What Happened?
On March 5, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued the Credit Card Penalty Fees Final Rule (“Final Rule”), which reduces the safe harbor for the maximum late fee that large credit card issuers may charge to $8. This rule is effective on May 14, 2024.
Why Is It Important?
Background
The Credit Card Accountability Responsibility and Disclosure Act of 2009 provided that any penalty fee imposed on a consumer in connection to an omission or violation of a cardholder agreement under an open-end consumer credit plan must be “reasonable and proportional” to the omission and violation.[1] To implement this provision, Regulation Z provided that card issuers may not impose a fee for violating the terms of a credit card account under an open-end consumer credit plan (“Penalty Fee”) unless the issuer (1) undergoes a cost analysis and determines that the fee is reasonably proportional to the total costs incurred by the issuer for such violation, or (2) complies with the safe harbor provisions, which provide set amounts for Penalty Fees that card issuers may charge.[2]
Previously, the safe harbor for Penalty Fees were $30 for an initial violation 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. These thresholds were adjusted annually to reflect changes to the Consumer Price Index (“CPI”).[3]
Final Rule
Under the Final Rule, the safe harbor threshold for late fees is limited to $8 and the annual adjustments to reflect changes in the CPI no longer apply to the $8 threshold. This new threshold only applies to “Large Card Issuers,” which are card issuers that have one million or more open credit card accounts.
The new late fee safe harbor threshold does not apply to Smaller Card Issuers. To qualify as a “Smaller Card Issuer,” the issuer, together with its affiliates, must have fewer than one million “open credit card accounts” from January through December of the preceding year.[4] If an issuer has one million or more open credit card accounts at any point in the current calendar year, it loses its status as a Smaller Card Issuer.[5] If the card issuer chooses to use the Regulation Z safe harbor provisions, the late fee safe harbor threshold of $8 is applicable to the issuer starting the 60th day after it meets or exceeds the threshold.[6] It will not qualify as a Smaller Card Issuer again until it has fewer than one million open credit card accounts in an entire preceding calendar year.
For other violations, the safe harbor amounts, adjusted to reflect changes to the CPI, are now $32 for an initial violation and $43 for subsequent violations of the same type that occurs during the same billing cycle or in one of the next six billing cycles.[7] Large Card Issuers may charge Penalty Fees pursuant to these safe harbors for other violations of the terms or requirements of an account.[8] Smaller Card Issuers may continue to charge fees, including late fees, under the current safe harbor provisions.
Alternatively, if not relying on the safe harbor provisions, a card issuer may impose penalties on consumers for violations of their credit card account if the issuer undergoes a cost analysis and determines that the fee is reasonably proportional to the total costs incurred by the issuer for such violation. However, the Final Rule provides that when determining penalty fees, card issuers may not include any collection costs incurred after an account is charged-off in accordance with loan loss provisions.[9] These restrictions and challenges in demonstrating that the fee is reasonably proportional to the total costs incurred by the issuer for violations make it difficult for card issuers to deviate from the safe harbors.
The U.S. Chamber of Commerce (the “USCC”) indicated that it would sue “immediately” to prevent the Final Rule from going into effect, arguing that the Final Rule will result in fewer card offerings and limit access to affordable credit for many consumers.[10] On March 7, 2024, two days after the CFPB issued its Final Rule, the USCC filed a lawsuit in the Northern District of Texas seeking an injunction to stop the CFPB from implementing the Final Rule.[11] Most recently, in an order on March 18, 2024, the U.S. District Judge Mark Pittman expressed concern over the choice of venue and has ordered briefing regarding the choice to determine whether the case should be transferred to another venue.[12]
What Do I Need to Do?
Large Card Issuers should ensure that their policies, procedures, and controls are updated to ensure compliance with the Final Rule by May 14th, pending the outcome of any litigation against the CFPB challenging the Final Rule. Smaller Card Issuers should monitor the number of open accounts that they and their affiliates have to ensure that they still qualify as Smaller Card Issuers and that they are charging the correct late fee penalties depending on their status.
[1] 15 USC § 1665d(a).
[2] 12 CFR § 1026.52(b)(1).
[3] 12 CFR §1026.52(b)(1)(ii)(D).
[4] 12 CFR § 1026.52(b)(3). “Affiliate” means any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. §§ 1841 et seq.). Id. “Open credit card accounts” are credit card accounts under an open end (not home secured) consumer credit plan where either (1) the cardholder can obtain extensions of credit on the account or (2) there is an outstanding balance on the account that has not been charged off. 12 C.F.R. § 1026.52(b)(6). An account that has been suspended temporarily is considered an open credit card account. Id.
[5] 12 CFR § 1026.52(b)(3).
[6] Id.
[7] 12 CFR §1026.52(b)(1)(ii)(A), (B).
[8] 12 CFR §1026.52(b)(1)(ii).
[9] 12 CFR §1026.52(b)(1)(i), Comment 2.i
[10] U.S. Chamber of Commerce, U.S. Chamber Opposes New CFPB Credit Card Late Fees Rule That Limits Access to Affordable Consumer Credit (March 5, 2024), https://www.uschamber.com/finance/u-s-chamber-opposes-new-cfpb-credit-card-late-fees-rule-that-limits-access-to-affordable-consumer-credit.
[11] U.S. Chamber of Commerce, U.S. Chamber Files Lawsuit Against Consumer Financial Protection Bureau to Protect Credit Card Users (March 7, 2024), https://www.uschamber.com/finance/u-s-chamber-files-lawsuit-against-consumer-financial-protection-bureau-to-protect-credit-card-users.
[12] Order, Doc. 45 at 1, Mar. 18, 2024, No. 4:24-cv-00213-P, https://fingfx.thomsonreuters.com/gfx/legaldocs/dwvkeqowrvm/03192024cfpb_venue.pdf.
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