On March 29, 2023, the Consumer Financial Protection Bureau (CFPB) released a notice of proposed rulemaking on credit card late fees. At the time of the proposed rule, a card issuer could not impose a fee for violating the terms or other requirements of a credit card account, such as a late payment, exceeding the credit limit, or returned payments. However, if 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 provisions, fees may be imposed. The safe harbor was set at $30 for penalty fees and at $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles
The proposed rule would amend 12 CFR § 1026.52(b) to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under the Truth in Lending Act. The proposal would:
- Reduce the safe harbor dollar amount for late fees from $30 to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type.
- Provide that the current section that allows for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount.
- Provide that late fee amounts must not exceed 25 percent of the required payment.
At that time, a depository financial institution was considered small if it had less than $850 million in total assets. For this rule, the CFPB estimated that there are approximately 3,780 small banks, of which approximately 498 report outstanding credit card debts on their balance sheets. The CFPB also estimates that there are approximately 4,586 small credit unions, of which 2,785 report credit card assets.
On May 3, 2023, the Office of Advocacy (Advocacy) submitted comments on the proposed rule on Credit Card Penalty Fees. In the comment letter, Advocacy asserted that the CFPB insufficiently considered the extent to which the proposed $8 safe harbor amount would cover the collection costs of smaller issuers and that the late fee amount may not be feasible for smaller institutions. Small institutions may not have ready access to professional staff or consultants to develop a late fee amount that qualifies under the reasonableness test provisions and may lack the information systems to provide the necessary support to determine the late fee amount under those provisions.
Moreover, smaller institutions may rely on safe harbors to be certain that they are complying with the law. An adequate safe harbor amount that reflects the costs that small entities incur in processing late payments would be necessary to prevent small institutions from incurring potential legal fees if they were to use the incorrect late fee amount.
In addition, consumers, including small businesses, may choose to obtain their credit cards from small depository institutions that offer credit cards for a variety of reasons, including the ability of consumers with low credit scores to obtain a credit card that may otherwise be unavailable. If the safe harbor amount does not cover the costs of providing the service, small depository institutions may decide to stop issuing credit cards,
The CFPB issued the final rule on March 14, 2024. In the final rule, the CFPB stated that the $8 late fee safe harbor threshold and the elimination of the higher late fee safe harbor amount for subsequent violations, as well as the elimination of the annual adjustments for the safe harbor threshold, did not apply to a card issuer that together with its affiliates had fewer than one million ‘‘open credit card accounts.’’ Also, the proposed provisions to restrict late fee amounts to 25 percent of the required minimum payment were not finalized in this final rule with respect to any card issuers, including smaller card issuers.
In total, the change will save 2,979 firms (401 banks and 2,578 credit unions that issue credit cards) a total of $92.5 million in cost savings over the next 10 years (discounted at 7%). This comes out to total annualized cost savings of $13.2 million. These savings help small financial institutions that issue credit cards.
For more information, please review our comment letter, Credit Card Penalty Fees (Regulation Z), Docket No. CFPB–2023–0010, RIN 3170–AB15.
COMMENT LETTER
Credit Card Penalty Fees (Regulation Z), Docket No. CFPB–2023–0010, RIN 3170–AB15
AUTHOR:
Jennifer Smith, Assistant Chief Counsel
EMAIL:
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