In a move that aligns with conservative arguments that the Consumer Financial Protection Bureau (CFPB) has become a political arm of the White House, the agency finalized its controversial credit card late fee rule just two days before President Biden’s March 7, State of the Union speech. The final rule closely resembles the proposal and maintains its key feature: limiting the safe harbor from late fees from an average of $30 to $8. Similar to the proposal, the final rule also no longer applies a higher safe harbor dollar amount for subsequent violations and eliminates the inflation adjustments for the safe harbor rate.
The final rule includes some notable changes, including the absence of a provision preventing late fee amounts from exceeding 25% of the cardholder’s required minimum payment. The final rule also only applies to Larger Card Issuers—entities with 1 million or more open credit card accounts.
This agency action is a continuation of the Biden administration’s crackdown on so-called “junk fees,” following several press releases and other less formal efforts targeting credit card fees, and proposed rules for overdraft protection services and NSF fees, President Biden is expected to highlight the credit card late fee final rule and other efforts in his State of the Union speech and at the March 5 White House Competition Council meeting.
Safe Harbor Dollar Changes
The CFPB’s final rule amends Regulation Z, which implements the Truth in Lending Act (TILA). Under Regulation Z, late fees charged on credit card accounts must be “reasonable and proportional” to the late payment. While Large Card Issuers can continue to issue late fees, they must follow new standards as outlined in the final rule.
- $8 Safe Harbor Dollar Amount. The final rule adjusts the safe harbor dollar amount for late fees to $8 from the current $30 level. The final rule asserts that the fees under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) are too high and not consistent with the “reasonable and proportional” standard. As proposed and in the final rule, the $8 threshold is set to allow Larger Card Issuers to recover pre-charge-off collection costs.
- Subsequent Violations. The CARD Act currently allows card issuers to charge customers $30 for a late payment and $41 for another late payment incurred within six months. The final rule prohibits Larger Card Issuers from charging a higher safe harbor dollar amount for subsequent violations of the same type that take place during the same billing cycle of one of the concurrent six billing cycles.
- No Inflation Adjustments. The final rule does not allow card issuers to adjust their late fees for inflation, which they are currently allowed to do. Within the rule, the CFPB will monitor the market and adjust the safe harbor amount on an ad hoc basis, though it notes that the bureau is not “statutorily required” to make annual adjustments, as it is in other similar statutes.
- Cost Analysis Provision. Large Card Issuers with costs exceeding $8 per late payment will be allowed to set a higher fee using the rule’s cost analysis provisions under 12 CFR § 1026.52(b)(1)(i), though the issuer must provide data to the CFPB showing that it must raise fees to make up for losses. The final rule also clarifies that the cost analysis provisions for determining penalty fee amounts do not include collection costs incurred after an account is charged off pursuant to loan loss provisions.
Smaller Card Issuers Exempted
Industry groups pushed back on these sweeping changes in the proposal and highlighted that the CFPB did not engage in the Small Business Regulatory Enforcement Fairness Act (SBREFA) process before issuing this rule, despite its clear impact on smaller financial institutions. The final rule, perhaps acknowledging that it would have been impermissible to move forward without the SBREFA process, does not target institutions with less than 1 million open accounts. These Smaller Card Issuers are exempt from: (1) the $8 late fee safe harbor threshold amount, (2) the elimination of a higher late fee safe harbor dollar amount for subsequent violations, and (3) the elimination of the annual adjustments for the safe harbor threshold dollar amounts.
For Smaller Card Issuers, the safe harbor thresholds will remain at the level of $30 for a late payment and $41 for another late payment incurred within six months. In total, the CFPB predicts that Smaller Card Issuers only represent 5% of the total outstanding balances in the credit card market.
Outlook
The CFPB announced that the final rule will take effect 60 days after publication in the Federal Register. In the coming days, the final rule will almost certainly receive numerous legal challenges, resulting in a slowed implementation process and potentially threatening the rule itself. The fate of the rule will also be closely tied to the Supreme Court’s ruling on the constitutionality of the CFPB’s funding structure, which is expected in the coming months.
The credit card late fee rule was finalized by the time the Congressional Review Act (CRA) look back window closes for the 118th Congress, meaning it cannot be subject to review by the 119th Congress. Regardless, a CRA resolution may emerge in the coming months, though it will likely be struck down by President Biden if it is able to pass both the House and Senate. A change of administration might also prompt a reexamination of the rule.
Brownstein is closely following these and other related developments across the federal government, and our team is well-equipped to help facilitate engagement with the CFPB and Congress on this issue. For assistance with or more information on any of these developments, please contact a member of the Brownstein Financial Services team.