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CFPB proposal targets late fees on cards
On February 1, the CFPB issued a notice of proposed rulemaking (NPRM) to amend Regulation Z, which implements TILA, and its commentary to better ensure that late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under the statute, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The NPRM would (i) adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type (a company would be able to charge above the immunity provision provided it could prove the higher fee is necessary to cover the incurred collection costs); (ii) eliminate the automatic annual inflation adjustment for the immunity provision amount (the Bureau would instead monitor market conditions and make adjustments as necessary); and (iii) cap late fees at 25 percent of the consumer’s required minimum payment (issuers are currently able to potentially charge a late fee that is 100 percent of the cardholder’s minimum payment owed).
The NPRM also seeks feedback on other possible changes to the CARD Act regulations, including “whether the proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.” Comments on the NPRM are due by April 3, or 30 days after publication in the Federal Register, whichever is later.
According to the CFPB, the Federal Reserve Board “created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard.” As a result, the CFPB stated that immunity provisions have risen (due to inflation) to $30 for an initial late payment and $41 for subsequent late payments, resulting in consumers being charged approximately $12 billion in late fees in 2020. Based on CFPB estimates, the NPRM could reduce late fees by as much as $9 billion per year. CFPB Director Rohit Chopra issued a statement commenting that the current immunity provisions are not what Congress intended when it passed the CARD Act.
The Bureau also released an unofficial, informal redline of the NPRM to help stakeholders review the proposed changes, as well as a report titled Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies, which documents findings on the relationship between late fee revenue and pre-charge-off collection costs for certain large credit card issuers. According to the report, “revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.”
The NPRM follows several actions initiated by the Bureau last year, including a request for comments on junk fees, a research report analyzing credit card late fees, and an advance notice of proposed rulemaking that solicited information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses (previously covered by InfoBytes here and here).
CFPB seeks feedback on credit cards
On January 24, the CFPB issued a notice and request for information (RFI) seeking public feedback on several aspects of the consumer credit card market in accordance with Section 502(b) of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted by Congress to establish fair and transparent practices related to the extension of credit within the credit card market, and requires the Bureau to undertake a biennial review of the industry to determine whether regulatory adjustments are needed. The Bureau said it plans to publish its report to Congress later in 2023.
The RFI covers several broad topics ranging from lending practices to the effectiveness of rate and fee disclosures, and seeks comments on the experiences of consumers and credit card issuers in the credit card market, as well as on the overall health of the credit card market. Specifically, the RFI requests feedback on issues related to:
- Credit card agreement terms and credit card issuer practices;
- The effectiveness of issuers’ disclosure of terms, fees, and other expenses of credit card plans;
- The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans;
- The cost and availability of consumer credit cards;
- The safety and soundness of credit card issuers;
- The use of risk-based pricing for consumer credit cards; and
- Consumer credit card product innovation and competition
Comments on the RFI are due April 24. The Bureau noted in its announcement that it also issued market-monitoring orders to several major and specialized credit card issuers seeking information on various topics, including major credit card issuers’ practices related to, among other things, applications and approvals, debt collection, and digital account servicing.
CFPB adjusts annual dollar amount thresholds under TILA, HMDA regulations
On December 21, the CFPB released a final rule revising the dollar amounts for provisions implementing TILA and its amendments that impact loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) and qualified mortgages (QM). The Bureau is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on June 1, 2022. The following thresholds are effective January 1, 2023:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $24,866, and the adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,243;
- For qualified mortgages under the General QM loan definition, the thresholds for the spread between the annual percentage rate and the average prime offer rate will be: “2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $124,331; 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $74,599 but less than $124,331; 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $74,599; 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $124,331; 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $74,599; or 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $74,599”; and
- For all QM categories, the adjusted thresholds for total points and fees will be “3 percent of the total loan amount for a loan greater than or equal to $124,331; $3,730 for a loan amount greater than or equal to $74,599 but less than $124,331; 5 percent of the total loan amount for a loan greater than or equal to $24,866 but less than $74,599; $1,243 for a loan amount greater than or equal to $15,541 but less than $24,866; and 8 percent of the total loan amount for a loan amount less than $15,541.”
With respect to credit card annual adjustments, the Bureau noted that its 2023 annual adjustment analysis on the CPI-W in effect on June 1, did not result in an increase to the current minimum interest charge threshold (which requires “creditors to disclose any minimum interest charge exceeding $1.00 that could be imposed during a billing cycle”).
The Bureau also issued a final rule adjusting the asset-size threshold under HMDA (Regulation C). Under HMDA, institutions with assets below certain dollar thresholds are exempt from collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $50 million to $54 million, thereby exempting institutions with assets of $54 million or less as of December 31, 2022, from collecting HMDA data in 2023.
