Just two days after the CFPB issued its final credit card late fee rule (Rule) last week, a lawsuit was filed in a Texas federal district court seeking to invalidate the Rule.  The plaintiffs in the lawsuit are the Chamber of Commerce of the United States of America, Fort Worth Chamber of Commerce, Longview Chamber of Commerce, American Bankers Association, Consumer Bankers Association, and Texas Association of Business.  In addition to the complaint, the plaintiffs filed a motion for a preliminary injunction in which they ask the court to preliminarily enjoin the Rule during the pendency of the lawsuit.  The court has ordered the CFPB to file a response to the motion by March 12, 2024 and will allow the plaintiffs to file a reply by March 14, 2024.

The case was initially assigned to Senior Judge Terry R. Means who asked that the case be reassigned.  The case was then reassigned to Judge Reed O’Connor who was appointed by President George W. Bush and is widely-viewed as very conservative.

Complaint.  In their complaint, the plaintiffs argue that the court should vacate the Rule and set it aside in its entirety because the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution.  The Fifth Circuit ruled in CFSA v. CFPB that the CFPB’s funding mechanism is unconstitutional and that case is currently pending before the U.S. Supreme Court, which heard oral argument on October 3, 2023.  The plaintiffs also argue that the Rule violates the Administrative Procedure Act (APA) for the following reasons:

• The Rule violates the CARD Act requirement that the CFPB “set standards for assessing whether the amount of any penalty fee…is reasonable and proportional to the omission or violation to which the fee or charge relates.”  A “penalty fee” that is “reasonable and proportional” to the late payment is one that not only compensates the issuer but also accounts for the violation of an agreement and deters future late payment.  The $8 safe harbor amount does not allow issuers to charge fees that sufficiently account for deterrence of consumer conduct, including with respect to repeat violations.  In addition, the Rule only allows issuers to consider pre-charge-off collection costs when setting late fees above the safe harbor amount and precludes consideration of post-charge-off collection costs and other non-collection costs associated with late payments.
• The Rule violates the requirement in Dodd-Frank that when engaging in rulemaking, the CFPB must consider “the potential benefits and costs to consumers and covered persons, including the potential reduction of access by consumers to consumer financial products and services resulting from such a rule.”  The CFPB did not give sufficient consideration to the likely costs to consumers, including the reduced access to credit for some consumers.  In addition to limiting credit offerings to consumers who present a higher credit risk, the Rule may force issuers to raise minimum payments, annual fees or APRs; lower credit limits; or offer fewer rewards.
• The CFPB failed to engage in reasoned decision making, failed to explain its reasoning sufficiently and failed to support its conclusions with substantial evidence.  For example, the CFPB used inappropriate, incomplete, and non-public data to estimate card issuers’ costs, used flawed analysis to dismiss concerns about the decreased deterrent effect of an $8 late fee, underestimated the expected increases in issuers’ costs from the resulting increases in late payments, did not sufficiently explain the basis for not adjusting the $8 safe harbor for inflation, arbitrarily and irrationally excluded post-charge-off collection costs from the costs that issuers are permitted to recover through late fees, and understated the costs to issuers of implementing late fees outside of the $8 safe harbor.  In their complaint, the plaintiffs claim that “instead of calibrating its regulations based on the statute, the CFPB crafted a rule that would allow the President to make good on his promise to ‘cut[] credit card late fees by 75 percent, from $30 to $8.’”
• The CFPB failed to make available for public comment the Federal Reserve’s Y-14M data on which its substantially based its conclusions.
• The Rule’s effective date violates the Truth in Lending Act (TILA) requirement that any CFPB regulation or “any amendment or interpretation thereof, requiring any disclosure which differs from the disclosures previously required” by TILA must have “an effective date of that October 1 which follows by at least six months the date of promulgation.”  The Rule provides that it is effective 60 days after its publication in the Federal Register.  By changing the maximum late fee that an issuer can charge, many issuers will be required to update their disclosures, requiring an October 1, 2024 effective date.  Even where issuers do not rely on the safe harbor, the CFPB’s narrowed definition of costs will nevertheless require an update to their disclosures to reflect the lowered cost-based fees permitted by the Rule.

Preliminary Injunction Motion.  In their motion, the plaintiffs argue that the court should preliminarily enjoin the Rule during the pendency of the lawsuit for the following principal reasons:

• The plaintiffs are likely to succeed on the merits of their claims because (1) the Fifth Circuit has ruled in CFSA v. CFPB that the CFPB’s funding is unconstitutional, and (2) the Rule violates the CARD Act, TILA, and APA for the reasons set forth above.
• Card issuers will suffer at least six types of irreparable harm if the Rule is allowed to take effect: (1) compliance costs in connection with updating fee disclosures to reflect lower late fees, training compliance, customer-service and other staff on Rule’s new requirements, performing an initial and annual cost-justification study if charging a late fee above the $8 safe harbor; (2) risk of enforcement actions because there is a significant risk that it will be impossible to approve and print all of the required physical disclosures by the effective date; (3) lost late fee revenues, including by issuers who are not subject to the Rule but who will lose revenue due to the downward competitive pressure the Rule will put on their late fees; (4) increased collection costs because the Rule will make consumers more likely to make late payments; (5) changed economics of accounts which would never have been issued, or would not have been issued on their particular terms, had issuers been limited to (or had anticipated) an $8 late fee; and (6) loss of customer goodwill if issuers are forced to reduce their late fees to $8 and subsequently raise them, either through the Rule’s cost-analysis provisions or based on the outcome of this litigation.
• The equities favor a stay pending resolution of the case because the harms to the plaintiffs’ members will be substantial while the harms to the CFPB in delaying the Rule’s effective date are negligible.  Because the Rule would likely lead to more late payments, higher interest rates, constrict credit access , and other less favorable terms, the public interest would be served by delaying these effects while the case is pending.

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