The move becomes effective on October 1, 2023, with the Supreme Court soon to decide on the agency’s rule-writing authority.
On February 1, 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule (the Proposal) to amend Regulation Z, which implements the Truth in Lending Act (the Act) to limit credit card late fees. The CFPB received comments before its May 3, 2023 deadline, and it announced that the proposed rule will go into effect on October 1, 2023.
Absent further challenges as described below, credit card issuers should be ready to implement controls to comply with the Proposal.
The Proposal aims to ensure that late fees are “reasonable and proportional” to the costs that the credit card issuers incur in collecting late payments, as required by the Act. In particular, the Proposal outlines three changes:
- The safe harbor dollar amount for late fees would be lowered from up to $41 to $8.
- The current provision providing for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount.
- Late fees cannot exceed 25% of the required payment. Currently, late fees cannot exceed 100% of the required payment.
Under Regulation Z, card issuers may charge penalty fees for violations of the terms under a credit card account so long as the issuer has determined that the fee is a reasonable proportion of the total costs that the issuer incurred in relation to the violation. Currently, Regulation Z provides safe harbor amounts for card issuers, which are certain dollar amounts that do not run afoul of the “reasonable proportion” requirement. Issuers may charge a cardholder up to $30 for the first violation and up to $41 for a subsequent violation of the same type that occurred during the same billing cycle or one of the next six billing cycles.[1]
The CFPB’s proposed rule would lower this safe harbor amount for late payment fees to $8. This new safe harbor amount would apply to the initial and all other subsequent violations. However, the proposed rule would allow card issuers to charge more than $8 if they can demonstrate that a higher fee is necessary to cover their costs. Notwithstanding such safe harbor provisions, the proposed rule would allow card issuers to continue charging for other penalty fees and 3% of the delinquent balance on a charge card account that requires payment of outstanding balances.[2] The current version of Regulation Z also provides for automatic annual adjustments on the safe harbor amounts, which reflect changes in inflation.[3] The proposed version, however, would eliminate such automatic adjustments.
Finally, under the current regime, card issuers may charge late fees up to 100% of the required minimum payment.[4] The proposed change would limit penalty fees for late payments to 25% of the required minimum payment.
Advocates and Critics Respond
The CFPB published the Proposal in the Federal Register on March 29, 2023 and requested comments by May 3, 2023. The CFPB received approximately 57,000 comments, 56,000 of which were largely positive, according to Brian Shearer, the senior advisor to the CFPB director.
Meanwhile, the banking industry’s largest trade associations objected to the Proposal. In a letter dated May 3, 2023, the American Bankers Association, the Consumer Bankers Association, and the National Association of Federally-Insured Credit Unions (together, the Associations) issued three objections to the Proposal:
- Late fees serve an important function in helping consumers and card issuers manage their respective finances, and the Proposal would harm all cardholders.
- The CFPB made incorrect assumptions about late fees, which will result in a flawed policy.
- The CFPB violated numerous process and procedural requirements.
As to their first objection, the Associations noted that the proposed rule would harm all consumer cardholders, regardless of whether they make their payments in full and on time, on time while carrying a balance, or late. Specifically, consumer cardholders who make their payments in full and on time would pay more for existing and new credit as a result of issuers adjusting rates and fees to manage risks and recover costs from late payments. Cardholders who pay on time but carry a balance would face higher annual percentage rates and pay more for their balance. Lastly, cardholders who pay late would be disincentivized from paying on time altogether when the short-term consequences are more lenient. The Associations caution, however, that such cardholders would ultimately face serious long-term consequences, such as a greater risk of default, lower credit scores, and higher interest rates.
In their second objection, the Associations emphasized the CFPB’s assumptions that late fees are harmful to consumers — which the Associations contend is an incorrect assumption. In particular, the Associations noted that the CFPB failed to consider the important deterring effect of late fees on consumers because late fees reduce the frequency of late payments. They argued that late fees help consumers foster a healthy financial mindsetby encouraging them to pay on time and develop good financial and credit management habits.
Finally, the Associations argued that the CFPB committed several process and procedural violations in setting out its proposed rule:
- The CFPB cannot request a courtesy period — in which late fees may not be imposed within 15 days after each payment due date — without notice and comment.
- The CFPB director improperly certified that the proposed rule would not have a Significant Economic Impact on a Substantial Number of Small Entities (SISNOSE).
- The CFPB director made public statements before issuance of the final rule that imply the completion of the rule before notice and comment, in violation of the Administrative Procedure Act.
- The proposed effective date of 60 days after final rule promulgation would directly conflict with the Act’s Section 105(d) required effective date of October 1, 2023.
- The CFPB should halt its rulemaking process until the US Supreme Court renders an opinion in a case it has certified for review, which would set out the agency’s rule-writing authority[5].
In contrast to the Associations’ objections, a number of lawmakers support the proposed rule, including Senator Elizabeth Warren who is signing an amicus brief backing the CFPB. At a recent hearing of the Senate Banking, Housing, and Urban Affairs Committee, Senator Warren applauded the Proposal in its attempt at rooting out “junk fees” and placing the government on the side of the people, while denouncing the banking industry’s alleged public relations campaign that ending the current late fee regime would destroy the credit card market.
Conclusion
The proposed rule is published on the CFPB’s website, with a notation that it goes into effect on October 1, 2023. However, as previously discussed, legal challenges against the CFPB continue to emerge.
In an order published on July 31, 2023, US District Court Judge Randy Crane of the Southern District of Texas granted a request from a group of banks to halt compliance on another CFPB rule requiring covered financial institutions to collect and report data on small business credit applications[6]. Judge Crane enjoined the CFPB from implementing and enforcing the rule as final until the Supreme Court renders an opinion in the case noted above.
At this time, it is unclear if the CFPB will postpone the amendment of Regulation Z until the Supreme Court furnishes its opinion on the CFPB’s rule-writing authority or if legal challenges will delay implementation.
Latham & Watkins will continue to monitor developments in this area.
Endnotes
[1] §§ 1026.52(b)(1)(ii)(A)-(B).
[2] § 1026.52(b)(1)(ii)(C).
[3] § 1026.52(b)(1)(ii)(D).
[4] § 1026.52(b)(2)(i)(A).
[5] Cmty. Fin. Servs. Ass’n of Am., Ltd. v. CFPB, 51 F.4th 616, 623 (5th Cir. 2022), cert. granted, 215 L. Ed. 2d 104, 143 S. Ct. 978 (2023).
[6] Texas Bankers Ass’n v. CFPB (5th Cir. 2023).
