the CARD Act in 2010 and set safe harbor fee maximums of $25 for a consumer’s first late payment and $35 for subsequent late payments. Today, a significant majority of issuers rely on these safe harbors.
The Dodd-Frank Act transferred responsibility for CARD Act rulemaking from the Federal Reserve 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 Proposed Rule
In February 2023, the CFPB proposed a rule to significantly reduce the late fees credit card issuers may charge cardholders (the “Proposed Rule”). The most significant aspect of the Proposed Rule was to propose a de facto $8 cap on credit card late fees, which credit card issuers would only be able to exceed if they could justify through a documented analysis that a higher fee would be reasonable and proportional to the costs incurred in connection with a consumer’s late payment.
The Final Rule Significantly Limits Credit Card Late Fees
The Final Rule largely adopts the Proposed Rule and has two primary components:
- Lowers the safe harbor late fee limits large credit card issuers may charge consumers from $30 for the first late payment and $41 for subsequent late payments, to $8 for both initial and subsequent late payments.
- Ends the automatic annual inflation adjustment to the $8 late fee safe harbor limit that applies to large credit card issuers. The CFPB would instead monitor market conditions and the safe harbor amount for potential adjustments as necessary.
The Final Rule applies only to the largest credit card issuers, which it defines as card issuers that together with their affiliates have one million or more open credit card accounts. This is a change from the Proposed Rule, which would have applied to all credit card issuers. The CFPB’s press release announcing the Final Rule states that this threshold will currently cover more than 95% of the credit card market.
Smaller credit card issuers will still be able to rely on higher safe harbor fee limits, which the Final Rule adjusts to $32 for the first late payment and $43 for subsequent late payments. These amounts will also continue to be subject to annual adjustment for inflation.
The Final Rule also retains the existing section of Regulation Z that permits credit card issuers to charge late payment fees that exceed the safe harbor fee limit if they can justify their fees’ reasonableness with a supporting cost analysis. However, the CFPB stated in the preamble to the Proposed Rule that it believes the $8 amount “would cover most issuer’ costs from late payments” and included a detailed, data-driven analysis in the preamble to the Final Rule to support its conclusion that $8 is the appropriate late fee limit. This suggests that the CFPB will 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.
Criticism and Litigation
Just one day after the CFPB issued the Final Rule, several industry trade associations sued in federal district court in Texas to enjoin its implementation. The lawsuit argues that the Final Rule exceeds the CFPB’s statutory authority and that it will ultimately harm consumers by redistributing costs to all cardholders, even those who never pay late. Several members of Congress have also criticized the Final Rule, and Senator Tim Scott stated that he will attempt to use the Congressional Review Act to overturn the Final Rule, an effort that will likely hinge on whether Republicans take control of the Senate, House, and White House after the 2024 general election. The Congressional Review Act allows Congress to repeal so-called “midnight regulations” promulgated by the Executive Branch near the end of a presidential term, but practically only applies when one party has unified control of Congress and the White House.
Outlook: The Final Rule is scheduled to take effect 60 days after it is published in the Federal Register (which has not yet occurred as of the date of this article), though the pending litigation could delay that implementation date. Whether or not legal or legislative challenges to the Final Rule are successful, financial services companies should continue to closely monitor all fees they charge consumers in light of the Biden Administration’s coordinated efforts to rein in those fees.