CFPB Officially Takes Aim at Credit Card Late Fees

The Consumer Financial Protection Bureau (CFPB or Bureau), under Director Chopra, is moving toward placing new restrictions on fees for the late payment of credit card debts. The proposed rulemaking represents a continuation of efforts by the Bureau to take aim at the amount and frequency of late fees (so-called "junk fees," in the Bureau's parlance).

Rulemaking Main Points

On March 29, 2023, the CFPB published a proposed rule in the Federal Register to amend Regulation Z, which implements the Truth in Lending Act (TILA), to limit late fees charged on credit card accounts.[1] If adopted, amended Regulation Z would:

• Adjust the safe harbor dollar amount for late fees to a flat $8, down from the current safe harbors of $30 for a first violation and $41 for a second violation within sixbilling cycles.[2]
• Provide that annual inflation adjustments for safe harbor dollar amounts would not apply to the late fee safe harbor amounts as it does in the current regulation;[3]
• Provide that late fee amounts must not exceed 25% of the amount of the required payment deemed late; and
• Clarify that for those issuers choosing to set late fees on the basis of a Section 52(b)(1)(i) cost analysis, issuer costs should not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions.

CFPB's Rationale for the Rulemaking

The Bureau asserts various rationales for the drastic overhaul to Regulation Z's late fee regulations, which have remained largely untouched since their implementation in 2010.[4] Primarily, the Bureau argues that the current safe harbor amount for late fees is not "reasonable and proportional" (the language used in TILA) to the cost to issuers of a late payment. The Bureau also argues that having a higher safe harbor threshold for subsequent violations of the same type within six billing cycles, as is currently permitted, could interfere with consumers' ability to make future payments on the account. Undergirding both of these points is the Bureau's critique of the data sets used in the Federal Reserve Board's initial rulemaking in 2010, as well as of the Board's overly permissive attitude toward what costs should be included in an issuer's analysis of the cost to the issuer of a late payment.

The Bureau believes that late fees are a notable revenue source for the industry and that that fact alone, considering that most large issuers rely on the safe harbor amount in charging late fees, is indicative of the current safe harbor not being "reasonable and proportional" to the cost to an issuer of a late payment. Per the Bureau's logic, issuers "may be disincentivized to lower late fee amounts" when reliance on the current safe harbor amounts generates this revenue. Additionally, the Bureau argues that issuers are disincentivized from lowering late fee amounts because consumers tend not to shop for credit cards based on the amount of late fees. The Bureau believes that the proposed rulemaking may cause issuers to shift certain of these costs to the account interest rate instead, which the Bureau suggests is a more transparent way of disclosing costs to the consumer.

Comment Requests

The CFPB is soliciting comments on the proposed rulemaking by May 3, 2023.

In particular, the Bureau is seeking comments on the following specific considerations within the rulemaking:

• A potential prohibition on late fees under certain conditions, e.g. "whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 calendar days following the due date."
• Options related to automatic payments and notifications. For example, requiring card issuers to: (1) offer automatic payment options; and/or (2) provide notification of the payment due date within a certain number of days prior to the due date.

The Larger Context

This rulemaking may be one of a number of future proposals on credit card fees and other products as part of the Bureau's push against "junk fees." The rulemaking notes in this respect that "the Bureau's proposed changes to the restrictions in § 1026.52(b) are limited to late fees at this time, although the Bureau seeks comments on whether the proposed amendments should apply to other penalty fees." Future considerations could include restrictions on "over-the-limit fees, returned-payment fees, and declined access check fees, or in the alternative, whether the Bureau should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees."

DWT is assisting clients in the submission of comments to the CFPB by the deadline and will continue to monitor the CFPB's late fee rulemaking and ongoing scrutiny of all credit card penalty fees.

[1] See https://www.federalregister.gov/documents/2023/03/29/2023-02393/credit-card-penalty-fees-regulation-z. 12 CFR 1026.52(b).

[2] See 12 CFR 1026.52(b)(1)(ii). https://www.ecfr.gov/current/title-12/chapter-X/part-1026?toc=1.

[3] § 1026.52(b)(2)(i)(A)

[4] 75 Fed. Reg. 37526 (Jun. 29, 2010).