[co-author: Michael Buckalew]*
The Consumer Financial Protection Bureau (CFPB or Bureau), under Director Chopra, is moving toward placing new restrictions on late payment fees for credit card debt. That the proposed rule-making is a continuation of the Bureau’s efforts to target the amount and frequency of late fees (so-called “junk fees”, in Bureau terms).
Main Points of Rule Making
On March 29, 2023, the CFPB published a proposed rule in the Federal Register to amend Regulation Z, which implements the Truth Borrowing Act (TILA), to limit late fees charged to credit card accounts. If adopted, the amended Regulation Z will:
- Adjust the safe harbor dollar amount for late fees to a fixed $8, down from the current safe harbor of $30 for the first breach and $41 for the second breach within sixbilling cycle.
- Provide an annual inflation adjustment for the safe harbor dollar amount won’t applies to the amount of safe harbor late fees as applicable in the current regulations;
- Stipulates that the amount of late fees may not exceed 25% of the amount of mandatory payments deemed late; And
- Clarified that for issuers who choose to charge a late fee based on a Section 52(b)(1)(i) fee analysis, the issuer’s fee shall not include any collection fees incurred after Accounts are charged according to loan loss provisions.
CFPB Rationale for Rule Making
The bureau cited multiple reasons for the drastic overhaul of Regulation Z’s late fee regulations, which have remained largely untouched since its adoption in 2010. Notably, the Bureau argues that the current safe harbor amount for late payments is not “reasonable and proportionate” (the language used at TILA) with the issuer’s fees from late payments. The Bureau also argues that having a higher safe threshold for subsequent violations of the same type within six billing cycles, as currently permitted, could impair consumers’ ability to make future payments on those accounts. Underlying these two points is the Bureau’s criticism of the data set used in the Federal Reserve Board’s initial rulemaking in 2010, as well as the Board’s overly permissive stance on what fees should be included in its analysis of late-paying issuer fees.
The bureau believes that late fees are an important source of revenue for the industry and that fact alone, given that most major issuers rely on safe harbor amounts in charging late fees, is an indication the current safe harbor is not “reasonably and proportionate” with fees to issuers for late payments. . In keeping with the Bureau’s logic, issuers “may have disincentives to lower late fee amounts” when reliance on current safe harbor amounts generates this revenue. In addition, the Bureau argues that issuers are a disincentive to lower late fee amounts because consumers are less likely to shop for credit cards based on late fee amounts. The Bureau believes that the proposed rule-making could lead issuers to shift certain fees to account interest rates, which the Bureau believes is a more transparent way of disclosing costs to consumers.
Request for Comments
The CFPB sought comment on the proposed rule-making by May 3, 2023.
In particular, the Bureau seeks comment on the following special considerations in rule making:
- Potential prohibition of late fees under certain circumstances, for example “whether card issuers are prohibited from charging late fees to consumers who make mandatory payments within 15 calendar days after the due date.”
- Options related to payments and automatic notifications. For example, requiring card issuers to: (1) offer automatic payment options; and/or (2) provide notification of the payment due date within a certain number of days prior to the due date.
This rulemaking may be one of a number of future proposals on credit card fees and other products as part of the Bureau’s push against “junk fees.” The rule-making notes in this regard that “the Bureau’s proposed amendment to the limitation in § 1026.52(b) is limited to current late fees, although the Bureau seeks comment on whether the proposed amendment should apply to other penalty fees.” Future considerations could include limiting “over-the-limit fees, refund fees, and denied access inspection fees, or alternatively, whether the Bureau should complete the proposed safe harbor for late fees and eliminate the safe harbor for other penalty fees. “
DWT assists clients in submitting comments to CFPB before the deadline and will continue to monitor CFPB late fee rulemaking and ongoing monitoring of all credit card penalty charges.
* a regulatory analyst with Davis Wright Tremaine LLP.
 See 12 CFR 1026.52(b).
 See 12 CFR 1026.52(b)(1)(ii).
 § 1026.52(b)(2)(i)(A)
 75 Eat. Reg. 37526 (June 29, 2010).[View source.]