The Consumer Financial Protection Bureau (CFPB) recently issued a notice of proposed rulemaking to amend Regulation Z (the Proposal), which implements the Truth in Lending Act (TILA), to better ensure that late fees charged on credit card accounts are “reasonable and proportional” to late payments as required under the Credit Card Accountability and Disclosure Act of 2009 (Card Act).
The Proposal would adjust the safe harbor dollar amount for late fees to $8 for any missed payment (issuers are currently able to charge late fees up to $41) as well as end the automatic annual inflation adjustment for the immunity provision amount (adjustments would be made based on market conditions going forward). It would eliminate a safe harbor dollar amount for late fees for subsequent violations of the same type (a company could charge above the immunity provision if it could prove the higher fee is necessary to cover costs). Finally, the Proposal would also cap late fee amounts above 25% of the consumer’s required minimum payment (issuers are currently able to potentially charge a late fee that is 100% of the customer’s minimum payment owed).
Currently, credit card companies utilize a safe harbor provision implemented by the Federal Reserve Board in 2010 that imposes certain fee limits and that allows late fees to rise with inflation. According to the CFPB, companies may now charge up to $30 for an initial late payment and $41 for subsequent late payments and many do so. Under the Proposal, the safe harbor amount would be adjusted to $8 and a higher safe harbor dollar amount for late fees for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles would be eliminated. Companies would be able to charge above the immunity provision but bear the burden of proving that the fee is necessary to cover incurred collection costs.
The Proposal also eliminates the ability for late fees to be adjusted annually due to inflation. Instead, the CFPB would monitor market conditions and possibly establish an adjusted fee cap. It should be noted that an adjustment could be lower as well and that such an adjustment, unlike the one proposed would not likely require a full rulemaking process.
Finally, the Proposal provides that late fee amounts must not exceed 25% of the required payment; currently, late fee amounts must not exceed 100%. The CFPB stated that they are making these adjustments to ensure that fees remain “reasonable and proportional.”
The CFPB’s focus on credit-card fees is part of a broader push by the bureau to crack down on what it describes as problematic fees, including for checking account overdrafts and high fees for student financial products. The Proposal follows an earlier request for comment on junk fees, a research report, and an advance notice of proposed rulemaking on credit card late fees that the CFPB issued last year. The Proposal contains an extensive discussion on the revenue generation of late fees for card issuers and the harmful impact on consumers by those fees.
The Proposal is high profile with broader media and interest group attention and has received significant media coverage. Based on CFPB estimates, the Proposal could reduce late fees by as much as $9 billion per year. It also was first among the agenda items noted by President Joseph Biden at a meeting of the White House Competition Council as, according to CFPB Director Rohit Chopra, such fees undermine competition and “chip away at monthly budgets by obscuring part of the price from comparison shopping, making it difficult for Americans to shop around.” CFPB Director Chopra issued a statement commenting that the current immunity provisions are not what Congress intended when it passed the CARD Act.
The CFPB seeks comment on other potential changes. For instance, it requests comment on whether the safe harbor should be eliminated altogether, whether there should be a mandatory 15-day courtesy period after the due date before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.
Comments on the Proposal must be received on or before April 3, 2023, or 30 days after publication in the Federal Register, whichever is later.
Takeaways
- The Proposal follows several significant actions led by the CFPB, including a research report analyzing credit card late fees, an advance notice of proposed rulemaking regarding credit card late fees and late payments, and a request for comments on junk fees.
- The CFPB released an unofficial, informal redline of the Proposal to help the industry review proposed changes.
- This Proposal, if promulgated, could be subject to challenge on both Major Questions Doctrine under West Virginia vs. EPA, and Chevron deference grounds.
- The CFPB issued a report, Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies, which documents findings on the relationship between late fee revenue and pre-charge-off collection costs for certain large credit card issuers. The report found that, over the last several years, late fee revenue far exceeded pre-charge-off collection costs. Research reports and notices of proposed rulemaking often detail what is forthcoming from the CFPB.