Update on Credit Card Late Fee Rule Challenge

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:

• Under the existing rule, the safe harbor late fee for all credit card issuers is $30. A higher safe harbor late fee of $41 applies for subsequent violations of the same type occurring in the same or next six billing cycles. (§1026.52(b)(1)(ii)(A) and (B))
• Under the Final Rule, the safe harbor late fee for Larger Card Issuers (those that, together with their affiliates, have one million or more open credit card accounts) will be capped at $8, and it will not be adjusted annually for inflation. The higher safe harbor late fee for subsequent violations is eliminated. (§1026.52(b)(1)(ii)(D) and (E))
  • “Affiliate” means any company that controls, is controlled by, or is under common control with another company, consistent with the Bank Holding Company Act of 1956 (12 U.S.C. 1841 et seq.). (§1026.52(b)(3))
  • “Open account” means a credit card account under an open-end (not home-secured) consumer credit plan and either: (i) the cardholder can obtain extensions of credit on the account; or (ii) there is an outstanding balance on the account that has not been charged off. An account that has been temporarily suspended is considered an open account. (§1026.58(b))
• Under the Final Rule, Smaller Card Issuers (those that, together with their affiliates, had fewer than one million open credit card accounts for the entire preceding calendar year) may continue to charge the standard safe harbor late fee, which will be adjusted for inflation from $30 to $32. The higher safe harbor late fee for subsequent violations is adjusted from $41 to $43. (§1026.52(b)(1)(ii)(A), (B) and (E))
  • If a Smaller Card Issuer meets or exceeds the one million open account threshold during the current calendar year, it will no longer be considered a Smaller Card Issuer 60 days after meeting or exceeding the threshold. (§1026.52(b)(3)(ii))
• The above changes would also apply to late fees for charge card accounts. This does not, however, affect the alternative safe harbor option of charging a late fee equal to 3% of the outstanding balance if a required payment-in-full is not received for two or more consecutive billing cycles. In such case, the issuer may charge the greater of the two amounts. (§1026.52(b)(1)(ii)(D))
• Application, solicitation, account opening, and periodic statement disclosures containing late payment fee information will also need to be updated to reflect the modified fees. The Final Rule includes updated Model Forms (Part 1026, Appendix G).
• Card issuers will retain the option to use the cost analysis approach for determining penalty fee amounts, including late fees, i.e., the dollar amount of the fee must represent a reasonable proportion of the total costs incurred by the card issuer as a result of that type of violation, as determined annually. However, the Official Commentary is amended to clarify that costs for this purpose do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. (§1026.52(b)(1)(i); Comment 52(b)(1)(i)-2.i))

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:

• The CFPB violated the CARD Act by promulgating a Final Rule that prevents card issuers from collecting a penalty (late fee) that is “reasonable and proportional to the omission or violation to which the fee or charge relates” (late payment). In determining whether a penalty was reasonable and proportional, the CFPB erroneously focused solely on the cost incurred, but the CARD Act required the CFPB to consider:

“(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 CFPB violated the Administrative Procedure Act (“APA”) by promulgating a Final Rule that is arbitrary and capricious. Plaintiffs allege:
  • The CFPB relied on an analysis of non-public data from a Federal Reserve Board report that only collects limited data from financial holding companies with at least $100 billion in assets for an unrelated purpose.
  • It failed to justify the distinction between Larger and Smaller Card Issuers.
• The CFPB violated the TILA requirement that rules requiring a different disclosure have an effective date of the October 1 which follows the date of promulgation by at least six months. (15 U.S.C. § 1604(d)) The Final Rule in this case included an effective date of 60 days after its publication in the Federal Register, leaving insufficient time for card issuers to make the necessary changes and provide updated disclosures.
• The CFPB’s funding mechanism is unconstitutional, in violation of the Appropriations Clause of the U.S. Constitution because it comes from the Federal Reserve rather than through the congressional appropriations process.

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.