The rule targets a statutory loophole that the CFPB asserts large credit card issuers exploited to exact excessive late fees from consumers.

On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule (the Rule) to amend Regulation Z, which implements the Truth in Lending Act (TILA) to limit credit card late fees. The Rule was initially proposed in February 2023 and was intended to go into effect in October 2023 (for more information on the proposal, see this Latham blog post). The Rule aims to ensure that credit card late fees are “reasonable and proportional” to the costs that issuers incur in collecting late payments, as required by TILA.

The Rule establishes two main changes to credit card late fee practice:

• Safe harbor lowered: The late fee safe harbor threshold is lowered to $8.
• No inflation adjustment: The automatic annual inflation adjustment permitted under the implementing statute no longer applies to the $8 late fee threshold.

The CFPB estimates that the Rule will encompass over 95% of outstanding balances in the credit card market, and that consumers will save more than $10 billion in late fees annually.

Safe Harbor Lowered

Under TILA, credit card issuers were generally afforded a safe harbor of $30 for penalty fees, and $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles. The CFPB determined that this safe harbor is excessive and “not consistent with TILA’s statutory requirement that such fees be reasonable and proportional to the omission or violation to which the fee relates.”

The Rule therefore establishes a late fee safe harbor dollar amount of $8, which in CFPB’s view “is sufficient to cover the pre-charge-off collection costs of the average Larger Card Issuer.” It also eliminates the higher late fee safe harbor dollar amount for subsequent violations.

Larger card issuers will be able to charge fees above the newly established $8 threshold if they can provide a cost analysis showing that the higher fee is reasonable and proportional to their late payment collection costs.

No Inflation Adjustment

Under TILA, credit card issuers were generally allowed to annually adjust the safe harbor dollar amounts to reflect changes in the Consumer Price Index (CPI). The CFPB found that issuers were automatically adjusting fees higher based on changes in CPI, rather than providing any cost analysis to justify the increases.

The Rule therefore will no longer permit inflation adjustments to the $8 safe harbor amount for late fees, except as determined by the CFPB.

Exception for Small Issuers

The Rule only applies to the largest credit card issuers, i.e., those that together with their affiliates have more than 1 million open credit card accounts for the entire preceding calendar year. According to the CFPB, these issuers account for nearly all total outstanding credit card balances. The CFPB indicated that smaller issuers tend to charge lower rates and fees, while the largest issuers generally charge close to the maximum allowable late fee amount.

Deviations From the Proposal

The original proposal sought to establish that late fees cannot exceed 25% of the required payment (currently, late fees cannot exceed 100% of the required payment). The CFPB, however, declined to adopt this aspect of the proposal in the final Rule. The CFPB assessed the feedback from commenters and agreed that the reduction would have adverse effects on issuers’ ability to cover costs associated with late payments. According to the CFPB, the benefits to consumers in adopting this provision would “not outweigh considerations of card issuers’ ability to recoup their pre-charge-off collection costs when they are using the $8 safe harbor threshold amount.”

Challenges Expected

Like the original proposal, the Rule is facing intense criticism from market participants and trade groups representing banks and credit unions. Critics assert that the changes will only be a detriment to issuers and consumers, with the potential to reduce credit availability, increase the cost of credit, reduce credit card program perks, shift fees elsewhere, and drive issuers to cut innovation costs to offset the losses. (For more information on banking trade groups’ objections to the proposal, see this Latham blog post).

Indeed, the US Chamber of Commerce and allied bank trade groups wasted no time opposing the Rule. On March 7, 2024, they filed a lawsuit in the Northern District of Texas seeking a preliminary injunction to prevent the CFPB from implementing the Rule. The prominent trade group asserted that the CFPB “exceeded its statutory authority” in issuing the Rule. The group also asserted that the Rule is “arbitrary and capricious” as the CFPB allegedly relied on “secret data collected for an unrelated purpose.” Finally, it claimed that the CFPB issued the Rule while operating with funds drawn from the Federal Reserve in violation of the US Constitution’s Appropriations Clause (Article I, Section 9). This claim echoes that of another case challenging the CFPB for a rule on small-business lending reporting. The US Court of Appeals for the Fifth Circuit stayed that rule, not for its substance but on the issue of CFPB funding. The CFPB appealed, and the US Supreme Court will decide on the constitutionality of the CFPB’s funding structure by the end of the current term.

Representative Patrick McHenry, chairman of the House Financial Services Committee, severely criticized the Rule in a published statement, asserting that “[t]he final rule “raises the cost of borrowing for all consumers . . . [and] suffers from the same fatal flaws as the proposal.” He cast a suspicious eye on the “composition and motivation” of the Rule, alleging that the Rule reflects the administration’s ongoing attempt “to weaponize financial regulators to play politics in an election year.”

Senator Tim Scott, ranking member of the Senate Committee on Banking, Housing, and Urban Affairs, and longstanding critic of the CFPB’s agenda, went further by asserting that he would be “using the Congressional Review Act process to fight the implementation of this rule.”

Not all public comments, however, were negative. Representative Maxine Waters, ranking member of the House Financial Services Committee, applauded the Rule and CFPB leadership for “finalizing this critical rule to slash credit card late fees.”

Conclusion

The Rule is another win for the consumer financial regulator against what it calls “junk fee harvesting” in the banking and credit sectors. In a public statement, CFPB Director Rohit Chopra lauded the Rule as “an important step forward” in protecting consumers from “the fee churning business model.”

Along the same lines, the CFPB has recently proposed a rule that would prevent banks and other financial institutions from charging non-sufficient funds fees on transactions declined in real time (for more information, see this Latham blog post).

Meanwhile, the Board of Governors of the Federal Reserve System recently published a proposal that would lower the maximum interchange fee — transaction fees that a merchant must pay to card issuers whenever a customer uses a debit card to make a purchase — that a debit card issuer can charge per transaction (for more information, see this Latham blog post).

More recently, President Biden announced an interagency Strike Force on Unfair and Illegal Pricing (led by the Department of Justice and the Federal Trade Commission) to “root out and stop illegal . . . anti-competitive, unfair, deceptive, or fraudulent business practices” across key markets and sectors.

The Rule becomes effective 60 days after publication in the Federal Register.

Latham & Watkins will continue to monitor developments in this area.