On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) announced the issuance of its final rule to amend Regulation Z and further restrict credit card late payment fees (the “Final Rule”). With certain material differences discussed herein, the Final Rule tracks the CFPB’s proposal from March 2023 (the “Proposed Rule”). The Final Rule continues the CFPB’s efforts to regulate so-called “junk fees” in financial products and services.

Like the Proposed Rule, significant provisions of the Final Rule: (1) reduce the safe harbor for late payment fees to $8 for the vast majority of credit card transactions; and (2) restrict any cost-based analysis from considering post-charge-off costs. Also like the Proposed Rule, the Final Rule will take effect 60 days after publication in the Federal Register.

Unlike the Proposed Rule, the Final Rule did not adopt: (1) a restriction on late fee amounts to 25 percent of the required minimum payment; (2) a 15-day courtesy period for late fees; (3) the elimination of safe harbor threshold amounts for other penalty fees; or (4) additional conditions on using the safe harbor threshold amounts, such as providing auto payment options.

As discussed further herein, the Final Rule exempts so-called “Smaller Card Issuers” from the reduced safe harbor.

Scope of the Final Rule

One material difference from the Proposed Rule is that the Final Rule exempts “Smaller Card Issuers,” which are defined as card issuers that, together with any affiliates, have fewer than one million open credit card accounts for the entire preceding calendar year. Under the Final Rule, a Smaller Card Issuer as of 60 days after meeting or exceeding one million open credit card accounts will need to comply with the limitations applicable to “Larger Card Issuers” (i.e., card issuers with one million or more open accounts).

The Final Rule applies the existing definition of “open account” relevant to the internet posting of credit card agreements requirement in Section 1026.58 of Regulation Z to the limitations on fees under Section 1026.52. Specifically, an account is an “open account” or “open credit card account” if it is a credit card account under an open-end (not home-secured) consumer credit plan, and generally either: (i) the cardholder can obtain extensions of credit on the account; or (ii) there is an outstanding balance on the account that has not been charged off. As a point of comparison, to qualify for a de minimis exception under Section 1026.58, a card issuer must have fewer than 10,000 open accounts, whereas under the Final Rule, a card issuer must have fewer than one million open accounts to qualify for an exemption from the reduced safe harbor.

Reduction in Credit Card Late Fee Safe Harbor for Larger Card Issuers

Consistent with the Proposed Rule, for Larger Card Issuers, the Final Rule implements a late fee safe harbor threshold of $8, and eliminates the annual inflation adjustment for the late fee safe harbor. Specifically, under the Final Rule, a Larger Card Issuer may impose a fee for a late payment on an account if the dollar amount of the late fee does not exceed $8, regardless of whether it is the first late fee or a subsequent late fee. This is the same dollar amount as proposed, but down from the $30 threshold under the current rule.

In addition, the Final Rule provides that the annual inflation adjustment for the safe harbor dollar amount does not apply to the safe harbor amount for late fees for Larger Card Issuers. Instead, the CFPB will adjust the $8 safe harbor threshold amount for Larger Card Issuers on an ad hoc basis. However, the annual inflation adjustments for the safe harbor dollar amount will continue to apply to late fees imposed by Smaller Card Issuers.

Adjustments to Other Credit Card Penalty Fees

The Final Rule revises the safe harbor threshold amounts that apply to late fees imposed by Smaller Card Issuers, as well as penalty fees for other types of violations of the terms, other than late payments, charged by all card issuers, if the dollar amount of the fee does not exceed:

• $32 (up from the current $30 threshold);
• $43 (up from the current $41 threshold) if the card issuer previously imposed a fee for a violation of the same type that occurred during the same billing cycle or one of the next six billing cycles; or
• Three percent of the delinquent balance on a charge card account that requires payment in full at the end of each billing cycle if the card issuer has not received payment for two or more consecutive billing cycles.

Under the cost analysis provision in Section 1026.52 of Regulation Z, a card issuer is still permitted to charge penalty fees above the threshold amounts if it can demonstrate to the CFPB that a higher fee is required for the card issuer to cover its collection costs. A card issuer can continue to include pre-charge-off collection costs in its analysis; however, the Final Rule prohibits the card issuer from considering any collection costs that are incurred after the card issuer has charged off the account as a loss pursuant to loan loss provisions when determining its need for a higher penalty fee amount.

What’s Next?

The Final Rule will take effect 60 days after publication in the Federal Register, which may take weeks or months. As discussed above and according to the CFPB, for Larger Card Issuers the 60-day effective date applies to: (1) the repeal of the current safe harbor threshold amounts; (2) the adoption of an $8 late fee safe harbor dollar amount; (3) the elimination of a higher safe harbor dollar amount for subsequent late fees that occur during the same billing cycle or in one of the next six billing cycles; and (4) the elimination of the annual inflation adjustment provisions for the safe harbor dollar amounts. The Final Rule states that if any provision is deemed invalid—in particular, the $8 safe harbor amount for Larger Card Issuers—then the CFPB’s conclusion to repeal the existing safe harbor is severable and will remain in effect.

On March 7, 2024, the U.S. Chamber of Commerce and co-plaintiffs filed a complaint in the U.S. District Court for the Northern District of Texas seeking a preliminary injunction to stop the CFPB from implementing the Final Rule.

Additionally, Senator Tim Scott (R-S.C.), Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, stated that he intends to “us[e] the Congressional Review Act process to fight the implementation of this rule.” We will continue to follow developments in the area.

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