CFPB Proposes Rule to Lower Credit Card Late Fees: Could This Approach Be Used to Attack “Junk” Fees in Other Markets? And What Happens to Consumers Who Pay Timely?

The CFPB issued a proposed rule today, February, 1, 2023, to decrease the safe harbor for credit card late fees under the agency’s CARD Act rules from $30 (and $41 for repeat late payments) to $8 for all late payments.  The existing regulatory safe harbor provides that card issuers comply with the CARD Act’s general limit on penalty fees (which limits such fees to a “reasonable proportion of the total costs incurred by the card issuer” from the consumer’s violation), if they impose no more than the safe harbor.  The CFPB also proposed to eliminate the annual adjustments for inflation of the late fee safe harbor amounts.  The CFPB also proposed to decrease the overall limit on a late fee from the current 100% to 25% of the late payment.  Note that this proposal would not affect the safe harbor for other penalty fees (such as returned-payment fees).  But the CFPB also solicited comment on other issues, such as whether the agency should instead eliminate the safe harbor entirely (requiring issuers to conduct the general cost analysis for late fees and/or other penalty fees), apply the rule to other penalty fees, or provide a 15-day grace period for late fees. 

This proposed rule comes after the CFPB’s Request for Information (RFI) regarding junk fees, which I wrote about here.  It is clear that the CFPB’s Director Chopra has pre-judged the current safe harbor and views it as allowing a “junk fee.”  The CFPB’s press release quotes the Director as describing the current safe harbor as a, “regulatory loophole that has allowed them to escape scrutiny for charging an otherwise illegal junk fee.”  Although this proposal is specific to credit card late fees, it would be prudent for companies in other industries the CFPB called out in its RFI, such as the mortgage and title insurance industries, to review this proposal to understand the CFPB’s potential future approaches to regulating their fees.  I will discuss some of the CFPB’s considerations in issuing the proposal below, and how this might be a signal for future CFPB action on so-called “junk fees” in other industries.

The CARD Act rules were originally promulgated by the Federal Reserve (“Fed”) under Regulation Z in 2010 (the CARD Act is codified under TILA), but the rule transferred over to the CFPB under the Dodd-Frank Act.  The CFPB noted in its proposal that prior to the Fed’s CARD Act rules, the average late fee was $33 for issuers in the CFPB’s database, but after the Fed’s rule became effective, the average fees “declined by over $10 to $23” in Q4 of 2010.  But the CFPB stated that since that time, late fees increased to an average of about $31 in 2019, “approaching nominal pre-CARD Act levels.”  The CFPB also stated concerns that consumers do not shop based on the late fee amounts, stating that, “many consumers may not shop for credit cards based on the amount of late fees, which also may lessen card issuers incentive to charge late fees lower than the safe harbor amount.” 

The CARD Act requires the CFPB to consider four factors in issuing rules required to implement the statutory penalty fee restriction: (1) the cost incurred by the creditor from the consumer’s violation; (2) deterrence effects; (3) cardholder conduct; and (4) other factors the CFPB deems “necessary or appropriate.”  The CFPB’s preamble analyzes these factors with respect to the $8 safe harbor.  The CFPB analyzed the pre-charge off costs incurred by card issuers in the collection of late fees and late payments, and stated that it expects most issuers would recover pre-charge off collection costs even if late fees were reduced by a fifth, to $8 or less.  The CFPB stated that it recognizes that this may not be true for all issuers, and that some may choose, instead of the safe harbor, to determine the amount of their late fees on the basis of the cost incurred under the CARD Act’s general restriction.  The CFPB also stated that it expects this $8 amount will still have a deterrent effect, noting that the cost of paying late is still steep for consumers (the CFPB calculated hypothetical, illustrative effective APRs based on the $8 late fee, as well as noted the additional interest costs from balances and other issuer methods to deter late payments).  The CFPB also stated that, in any event, card issuers would not face increased costs from more frequent late payments, because an increase in late payments would increase fee income, as well as collection costs. 

The CFPB also stated that it considered the “possible impact of lower late fees on cardholders’ repayment behavior and finances,” under the aforementioned CARD Act authority to consider other factors it deems “necessary or appropriate” in issuing required rules under the statutory section.  The CFPB stated that it believes that subprime borrowers would benefit from a reduction in late fees, because they could use the difference to make payments on their accounts, and considered this in its analysis.

