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Financial Services Law Insights and Observations

CFPB to look at late fees on cards

Agency Rule-Making & Guidance Federal Issues Bank Regulatory CFPB Consumer Finance Federal Reserve CARD Act Regulation Z Fees Credit Cards

Agency Rule-Making & Guidance

On June 22, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) rules inherited by the CFPB from the Federal Reserve, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. However, the rules provide for a safe harbor limit that allows banks to charge certain fees, adjusted for inflation, regardless of the costs incurred. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.”

In 2010, the Federal Reserve Board approved implementing regulations for the CARD Act that allowed credit card issuers to charge a maximum late fee, plus an additional fee for each late payment within the next six billing cycles (subject to an annual inflation adjustment). As the CFPB reported, the safe harbor limits are currently set at $30 and $41 respectively. The CFPB pointed out that in 2020, credit card companies charged $12 billion in late fee penalties. “Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” CFPB Director Rohit Chopra said. Chopra issued a separate statement on the same day discussing the current credit card market, questioning whether it is appropriate for card issuers to receive enforcement immunity if they hike the cost of credit card late fees each year by the rate of inflation. “Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?” he asked.

Among other things, the ANPRM requests information relevant to certain CARD Act and Regulation Z provisions related to credit card late fees to “determine whether adjustments are needed.” The CFPB’s areas of inquiry include: (i) factors used by card issuers to determine late fee amounts and how the fee relates to the statement balance; (ii) whether revenue goals play a role in card issuers’ determination of late fees; (iii) what the costs and losses associated with late payments are for card issuers; (iv) the deterrent effects of late fees and whether other consequences are imposed when payments are late; (v) methods used by card issuers to facilitate or encourage timely payments such as autopay and notifications; (vi) how late are most cardholders’ late payments; and (vii) card issuers’ annual revenue and expenses related to their domestic consumer credit card operations. The Bureau stated that public input will inform revisions to Regulation Z, which implements the CARD Act and TILA. Comments on the ANPRM are due July 22.

The ANPRM follows a June 17 Bureau blog post announcing the agency’s intention to review a “host of rules” inherited from other agencies such as the FTC and the Federal Reserve, including the CARD Act. (Covered by InfoBytes here.)