Bankers are opposing any effort by the Consumer Financial Protection Bureau (CFPB or Bureau) to reduce or eliminate the late fee safe harbor, citing a potentially significant adverse impact on community banks and credit unions. In a letter dated January 20, the American Bankers Association (ABA), Credit Union National Association (CUNA), Independent Community Bankers of America, National Bankers Association, and National Association of Federally‐Insured Credit Unions (NAFCU) (collectively, the Associations) expressed their concern over the CFPB’s proposed rulemaking regarding credit card late fees, urging the CFPB to convene a Small Business Review Panel (Panel) as required under the Small Business Regulatory Enforcement Fairness Act (SBREFA).
As discussed here, on January 4, the CFPB issued its 2022 Fall Rulemaking Agenda containing pre-rule, proposed rule, and final rules under consideration. In the agenda, the CFPB indicated it was considering whether to propose amendments to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) relating to penalty fees levied by card issuers, including the safe harbor for penalty fees. For background, the Federal Reserve Board of Governors (Fed) in 2010 voted to implement provisions of the CARD Act that required penalties to be “reasonable and proportional to the omission or violation.” The Fed also included a provision that allowed credit card issuers to escape enforcement scrutiny if they set fees at a particular level, that is, a “safe harbor.” But the Fed stated that it would adjust the safe harbor amount annually, based on changes in the consumer price index. In 2010, the safe harbor limit on late fees was $25 for the first late payment. Since then, the late fee limit has increased to $30 for the first late payment and $41 for subsequent late payments within six billing cycles. Now that inflation has spiked, late fees are expected to rise next year to $33 for the first late payment and $45 for subsequent ones.
In June 2022, the CFPB issued an advance notice of proposed rulemaking seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees. The CFPB’s recent agenda stated it was considering the comments it received and would issue a proposed rule in January 2023.
In their letter, the Associations object to the CFPB’s proposed timeline as it would appear the Bureau is proceeding without convening a Panel. Under the SBREFA, the CFPB must convene a Panel if it is considering a rule that could have a significant economic impact on a substantial number of small entities. “Specifically, the Panel is required to collect advice and recommendations from small entities or their representatives … that are likely to be subject to the regulation that the CFPB is considering proposing.” In addition, SBREFA requires the CFPB to consider the advice of the Panel concerning whether the proposed rule would increase the cost of credit for small businesses and whether any alternatives may exist that could accomplish the stated objective of the rule while minimizing the increased cost. According to the Associations, more than half of the credit card-issuing banks and 85% of the credit card-issuing credit unions have assets less than $850 million (the threshold for when a financial institution qualifies as a small business) and any reduction or elimination of the late fee safe harbor could have a significant adverse impact on these entities.
This is not the first time banking groups have voiced their opposition to the CFPB’s proposed amendments to the CARD Act. As discussed here, on August 1, 2022, the ABA, Bank Policy Institute, Consumer Bankers Association, CUNA, and NAFCU expressed their collective displeasure with the proposed rulemaking citing not only the potential harm to small banks and credit unions but also the lack of deterrent for customers to make late payments going forward. “When set appropriately, late fees encourage consumers to pay on time and develop good financial management habits. However, if late fees are too low, consumers are more likely to pay late and miss payments, leading to lower consumer credit scores, reduced credit access, and higher credit costs.”
Troutman Pepper will continue to monitor important developments involving the CFPB, credit card late fees, and the Fed’s safe harbor provision and will provide further updates as they become available.