The CFPB cited as its legal authority for this proposal Dodd-Frank Act section 1022(b)(1), which authorizes the CFPB to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”  The CFPB also cited TILA section 105(a), which is similarly general rulemaking authority.  This provision authorizes the CFPB to prescribe rules to “carry out the purposes of [TILA]…. as in the judgment of the Bureau are necessary or proper to effectuate the purposes of [TILA], to prevent circumvention or evasion thereof, or to facilitate compliance therewith.” The CFPB stated that, “strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA’s purposes.”  In addition, the CFPB cited the CARD Act provision that authorizes the CFPB to provide a safe harbor.  The CFPB acknowledged that this CARD Act authority is discretionary, stating in the preamble that, “the CARD Act also allowed, but did not require, the Board to issue rules to provide for a safe harbor amount for any such penalty fee.”  Notably, the cited general rulemaking authority under the Dodd-Frank Act and TILA is also discretionary, and there was no statutory mandate to the CFPB to reduce the late fee safe harbor (or make the other proposed changes, for that matter). 

It is also interesting to review the CFPB’s Dodd-Frank Act section 1022(b) cost-benefit analysis for the proposed rule.  In that analysis, the CFPB acknowledges that card issuers may make up the lost revenue by increasing other costs on consumers, stating that, “since the proposal would reduce issuers’ revenue from late fees, issuers may respond by adjusting interest rates or other card terms to offset the lost income” and that a “full offset” of the lost revenue “could manifest in higher maintenance fees, lower rewards, or higher interest on interest-paying accounts.”  The CFPB states that it believes card issuers will not be able to fully offset this decreased revenue, but describes some of its evidence as “tentative.”  In addition, the CFPB also notes the “potential for a pass-through of greater than what would be required to offset lost fee revenue.”  The CFPB also acknowledges that it is “possible that some consumers’ access to credit could fall,” if card issuers can only offset the lost fee revenue by increasing APRs beyond legal limits.  Sounds like this proposed rule could have some negative financial impacts for consumers.

Notably, the CFPB also acknowledges in its 1022(b) analysis that its proposal may harm specifically consumers who do not pay late.  The CFPB states that, “cardholders who never pay late will not benefit from the reduction in late fees and could pay more for their account if maintenance fees in their market segment rise in response—or if interest rates increase in response and these on-time cardholders also carry a balance,” and that “cardholders who carry a balance but rarely miss a payment are less likely to benefit on net.”  The CFPB also describes this distinction in terms of “naïve” and “sophisticated” consumers, stating that, “sophisticated consumers, inasmuch they would have been cross-subsidized by naïve customers’ costly mistakes, may pay higher maintenance fees or interest or collect fewer rewards if the issuer offsets the revenue lost to naïve consumers,” and states that, “some of these changes are likely,” but that the CFPB “has not quantified their magnitude.”  This sounds like the CFPB expects that consumers who pay timely will face higher credit card costs and lower rewards from this proposal, and the CFPB does not know how much.  This appears to be more of a cost-shifting proposal masquerading as a rule to “rein in excessive credit card late fees,” which the CFPB claims in its proposed rule.  Although I’m not an economist, it would appear there is some potential for a challenge to this rule based on these issues with the CFPB’s 1022(b) analysis. 

Could the CFPB try to use this approach to “rein in” fees in other markets?  Possibly.  Although other markets may not be subject to the same statutory limit on the “reasonableness” of fees as the CARD Act’s limit on penalty fees, the CFPB is also citing in this proposal its general rulemaking authority under the Dodd-Frank Act and TILA.  This general authority authorizes the CFPB to issue rules to further the purposes of those statutes.  And there is always the CFPB’s UDAAP authority, which has been used in the past by agencies to address costs on consumers.  It is possible that the CFPB could rely on such authority to issue a rule to reduce fees it deems “junk fees.”  It did call out fees in other industries as “junk fees” in its RFI on the topic. Under a similar approach as in this proposal, the CFPB could potentially compare the costs incurred by the industry in relation to the fees (or the services they pay for) to the revenue earned from the fees, as well as the ability (or inability) of consumers to shop based on such fees.  This does sound similar to the rubric past agencies have used to analyze certain fees in the mortgage industry.  Note that my blog post on the CFPB’s latest regulatory agenda, which you can read here, does not indicate any current rulemakings on this topic, but this is still something to keep an eye on. 

You can find the CFPB’s proposal here.  The comment deadline is the later of April 3, 2023 or 30 days after publication in the Federal Register.  If you would like to discuss drafting a comment letter or any of the issues raised in this blog post, please email me at rich@garrishorn.com.