Today the Consumer Financial Protection Bureau (CFPB) published a proposed rule with request for public comment that would amend Regulation Z to: 1) decrease the safe harbor for credit card late fees to $8 and eliminate altogether a higher safe harbor amount for subsequent late payments; 2) eliminate the annual inflation adjustments for the late fee safe harbor amount; and 3) mandate that late fees must not exceed 25% of the required minimum payment. The CFPB states that it is proposing the amendments to Regulation Z pursuant to its authority under the Dodd-Frank Act to prescribe regulations to carry out the purposes of the Truth in Lending Act. The CFPB’s rationale in proposing the amendments is, “to better ensure that the late fees charged on credit card accounts are ‘reasonable and proportional’ to the late payment.”
For background, the Federal Reserve Board of Governors (Fed) in 2010 voted to implement provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) that required late charges to be “reasonable and proportional to the omission or violation.” However, 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 also 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 and $35 for subsequent late payments within six billing cycles. Since then, the late fee limit has increased to $30 for the first late payment and $41 for subsequent late payments. In late June, the CFPB published an Advance Notice of Proposed Rulemaking seeking data as to whether late fees charged by credit card companies are “reasonable and proportional” to the amount owed. As discussed here, banking groups vigorously opposed any changes on the basis that, amongst other things, late fees act as a deterrent to consumers overextending beyond their means.
In addition to the three proposed amendments above, the CFPB is soliciting comment on whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 days of the due date, and whether, as a condition of using the safe harbor, it may be appropriate to require card issuers to offer automatic payment options (such as for the minimum payment amount), and/or to provide notification of the payment due date within a certain number of days prior to the due date.
The CFPB is also seeking comment on the following issues generally related to late fees:
- Whether the same or similar changes proposed above should be applied to other penalty fees, such as over-the-limit fees, returned-payment fees, and declined access check fees.
- Whether instead of the proposed changes, the CFPB should eliminate the safe harbor for all penalty fees, including late fees, over-the-limit fees, returned-payment fees, and declined access check fees.
Interested parties may submit comments on the proposed rule until the later of April 3, 2023 or 30 days after publication of the proposed rule in the Federal Register.
Given that this proposed rule, if finalized, would likely have a directly adverse effect on the bottom line of credit card issuing banks, we expect the discussion and commentary on this proposed rule to be robust. We will continue to monitor and report on these developments.