On March 5, the CFPB issued a final rule that would significantly reduce late fees that may be charged on consumer credit card accounts from $30 or more to $8 in most cases. A proposed rule on this subject matter was issued February 1, 2023, and the credit card industry has paid close attention to the rulemaking process since.
The final rule amends provisions of Regulation Z, implementing the Truth in Lending Act, related to permissible penalty fees—including late fees, NSF fees, returned payment fees, etc.— that a card issuer may impose on consumers who violate the terms of a credit card account subject to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act").
Under current law, card issuers may impose penalty fees not exceeding safe harbor values of $30 for an initial violation and $41 for a subsequent violation of the same account requirement within six billing cycles (each dollar amount subject to adjustment annually for inflation). Alternatively, a card issuer may impose fees representing a "reasonable proportion of the total costs incurred by the card issuer" as a result of the violation. In each case, penalty fees may not exceed the dollar value of the violation resulting in the penalty. Establishing penalty fees in excess of the safe harbor values requires substantial analysis and documentation of the relevant costs, such that essentially all card issuers in market today impose fees at or below the safe harbor values.
The final rule resets the safe harbor value for late fees to $8 for card issuers other than "small card issuers" (those with fewer than 1 million accounts subject to the CARD Act that have an open credit line or an outstanding, non-charged-off balance). It also eliminates automatic inflation adjustments for the new safe harbor, and eliminates the distinction between first and subsequent late payments that exists under current law.
New restrictions would apply only to late fees and affect only the safe harbor value for such fees. The rulemaking would not impose new restrictions on other penalty fees (e.g., NSF or returned payment fees), nor would it eliminate the ability for a card issuer to justify a higher late fee based on analysis and documentation of hard costs incurred as a result of late payments.
While the rule as a whole presents material challenges for the credit card industry, there are some positive takeaways. First, as noted above, the final rule contains an exemption for "small card issuers" that was not present in the original proposal. Second, the final rule does not contain a separate restriction included in the original proposal that would have limited late fees to 25% of the required minimum payment that was late, notwithstanding the safe harbor values. Finally, while delayed over a year from their typical cadence and unlikely to offset the pain imposed by late fee reductions, the final rule makes the inflation adjustments for other penalty fee types for the first time since January 1, 2022, increasing the safe harbors to $32/$43 for a first or subsequent violation.
The final rule will become effective 60 days following publication in the Federal Register. Litigation brought by a coalition of trade groups challenging the rule was filed March 7, however, and it is possible that the effective date will be stayed, as has been the case for certain other challenged CFPB rulemakings.
Further analysis will follow, in the form of a Mayer Brown Legal Update, in the near future.
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