CFPB releases annual college credit card report
On October 13, the CFPB released its annual report to Congress on college credit card agreements. The report was prepared pursuant to the CARD Act, which requires card issuers to submit to the CFPB the terms and conditions of any agreements they make with colleges, as well as certain organizations affiliated with colleges. According to the Bureau, the report “raises questions about whether some marketing deals between colleges and financial institutions comply with Department of Education rules.” The report also highlighted the need for transparency in the arrangements schools have with financial institutions. In conjunction with the report, the DOE issued guidance clarifying colleges’ responsibility to ensure that campus financial products are consistent with students’ best financial interests, including by reviewing whether any fees assessed are consistent with or below prevailing market rates. The DOE’s guidance discussed overdraft and NSF fees, given that financial institutions in the general market have increasingly been reducing or eliminating certain fees. The Bureau’s report included data on 11 account providers, including non-bank financial service providers, banks, and credit unions offering more than 650,000 student accounts in partnership with 462 institutions of higher education during the 2020-2021 award year. Key findings of the report include, among other things: (i) financial services providers and their partner schools appear to offer and promote more costly products to students than are otherwise available in the market; (ii) one entity dominates the market for financial aid disbursements, providing nearly 70 percent of the accounts offered in partnership with schools; and (iii) nearly 30 percent of accounts in the Bureau’s sample were subject to arrangements in which the financial services provider made payments to the partner school.
CFPB reports on credit card interest rates
On August 12, the CFPB released a blog post analyzing factors affecting high credit card interest rates. According to the Bureau, over 175 million Americans have at least one credit card and nearly half of active credit card accounts carry a balance. The Bureau noted that reforms in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) “advanced competition and saved consumers billions of dollars by restricting harmful back-end or hidden pricing practices,” however, “after the market adjusted to these changes, credit card interest rates have increased despite falling charge-off rates, a stable share of subprime cardholders, and a historically low prime rate.” The Bureau further noted that credit card interest rates increased following the Great Recession, even though several industry indicators suggested the risk of credit card lending has fallen to an all-time low. Regarding subprime accounts, since 2015, the share of credit card holders with subprime scores has remained stable, representing less than one-fifth of total accounts. Therefore, high rates persist even though presumably riskier subprime loans have not increased. Regarding prime accounts, the Bureau noted that “[c]ompared to other lending products, credit card pricing appears to be less responsive to macroeconomic trends like changes in the cost of funds – a measure of how much banks spend to acquire money to lend to consumers – as represented by the prime rate.” As for credit card profitability, the Bureau suggested that the apparent mismatch between credit card interest rates and the risk and cost of lending may explain part of the market’s profits. The Bureau further explained that in 2021, large credit card banks reported an annualized return on assets of near seven percent, which was the highest level since at least 2000, and “[w]hile credit card portfolios have higher rates of defaults than other consumer lending products, it is unclear whether these factors fully account for revenue from high interest rates.” The Bureau also noted that because six credit card issuers account for more than two-thirds of total balances every year since 2005, the CFPB plans to assess whether this is the result of “trends, like increasing rewards and high switching costs, or the result of anti-competitive practices.”
CFPB to look at late fees on cards
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.)
CFPB revising its rulemaking approach
On June 17, CFPB Director Rohit Chopra announced in a blog post that the agency plans to move away from overly complicated and tailored rules. “Complexity creates unintended loopholes, but it also gives companies the ability to claim there is a loophole with creative lawyering,” Chopra said. The Bureau’s plan to implement simple, durable bright-line guidance and rules will better communicate the agency’s expectations and will provide numerous other benefits, he added.
With regards to traditional rulemaking, the Bureau outlined several priorities, which include focusing on implementing longstanding Congressional directives related to consumer access to financial records, increased transparency in the small business lending marketplace, and quality control standards for automated valuation models under Sections 1033, 1071, and 1473(q) of the Dodd-Frank Act. Additionally, the Bureau stated it will assess whether it should use Congressional authority to register certain nonbank financial companies to identify potential violators of federal consumer financial laws.
Chopra also announced that the Bureau is reviewing a “host of rules” that it inherited from other agencies such as the FTC and the Federal Reserve. “Many of these rules have now been tested in the marketplace for many years and are in need of a fresh look,” Chopra said. Specifically, the Bureau will (i) review rules originated by the Fed under the 2009 Credit CARD Act (including areas related to “enforcement immunity and inflation provisions when imposing penalties on customers”); (ii) review rules inherited from the FTC for implementing the FCRA to identify possible enhancements and changes in business practices; and (iii) review its own Qualified Mortgage Rules to assess aspects of the “seasoning provisions” (covered by a Buckley Special Alert) and explore ways “to spur streamlined modification and refinancing in the mortgage market.”
The Bureau noted that it also plans to increase its interpretation of existing laws through its Advisory Opinion program and will continue to issue Consumer Financial Protection Circulars to provide additional clarity and encourage consistent enforcement of consumer financial laws among government agencies (covered by InfoBytes here and here).
