Overview
On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) published its long-awaited final rule to amend Regulation Z's provisions on late fees (Final Rule). This marks the latest effort by the Biden Administration to target so-called "junk" fees.
Overview
The Final Rule is largely identical to the proposal. Most significantly, the Final Rule reduces the safe harbor for late fees under § 1026.52(b) to a flat $8, with no annual adjustment for inflation.
The Final Rule varies from the proposal in a few material ways:
- Larger v. Smaller Card Issuers. The new safe harbor limit only applies to so-called "Larger Card Issuers" – i.e., card issuers that, together with their affiliates, have one million or more open credit card accounts. "Smaller Card Issuers," on the other hand, are not subject to the reduced safe harbor limit.
- Late fees not limited to 25% of the required minimum payment. The Final Rule did not adopt the proposal to restrict late fees to 25% of the required minimum payment.
- No conditions for imposing a late fee. The Final Rule does not impose further conditions on the assessment of late fees, such as requiring a 15-day courtesy period or an autopay option.
- No other penalty fees covered; increased safe harbor in some cases. The reduced safe harbor limit does not apply to penalty fees other than late fees. The Final Rule does, however, increase the safe harbor amounts for penalty fees generally, including returned payment fees, to $32 for the first violation and $43 for a subsequent violation of the same type in the same billing cycle or in one of the next six billing cycles.
Effective Date
The Final Rule will take effect 60 days after publication in the Federal Register. The CFPB declined to provide a mandatory compliance date.
Our Take
- High APRs. The CFPB continues to believe that fees should be reflected in higher APRs (i.e., upfront pricing). APR increases will raise costs for all cardholders, not just those with late payments, and also carry a hefty regulatory compliance burden, including the obligation under § 1026.59 to reevaluate rate increases every six months. At the same time, a recent CFPB blog post noted historically high APRs, some approaching 40%. We may next see state and federal responses attempting to force rates back down, including potentially a federal usury cap on credit card interest rates, which has been proposed in Congress.
- Bank Partner Programs. The Final Rule may have unexpected consequences for bank partnership card programs. Whether an issuer is a Smaller Card Issuer or a Larger Card Issuer appears to be measured at the issuer level across all of an issuer's partner programs rather than at the card program level. As a result, even small credit card programs with a Larger Card Issuer sponsor bank will be subject to the Final Rule’s flat $8 late fee cap, significantly increasing the cost to fintech partners.
- Return of NSF Fees? Regulation Z prohibits an issuer from charging both a late payment fee and a returned payment fee with respect to the same payment. We understand that many issuers prioritize charging a late fee in lieu of a returned payment fee when a payment is late and then subsequently returned or vice versa. In light of the Final Rule, Larger Card Issuers may consider prioritizing charging returned payment fees instead of late fees.
- Puzzling Smaller Card Issuer Exception. Exempting Smaller Card Issuers from the reduced safe harbor limit and excluding other penalty fees seems inconsistent with protecting consumers from “junk” fees and more consistent with limiting the revenue streams available to large issuers. Accordingly, if Larger Card Issuers try to recapture some lost fee revenues through other means—e.g., returned payment fees, as discussed above—the CFPB may well respond with further restrictions.
- Cost Analysis Method. The Final Rule may persuade Larger Card Issuers to use the Cost Analysis Provisions in order to charge higher late fees. However, that carries significant regulatory and litigation risk because the CFPB has offered no guidance on what constitutes an adequate analysis, and the industry has historically relied solely on the safe harbors. Indeed, the first issuer that announces a late fee higher than $8 will likely be the subject of intense scrutiny by both the CFPB and plaintiffs' bar – i.e., it will likely make itself a target.
- Litigation. Litigation over the Final Rule has already begun, and we expect there will be more. On March 7, the US Chamber of Commerce and various bank trade groups sued the CFPB in the Fifth Circuit, which is a favorable circuit, being the same that held the CFPB is unconstitutionally funded. Challenges over the Final Rule will likely delay implementation, and the Final Rule’s severability clause could lead to a piecemeal roll out.
The Details: The Final Rule
1. Substantially reduces the safe harbor dollar amount for late fees to a flat $8 for "Larger Card Issuers." These changes do not apply to "Smaller Card Issuers."
Current Rule. Currently, Regulation Z permits a card issuer to charge a late fee of $30 for the first late payment and $41 for a subsequent late payment in the same billing cycle or in one of the next six billing cycles. The safe harbor dollar amounts are adjusted annually to reflect changes in the Consumer Price Index (CPI).
New Safe Harbor Reduction for Larger Card Issuers. For card issuers that together with their affiliates have one million or more open credit card accounts—i.e., "Larger Card Issuers"—the Final Rule adopts the CFPB's proposals to (i) reduce the late fee safe harbor to $8 for both the first and subsequent late payments and (ii) eliminate annual inflation adjustments to reflect changes in the CPI. In adopting the Final Rule for Larger Card Issuers, the CFPB determined that the existing safe harbor amounts "are too high to be 'reasonable and proportional' to a consumer's late payment." Final Rule at 104.
Smaller Card Issuers are Not Subject to the Safe Harbor Reduction. For "Smaller Card Issuers," the existing safe harbor stays in effect. A "Smaller Card Issuer" is defined in new § 1026.52(b)(3) as "a card issuer that together with its affiliates had fewer than one million open credit card accounts…for the entire preceding calendar year." An "open credit card account" is defined according to § 1026.58(b)(6). The CFPB notes that "this broad definition generally encompasses open credit card accounts that a card issuer keeps on-balance sheet as well as those that a card issuer may have sold or otherwise keeps off-balance sheet (except for accounts that have been charged off)," and that a card issuer cannot charge higher late fee safe harbor amounts "by simply securitizing their accounts and moving them off-balance sheet." Final Rule at 205 (emphasis added). Accordingly, it appears that issuers in bank-fintech partnerships must include accounts across all partners, including those for which the receivables have been sold, in the "open credit card account" calculation to determine whether they are a Larger Card Issuer subject to the reduced safe harbor limit.
2. Increases the current safe harbor dollar amounts for penalty fees.
Under the Final Rule, the safe harbor fee amounts will be increased to $32 for the first violation and $43 for a subsequent violation of the same type in the same billing cycle or in one of the next six billing cycles. For Smaller Card Issuers, this annual adjustment applies to all penalty fees, including late fees. For Larger Card Issuers, this annual adjustment applies to all penalty fees except late fees.
3. Clarifies that certain collection costs may not be included when using the Cost Analysis Provisions.
The Final Rule adopts the proposal to amend the commentary to § 1026.52(b)(1) to clarify that costs for purposes of the Cost Analysis Provisions do not include any collection costs incurred after an account is charged off pursuant to loan loss provisions. This amendment applies to both Larger Card Issuers and Smaller Card Issuers who opt to use the Cost Analysis Provisions.
4. Contains a severability clause.
The Final Rule provides that "[i]f any provision of this rule, or any application of a provision, is stayed or determined to be invalid, the remaining provisions or applications are severable and shall continue in effect." Final Rule at 268. "In particular, if the $8 safe harbor for Larger Card Issuers is stayed or determined to be invalid, the conclusion to repeal the existing safe harbor is severable and shall continue in effect." Id. The CFPB likely included this language in anticipation that challenges in federal court would be forthcoming. The clause begs the question of what Larger Card Issuers will be permitted to charge if the $8 safe harbor is indeed stayed or determined to be invalid and the existing safe harbor remains repealed.
