On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule (“Final Rule”) that would reduce credit card late fees to $8 for large credit card issuers (“Larger Card Issuers”). This rule comes on the heels of the CFPB and Federal Trade Commission (FTC) submitting an amicus brief in an Eleventh Circuit case, arguing that a mortgage company’s convenience fees are in reality “pay-to-pay fees” and are, therefore, “junk fees” in violation of the Fair Debt Collection Practices Act (FDCPA). Only 48 hours after the Final Rule was published, it was challenged in Texas court, with a decision expected today, May 10, 2024, regarding whether to grant a preliminary injunction, enjoining the Final Rule from taking effect next week. As reported in another post, these developments are part of a continuing enforcement trend aimed at reducing “junk fees” for consumers, carrying wide implications both for consumers and various financial institutions.

Covered Financial Institutions Under the Final Rule

This Final Rule impacts card issuers, defined as “a person that issues a credit card or that person’s agent with respect to the card” and their affiliates, who have one million or more open credit card accounts. The CFPB refers to this specific subset of card issuers as “Larger Card Issuers” but acknowledges that this term is not defined in the regulatory or commentary text.

Summary of the Final Rule

Effective May 14, 2024, the Final Rule amends Regulation Z of the Truth in Lending Act (TILA), as amended by the Credit Card Accountability Responsibility and Disclosure (CARD) Act. Currently, a card issuer cannot impose a late fee unless the fee is reasonable and proportionate following a cost analysis, or by complying with a safe harbor provision that sets $30 for penalty fees, rising to $41 for a subsequent violation in the same billing cycle or in one of the following six cycles. Under the Final Rule, the safe harbor late fee amount is reduced to $8 for Larger Card Issuers with no higher amount for subsequent violations, or card issuers may use a cost analysis to determine a late fee amount. Additionally, the Final Rule provides that the $8 amount will not be annually adjusted for Larger Card Issuers, eliminating the current annual inflation adjustment. If a card issuer — either Larger or Smaller — chooses to conduct a cost analysis, the Final Rule suggests pulling from §1026.52 of Regulation Z and the commentary of §52(b)(1)(i) to determine a reasonable amount. The commentary lists as reasonableness factors the number of violations the card issuer experienced over a reasonable period, such as twelve months, and the associated costs from those violations. The Final Rule excludes considering post-charge-off collection costs.

The CFPB claims that through this Final Rule it is addressing concerns that Larger Card Issuers use late fees as a form of revenue raising rather than to deter further violations or recover losses stemming from late payment. The CFPB argues that, because the fees are not reasonable and proportional to costs incurred by the issuer, the current fee structure violates TILA’s statutory requirements.

Under the Final Rule, Smaller Card Issuers, defined in the Final Rule as those with fewer than one million credit card accounts, may still use higher safe harbor amounts, which will be $32 and $43, after annual adjustments, for late fees, as well as other penalty fees.

Notably, while the Final Rule sets an $8 amount for late fees, it does not set the amount for the wider category of penalty fees, for which Larger Card Issuers may still use adjusted threshold amounts. Under §1026.52(a)(2) of Regulation Z, Penalty fees may include returned payment fees or any charges from an over-the-limit transaction.

Challenges to This Final Rule

On March 7, 2024, the U.S. Chamber of Commerce, the Fort Worth Chamber of Commerce, the Longview Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, and the Texas Association of Business filed a complaint against the CFPB and Rohit Chopra as Director of the CFPB challenging this Final Rule. They also filed a motion for preliminary injunction enjoining the Final Rule from being implemented. Plaintiffs assert that the CFPB violated the CARD Act by allegedly ignoring rulemaking provisions within the Act and violated the Administrative Procedure Act by relying on non-public data to set the Final Rule, creating an unlawful effective date, and otherwise engaging in arbitrary and capricious rulemaking. The complaint also asserts that the CFPB is unconstitutionally funded and thus in violation of the Appropriations Clause.

A preliminary injunction has not yet been granted, and on March 21, 2024, the CFPB filed a motion to transfer the case from the Northern District of Texas to the District Court for the District of Columbia, arguing that the case had an insufficient link to Texas. The judge granted that motion; however, the Fifth Circuit reversed, with the district court then dissolving the transfer order. The case had already been added to Judge Amy Berman Jackson’s docket in D.C., but she issued a Minute Order dismissing the case, leaving the matter in Texas. Judge Mark Pittman has until later today, May 10, 2024, to decide the preliminary injunction.

In addition to legal pushback, ranking member of the United States Senate Committee on Banking, Housing, and Urban Affairs, Senator Tim Scott, has publicly issued a statement against the Final Rule, stating that he will challenge the Final Rule through the Congressional Review Act and introduced a measure disapproving of the Final Rule.

Broadly, other concerns regarding this Proposed Rule include that limiting late fees will merely cause other fees to rise, may curtail other credit card benefits, and may make it more difficult for people to access credit.

The Larger Anti-Junk Fee Initiative

Building off of previous Executive initiatives, President Biden recently launched a “Strike Force on Unfair and Illegal Pricing,” co-chaired by the Department of Justice (DOJ) and FTC, designed to investigate anti-competitive, unfair, or deceptive business practices. The White House has previously addressed that it sees “junk fees” as anti-competitive and potentially fraudulent.

As explored in our related post, the CFPB has also taken action against nonsufficient funds fees and overdraft fees, with other federal agencies similarly taking action or supporting rulemaking efforts to eliminate “junk fees.”