CFPB Credit Card Late Fee Final Rule

Today, the CFPB issued its final rule on credit card late fees under TILA. This memorandum provides a brief overview of the final rule.

• New Safe Harbor for Credit Card Late Fees: The new safe harbor for credit card late fees is $8 (as opposed to $30/$41 under the previous rule) and is no longer adjusted for inflation. The rule eliminates for late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
  • The proposed provisions to restrict late fee amounts to 25% of the required minimum payment are not being finalized in this rule.
• Alternative Fees: A credit card issuer may charge more than the safe harbor amount, if it determines that such a charge is reasonable and proportional to the cost of the late payment. A card issuer must reevaluate that determination at least once every 12 months. Consumers could sue if they believe a fee does not meet this standard. While this is not a change from the current rule, the CFPB did restrict what costs the card issuers can consider for purposes of determining the amount of a penalty fee. Costs for purposes of the cost analysis may not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions.
  • Given the risk of litigation, we do not believe many credit card issuers will use this alternative fee structure and instead will charge the safe harbor amounts.
• Changes on Late Fees Do Not Apply to Smaller Card Issuers: Smaller card issuers, card issuers that together with their affiliates had fewer than one million open credit card accounts for the entire preceding calendar year, are exempt from the changes on late fees. These issuers can charge the other safe harbor amount ($32/$43). This is a change from the proposed rule (which would have applied to all card issuers). According to the CFPB, the rule will cover 95% of existing credit cards.
• Inflation Adjustment for Other Fees: Pursuant to the annual adjustments for safe harbor dollar amounts for other fees (not late fees), the final rule revises the safe harbor threshold amounts to $32 and $43 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.
• Rationale:
  • CFPB has determined that for Larger Card Issuers, the discretionary safe harbor dollar amounts for late fees are too high and, therefore, are not consistent with TILA’s statutory requirement that such fees be reasonable and proportional to the omission or violation to which the fee relates.
  • With respect to the current higher safe harbor threshold for late fees for certain subsequent violations, CFPB is concerned based on data from certain Larger Card Issuers that this amount is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with a consumer’s ability to make future payments on the account.
  • The CFPB believes that large card issuers generally will recoup their pre-charge-off collection costs using either the safe harbor ($8) or using the cost-analysis provisions.
  • The majority of the preamble focused on the CFPB’s rationale for the $8 safe harbor, as that has been criticized by the industry.
• Effective Date: 60 days after publication in the Federal Register. The CFPB believes that issuers subject to the rule have the capacity and resources to comply with the new rule within 60 days of publication in the Federal Register.
• Litigation Likely: It is highly anticipated that banks/banking trade associations will sue the CFPB under the Administrative Procedure Act.