CFPB Finalizes Rule on Credit Card Late Fees: What Companies Should Know

6 minute read | March.07.2024

In its latest contribution to the Biden Administration’s campaign against “junk fees,” the CFPB has finalized a rule to limit credit card late fees.

The rule slashes the late fee that larger issuers can charge under a regulatory safe harbor from $30 (or more for subsequent violations) to $8. If the rule takes effect, it could have a significant impact on large credit card issuers’ fee revenue. The CFPB expects that issuers’ attempts to recoup this revenue will increase the cost and decrease availability of credit for borrowers, including those who pay their credit card bills on time.

As a result, although the rule is scheduled to go into effect 60 days after publication in the Federal Register, the industry is expected to challenge the rule and seek a delay of that effective date until their challenge is resolved.

Background: The CARD Act

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) established disclosure requirements and other consumer protections for open-end consumer credit plans (i.e., credit cards). The CARD Act:

  • Directed the Federal Reserve Board to establish standards for limiting penalty fees such as late payment fees, over-the-limit fees and returned check fees, to those that are “reasonable and proportional” to the cardholder’s violation of the card agreement.
  • Permitted the Board to establish safe harbors pursuant to which an issuer could charge penalty fees that would be deemed “reasonable and proportional.”
  • Required the Board to consider, when crafting the rule, the costs card issuers incur because of violations, the deterrence of violations by cardholders, the conduct of cardholders and other appropriate factors.

In 2010, the Board issued a final rule articulating standards for “reasonable and proportional” penalty fees. The Board adopted a safe harbor for penalty fees:

  • $25 or less for the first violation.
  • Up to $35 for similar violations within the next six billing cycles to deter late payments.

The rule also provided for annual inflation adjustment of the safe harbor fees, which currently stand at $30 and $41.

The CFPB’s Proposed Rule

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 transferred the Board’s rulemaking authority to the CFPB. With exceptions related to the adjustment of safe harbor amounts to reflect inflation, the CFPB had not revisited the Board’s 2010 rule on penalty fees until this rulemaking. Indeed, in its September 2021 Card Act Report, the CFPB noted that late fees “remain below their nominal pre-CARD Act level of $33 in 2008, and well below $40 inflation-adjusted figure in 2020 dollars.” It did not list penalty fees as an area of future focus.

Early in 2022, however, the CFPB began characterizing late fees as “junk fees.” Although a rulemaking to amend the Board’s rule was not included in the agency’s Spring 2022 rulemaking agenda, Director Chopra announced that the CFPB would revisit the Board’s 2010 rule on penalty fees, referring to the Board’s regulatory safe harbors as “enforcement immunity and inflation provisions.” In June 2022, the CFPB issued an Advanced Notice of Proposed Rulemaking seeking information on issuers’ practices regarding late payments and associated fees.

In March 2023, the CFPB issued a Notice of Proposed Rulemaking for an amendment that would:

  • Lower the safe harbor amount for late fees (and not other penalty fees, such as returned payment fees) to $8.
  • Eliminate the higher safe harbor amount for subsequent violations of the same type.
  • Eliminate the automatic inflation adjustment of safe harbor amounts.
  • Limit late fees (including those under the safe harbor) to no more than 25 percent of the required payment.

The CFPB also proposed clarifying that issuers should not consider “post-charge off” costs when determining whether a late fee (not within the safe harbor) is “reasonable and proportional.”

Distinguishing Between Larger and Smaller Card Issuers

The most significant change between the proposed and final rule is the differential treatment of issuers based on the number of active accounts.

How the Rule Affects “Smaller Card Issuers”

The CFPB’s rule will permit issuers with fewer than a million open credit card accounts to charge penalty fees that exceed the current safe harbor amounts. They will be able to charge $32 for the first violation and $43 for subsequent violations. In addition, safe harbor amounts will continue to be adjusted annually for inflation.

How the Rule Affects “Larger Card Issuers”

According to the CFPB, the 30 to 35 largest issuers each have more than a million open accounts and collectively account for 95% of outstanding balances in the card market.

For them, the final rule differs little from last year’s proposal. The safe harbor amount for late fees will be $8—even for late payments that occur within six months of a prior late payment. This amount will not be adjusted for inflation.

The CFPB estimates this change will reduce late fee income at Larger Card Issuers by $10 billion annually, though it concedes that issuers may seek to recapture a portion of this lost revenue by increasing rates or other fees or by reducing rewards.

The CFPB justifies this differential treatment by pointing to comments suggesting that Smaller Card Issuers incur higher costs relative to late fee income and may be less able to absorb a significant reduction in late fee revenue. It also acknowledges that effectively shielding Smaller Card Issuers from the impacts of the rule will address concerns that it did not adequately consider the impacts on small issuers as required under the Small Business Regulatory Enforcement Fairness Act.

Revised Cost Analysis Calculus

The CFPB also adopted its proposed clarification that issuers can’t use post-charge-off costs to determine whether a late fee that exceeds the safe harbor amount is “reasonable and proportional” to the violation. This clarification applies to all issuers but only impacts issuers who charge a late fee higher than the applicable safe harbor. As a result, the clarification is likely to have little impact on Smaller Card Issuers, who are likely to continue relying on the regulatory safe harbor.

What’s Next?

The rule will take effect 60 days after publication in the Federal Register. If publication occurs in the next few weeks as expected, the rule would take effect in mid-to-late May. However, industry trade groups have said they plan to seek judicial review of the rule. They likely will ask a court to delay the effective date until the judicial challenge is resolved.

To learn more about the issues explored above or what impact they may have on your business, please reach out to the authors (Marshall Bell, John Coleman, Manley Williams and Hayden Irwin) or other members of the Orrick team.