We suspected something was afoot when December 2022 came and went without the CFPB announcing its annual inflation adjustments to the credit card late fee safe harbor amounts set forth in Regulation Z (which implements the Truth in Lending Act). With the CFPB’s issuance on February 1, 2023, of a proposal to substantially reduce the safe harbor amounts, eliminate the annual inflation adjustments, and make other significant changes to the Regulation Z rules for credit card late fees, we now know the reason for the CFPB’s inaction on the adjustments. Comments on the proposal must be filed by April 3, 2023 or 30 days after the date the proposal is published in the Federal Register, whichever is later.
The key changes proposed by the CFPB consist of the following:
- Reduction in safe harbor amounts. Regulation Z currently provides that a card issuer may not impose a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) consumer credit plan, such as by making a late payment, exceeding the credit limit, or having returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation or complies with the safe harbor amounts. The CARD Act gave the Federal Reserve Board the discretion to establish the safe harbor amounts which the Board exercised in its final rule issued in June 2010 revising Regulation Z to implement the CARD Act’s amendments to TILA. The Board initially set the safe harbor amounts at $25 for a first violation and $35 for subsequent violations. Since their creation in 2010 (and the transfer of the Board’s TILA rulemaking authority in 2011 to the CFPB), the safe harbor amounts have been adjusted annually by the CFPB for inflation with the most recent adjustments for 2022 having increased the safe harbor amounts to their current amounts of $30 for a first violation and $41 for subsequent violations.
The CFPB is proposing to amend Regulation Z to reduce the safe harbor dollar amount for credit card late fees to a flat $8 amount that would apply to both first and subsequent late payments. (Stated differently, the proposal would eliminate a higher late fee safe harbor amount for subsequent late payments.) The CFPB is also proposing that the credit card late fee safe harbor would not be subject to an annual inflation adjustment. (The current tiered safe harbor amounts and annual inflation adjustments would continue to apply to other types of penalty fees.) The CFPB states in its discussion of the proposal that “[a]fter analyzing available evidence and considering the applicable statutory factors, the Bureau preliminary determines that a late fee amount of $8 for the first and subsequent late payments is presumed to be reasonable and proportional to the late payment violation to which it relates.” It also states that it has made a “preliminary determination that lower late fee amounts to the proposed $8 safe harbor amount would still have a deterrent effect on late payments.”
- Reduction in maximum late fee amount. Regulation Z currently provides that a card issuer may not impose a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) consumer credit plan that exceeds the dollar amount associated with the violation. The CFPB is proposing to amend Regulation Z to restrict the amount of a credit card late fee to 25 percent of the required minimum payment prior to assessment of the late payment. (The limitation would not apply to other types of penalty fees.) As a result, an issuer using the safe harbor could charge a late charge equal to the lesser of $8 or 25% of the minimum payment.
- Allowable costs for penalty fee determination. For issuers who choose to use a cost analysis to charge a late fee or other penalty fees higher than safe harbor amounts, the proposal would revise the Official Staff Commentary to clarify that the costs that the issuer may consider in its analysis do not include collection costs that are incurred after an account is charged off.
While not included in the text of its proposed revisions to Regulation Z, the Bureau also asks for comment on whether it should amend Regulation Z to provide for a courtesy period which would prohibit late fees imposed within 15 calendar days after each payment due date and whether the courtesy period should apply only to late fees assessed by a card issuer using the safe harbor or if it should apply generally. We find it strange that the CFPB would seek comment on what would be a first time mandate by the CFPB that a grace period be provided since we are not aware of anything in the CARD Act or other laws that gives the CFPB the authority to mandate grace periods.
Other issues on which the Bureau asks for comment include whether: (1) as a condition of using the safe harbor for late fees, it should require card issuers to offer automatic payment options (such as for the minimum payment amount), or to provide notification of the payment due date within a certain number of days prior to the due date, or both; (2) it should eliminate a higher safe harbor amount for subsequent violations other than late payments; and (3) it should eliminate the safe harbor amount entirely for late fees or eliminate the safe harbor amounts entirely for all penalty fees.
The CFPB’s proposal is far more radical than anyone anticipated and a repudiation of the Federal Reserve Board’s serious study of penalty fees at the time of its CARD Act rulemaking. We find it ironic that the CFPB seeks to justify the proposal as a means of promoting competition in what is arguably the most competitive industry in America. In reality, if adopted in its present form, the proposal would force many issuers out of the market, resulting in less competition which will lead to less innovation, fewer and less valuable credit card rewards, and increasingly fewer choices for consumers.
The proposal quickly elicited sharp criticism from industry members. The Consumer Bankers Association issued a statement in which it called the proposal “just the latest example of the Bureau seeking to advance a political agenda that will harm, rather than help, the very people they are responsible for serving.” CBA also called it “deeply unfortunate and puzzling that policymakers would take action that could ultimately limit consumers’ access to these valued financial products at a time when they are needed most.”
In its statement about the proposal, the American Bankers Association stated that “[the] extreme CFPB proposal will harm consumers by reducing competition and increasing the cost of credit. It will result in more late payments, higher debt and lower credit scores, and is inconsistent with the CARD Act’s encouragement of responsible credit management.” ABA also commented that “[i]f the proposal is enacted, credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts and raising APRs for all consumers, including the millions who pay on time.”