Credit Card Industry Gears Up for Battle Against CFPB's Proposed Late Fee Cut

Credit card companies are bracing for a confrontation with the Consumer Financial Protection Bureau (CFPB) over the agency's proposal to slash credit card late fees from the existing range of $31 to $40 to a flat rate of $8. This move has the potential to erase 75% of annual bank earnings derived from late fees.

Trade groups have already announced their intention to sue the bureau, citing violations of the Administrative Procedure Act and other legal grounds once the rule is finalized, anticipated in the coming fall. However, analysts speculate that the credit card industry might act even sooner to halt the rule's implementation due to a pending Supreme Court decision on the constitutionality of the CFPB, expected next year.

Alan Kaplinsky, senior counsel at the law firm Ballard Spahr, advocates for legal action, suggesting that the CFPB should postpone finalizing any regulations until after the Supreme Court's decision. He proposes that all final rules, including the one pertaining to credit card late fees, should be put on hold until then.

Some analysts argue that the CFPB might proceed with the rule's finalization regardless of legal challenges. Ed Groshans, senior policy and research analyst at Compass Point Research & Trading, describes the CFPB's approach as a continuous forward momentum, seemingly undeterred by potential outcomes.

The proposed changes by the CFPB encompass several significant shifts. It reduces the 'safe harbor' late fee amount to a flat $8, in contrast to the current maximum of $30 for a first violation and $41 for subsequent violations. Credit card companies adhering to fees at or below $8 are safeguarded from legal liability.

For those charging late fees beyond $8, they would need to demonstrate to the CFPB the costs and losses tied to late payments as justification for higher fees. The proposal also eliminates automatic annual inflation adjustments for late payments and imposes a cap of 25% of the minimum payment as the maximum late fee amount. Technically, the CFPB plans to amend Regulation Z, which implements the Truth in Lending Act.

In addition to the rulemaking, the CFPB issued guidance in October 2022 on two additional junk fees that it considered unfair or deceptive acts or practices. The CFPB’s compliance bulletin focused on:

• “Surprise depositor fees” and

• “Surprise overdraft fees,” which it defined as fee when the customer doesn’t reasonably expect their actions to incur an overdraft fee.”

Similarly, the bureau recently released a “special edition” of its Supervisory Highlights dedicated to all things junk fees, including more examples of impermissible junk fees in consumer products and services.

Specifically, CFPB highlighted the following:

• Unfair and unanticipated overdraft fees for transactions where the consumer had a positive balance at the time of the transaction. The CFPB said it had “already identified at least tens of millions of dollars of consumer injury in response to these examination findings, institutions are providing redress to over 170,000 consumers.”

• Assessing multiple insufficient funds (NSF) fees for one transaction. It noted that such unfair acts or practices cost consumers “millions of dollars.”

• Auto and mortgage loan servicers charging late fees in excess of the amounts permitted under the applicable consumer’s contract.

• Auto servicers charging unauthorized late fees after repossession and acceleration.

CFPB Director Rohit Chopra states that the bureau aims to address a "regulatory loophole" that has permitted credit card companies to impose "excessive" late fees for over a decade. This issue gains prominence as consumers increasingly borrow on credit cards, contributing to a 17% uptick in balances in the first quarter, the fastest pace in two decades.

The credit card industry's counterargument suggests that the CFPB failed to fulfill regulatory prerequisites before issuing the proposal. Trade groups contend that political influence or bias is at play, claiming that the CFPB collaborated closely with the White House on the rule. They point to President Biden's State of the Union Address, wherein he spoke as if the CFPB's rule had already taken effect.

Trade groups assert that the CFPB violated an obscure federal rule, the Administrative Procedure Act, which forbids arbitrary and capricious enactment of federal rules. However, some experts opine that the industry faces a formidable challenge in proving the bureau's error in issuing the rule.

While the credit card industry is poised to contest the rule's validity, the CFPB maintains its stance, indicating that all relevant feedback and data will be considered before any decisions are made about the final rule. Meanwhile, the CFPB's solicitation of public feedback has garnered a significant response, with more than 88,000 individuals sharing stories and grievances about unnecessary fees.

The credit card issuers' argument may also focus on the CFPB's omission of certain costs associated with collection efforts and a perceived lack of comprehensive research supporting the reduction of the safe harbor limit to $8. While the industry anticipates a legal showdown, the CFPB remains determined to uphold its mandate, irrespective of impending legal challenges.