CFPB Targets Credit Card Late Fees As Junk Fees, Proposes Significant Reduction In Safe Harbor
For Card Issuers:
The Consumer Financial Protection Bureau’s (the “CFPB” or the “Bureau”) latest move in its crusade against “junk fees” may hit closer to home for companies charging common fees that are considered, to date, to be lawful and valid. On February 1, the Bureau issued a Notice of Proposed Rulemaking1 (the “Proposed Rule”) targeting credit card late fees that would have substantial implications for the consumer credit card industry across essentially all credit bands and submarkets. Consumer credit card issuers currently are subject to a statutory prohibition against unreasonable penalty fees such as late fees.2 However, regulations implementing that prohibition provide a safe harbor for card issuers charging fees not in excess of certain inflation-adjusted thresholds for initial and subsequent violations of account terms. The Federal Reserve Board initially set the threshold in 2010 at $25 for a first violation and $35 for a subsequent violation of the same type within the next six billing cycles. The CFPB most recently increased the threshold to $30/$41, respectively, as of January 1, 2022.3 In addition, the regulations tie unreasonableness to the costs borne by the card issuer in avoiding or mitigating the violation resulting in the penalty fee. Current regulations also prohibit a card issuer from charging a penalty fee exceeding the amount of the violation resulting in the fee4 (i.e., a consumer late on a payment of $10 cannot be charged a late fee exceeding $10), even if a greater charge normally would fall within the safe harbor. [as reported in 2/10/23 Credit & Collection e-newsletter]