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As a result of the ongoing litigation with the U.S. Chamber of Commerce, the Consumer Financial Protection Bureau (“CFPB”) Final Rule on Credit Card Penalty Fees issued on March 5, 2024 (“Final Rule”) remains stayed… for now.
Rule Background
In January 2022, the CFPB first announced its initiative to address what it deemed “exploitative junk fees” charged by financial institutions associated with financial products and services. While the idea of a junk fee immediately triggers thoughts vaguely defined service fees that are only disclosed in the moments before finalizing a transaction, identifying a junk fee in the already highly regulated and disclosure-heavy realm of financial services proved to be a bit more nuanced. The CFPB immediately set its sights on excessive credit card late fees, issuing a Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services. Within the next few months, it released a Report on Credit Card Late Fees and an Advance Notice of Proposed Rulemaking. A Proposed Rule followed in February 2023, with the Final Rule issued on March 5, 2024.
Two days later, the U.S. Chamber of Commerce and other business and financial services trade groups filed a lawsuit seeking to prevent the Final Rule from taking effect on May 14, 2024, as originally scheduled.
Final Rule Summary
The Final Rule would amend provisions of Regulation Z (12 CFR Part 1026), which implements the federal Truth in Lending Act (“TILA”) and the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”), as follows:
While it doesn’t appear that any California or Nevada credit unions currently meet the threshold to be deemed a Larger Card Issuer, the Final Rule still sets a concerning precedent.
A Note About the California Rule
The California Credit Union Act already imposes additional late fee restrictions on California’s state-licensed credit unions. Financial Code §15001 states, “Every credit union may assess charges as approved by the board of directors for failure to meet punctually obligations to the credit union. Any late charge shall be made only once for each delinquent payment and shall be subject to Section 2954.5 of the Civil Code, Division 1.1 (commencing with Section 4000) of this code, and any other applicable law.” Financial Code §4001 provides that, if stated in the consumer credit agreement (i.e., an extension of unsecured open-end credit for personal, family, or household purposes), one of the following late payment fees may be charged:
(A) A $7 late fee with respect to any monthly billing cycle when the minimum payment due is not paid within five days after the due date.
(B) A $10 late fee with respect to any monthly billing cycle when the minimum payment due is not paid within 10 days after the due date.
(C) A $15 late fee with respect to any monthly billing cycle when the minimum payment due is not paid within 15 days after the due date.
In lieu of the above, If the consumer has already incurred two late fees during the preceding 12-month period, the late fee may be no more than $10 with respect to any monthly billing cycle when the minimum payment due is not paid within five days after the due date.
Litigation Summary
Chamber of Commerce of the U.S.A., et al. v. Consumer Financial Protection Bureau, et al. (Case 4:24-cv-00213; March 7, 2024) (“Chamber of Commerce v. CFPB”) was initially filed in the federal district court for the Northern District of Texas, Fort Worth Division, seeking to vacate and set aside the Final Rule in its entirety, and an order to enjoin the effective date and implementation of the Final Rule. In the alternative, they challenge certain aspects of the Final Rule, including the repeal of the safe harbor for Larger Card Issuers. Plaintiffs’ key allegations include:
“(1) the cost incurred by the creditor from such omission or violation;
(2) the deterrence of such omission or violation by the cardholder;
(3) the conduct of the cardholder; and
(4) such other factors as the Board may deem necessary or appropriate.”
The procedural history in this action has been a labyrinth of overlapping motions and appeals, including efforts by plaintiffs to expedite the proceedings, some rather pointed exchanges between the district court and the Fifth Circuit regarding docket management and judicial authority, and a thwarted effort by the Texas district court to transfer the proceedings to the federal district court in Washington D.C.
On May 10, 2024, just days before the Final Rule was set to take effect, the Texas federal district court granted the plaintiffs’ motion for a preliminary injunction, staying the effective date of the Final Rule. In finding a likelihood of success on the merits, the judge relied on the Fifth Circuit’s decision in Community Financial Services Association of America, Limited v. Consumer Financial Protection Bureau, 51 F.4th 616, 638 (5th Cir. 2022) (“CFSA v. CFPB”), which held that the CFPB’s self-funding structure violated the Appropriations Clause. Due to this finding, the judge in the present case did not address plaintiffs’ other arguments based on the TILA, the CARD Act, or the APA.
However, at the time the preliminary injunction was granted in Chamber of Commerce v. CFPB, the Fifth Circuit’s decision in CFSA v. CFPB was still pending before the U.S. Supreme Court. Within days, on May 16, 2024, the U.S. Supreme Court rendered its decision, reversing the Fifth Circuit and finding the CFPB’s funding mechanism to be in compliance with the Appropriations Clause. See CFSA v. CFPB, 144 S.Ct. 1474 (May 16, 2024).
Because of the Texas district court’s reliance on CFSA v. CFPB in granting the preliminary injunction in Chamber of Commerce v. CFPB, and its failure to cite any other basis for finding a likelihood of success on the merits, it naturally raises questions about the continuing validity of the preliminary injunction and whether it might be challenged by the CFPB, allowing the Final Rule take effect. In the meantime, on May 28, 2024, the Texas district court once again ordered Chamber of Commerce v. CFPB transferred back to the federal district court in Washington D.C.
What Happens Now
First, it’s important to recognize that the U.S. Supreme Court’s decision in CFSA v. CFPB cleared the longstanding cloud of suspicion over the validity of the CFPB’s rulemaking and enforcement authority, the result of which is likely to be a more aggressive approach to pursuing their regulatory and enforcement priorities going forward.
Second, California state-licensed credit unions will remain subject to the limits in Financial Code §4001 in addition to any requirements in Regulation Z. To the extent that California late payments fee limits are more favorable to the consumer, they will prevail.
As to Chamber of Commerce v. CFPB, the matter is now in the hands of the Washington D.C. district court and the preliminary injunction remains in place… for now. On July 9, 2024, the CFPB filed a motion to dissolve the preliminary injunction and lift the stay on the Final Rule, allowing it to take effect. The CFPB argues that the U.S. Supreme Court’s decision in CFSA v. CFPB is “a substantial change in the law that justifies dissolving the preliminary injunction, which now rests entirely on overruled precedent.” They acknowledge that the plaintiffs offered a number of alternative grounds in seeking the preliminary injunction but argues that a likelihood of success has not been shown on any of them, and the public interest doesn’t support continuing to block the Final Rule. Response briefs and a ruling will be forthcoming in the days ahead.
For now, credit unions are encouraged to work with their legal counsel to identify any steps they may need to take in the event the Final Rule is permitted to take effect. This may include reviewing credit card late payment fees to determine whether changes will need to be made, identifying documents that may need to be updated (e.g., application, solicitation, account opening, and periodic statement disclosures), and having a plan in place to ensure ongoing compliance within any newly established timelines.
Article by Victoria Allen, Partner at Moore, Brewer & Wolfe, APC.
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