CFPB releases report on credit card late fees
On March 29, the CFPB released a report analyzing credit card late fees. Using three data sources to study the consumer impact of and industry reliance on late fees, the report found that credit card issuers charged approximately $12 billion in 2020. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires that late fees be “reasonable and proportional,” and its implementing regulation (Regulation Z) sets a “safe harbor” for certain fee amounts, which are adjusted by the CFPB annually for inflation. The report described that these limits have increased to $30 for the first late payment and $41 for a subsequent late payment within 6 billing cycles. The Bureau noted that Congress transferred provisional authority to the CFPB, who “expects many major card issuers to hike fees further, based on inflation, given the existing reliance on the immunity provisions in the marketplace.” Other significant findings of the report include, among other things, that: (i) the average deep subprime account was charged $138 in late fees in 2019, compared with $11 for the average superprime account; (ii) credit card accounts held by consumers living in the United States’ poorest neighborhoods paid approximately twice as much on average in total late fees than those living in the richest areas in 2019; (iii) late fee volume decreased when stimulus checks arrived in 2020 and 2021, particularly in households with lower credit scores; and (iv) “[l]ate fees account for a greater share of charges for issuers who service a higher percentage of subprime accounts at almost 20 percent of total interest and fees.”
CFPB publishes fall 2021 rulemaking agenda
On December 13, the Office of Information And Regulatory Affairs released the CFPB’s fall 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau plans to pursue during the period from November 2, 2021 to October 31, 2022. Additionally, the Bureau stated that the latest agenda reflects continued rulemakings intended to further its consumer financial protection mission and help advance the country’s economic recovery from the Covid-19 pandemic. Promoting racial and economic equity and supporting underserved and marginalized communities’ access to fair and affordable credit continue to be Bureau priorities.
Key rulemaking initiatives include:
- Small Business Rulemaking. This fall, the Bureau issued its long-awaited proposed rule (NPRM) for Section 1071 regulations, which would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. (Covered by a Buckley Special Alert.) The NPRM comment period goes through January 6, 2022, after which point the Bureau will review comments as it moves to develop a final rule. Find continuing Section 1071 coverage here.
- Consumer Access to Financial Records. The Bureau noted that it is working on rulemaking to implement Section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued fall 2020 regarding consumer data access (covered by InfoBytes here). Additionally, the Bureau stated it is monitoring the market to consider potential next steps, “including whether a Small Business Review Panel is required pursuant to the Regulatory Flexibility Act.”
- Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA (as required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended TILA to mandate that the Bureau issue certain regulations relating to PACE financing). The Bureau noted that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
- Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, seek to avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for June 2022.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued a final rule on December 7 to facilitate the transition from LIBOR for consumer financial products, including “adjustable-rate mortgages, credit cards, student loans, reverse mortgages, [and] home equity lines of credit,” among others. The final rule amended Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establish requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans. The final rule generally takes effect April 1, 2022.
- Reviewing Existing Regulations. The Bureau noted in its announcement that it decided to conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), and referred to a notice and request for comments issued last month (covered by InfoBytes here), which solicited public comments on its plans to assess the effectiveness of the HMDA Rule. Additionally, the Bureau stated that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009, and that “[a]fter considering the statutory review factors and public comments,” it “determined that the CARD Act rules should continue without change.”
Notably, there are 14 rulemaking activities that are listed as inactive on the fall 2021 agenda, including rulemakings on overdraft services, consumer reporting, student loan servicing, Regulation E modernization, abusive acts and practices, loan originator compensation, and TILA/RESPA mortgage disclosure integration.
CFPB adjusts annual dollar threshold for Regulation Z, CLA
On October 25, the CFPB announced the annual dollar threshold adjustments that govern the application of Regulation Z (Truth in Lending Act). The final rule revises the dollar amounts, where appropriate, for provisions implementing TILA and amendments to TILA, including under the CARD Act, the Home Ownership and Equity Protection Act of 1994 (HOEPA), and Dodd-Frank. Each year the thresholds must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which took effect June 1. Effective January 1, 2022, the threshold that triggers requirements to disclose minimum interest charges for open-end consumer credit plans under TILA will remain unchanged at $1.00. The adjusted dollar amount for a safe harbor for a first violation penalty fee will increase to $30 in 2022, and the adjusted dollar amount for a safe harbor for a subsequent violation penalty fee will increase to $41 for open-end consumer credit plans under the CARD Act amendments to TILA. With respect to HOEPA, the adjusted total loan amount threshold for high-cost mortgages in 2022 will be $22,969, whereas the adjusted points and fees dollar trigger for high-cost mortgages will be $1,148. The final rule also specifies 2022 pricing thresholds for the spread between a qualified mortgage’s annual percentage rate and the average prime offer rate, and identifies points and fees limits for all categories of qualified mortgages.
Additionally, the Bureau and the Federal Reserve Board finalized the annual dollar threshold adjustment that governs the application of the Consumer Leasing Act (Regulation M), as required by the Dodd-Frank Act. The exemption threshold for 2022, based on the annual percentage increase in the CPI-W, will increase from $58,300 to $61,000.
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