Financial institutions' longstanding practice of charging fees to consumers for the late payment of credit card debts is under scrutiny from the Consumer Financial Protection Bureau (CFPB) and its Director, Rohit Chopra. Despite the explicit authorization of such fees in federal and state consumer financial regulation, the CFPB, in a series of releases this year, has hinted at the implementation of greater restrictions on the practice. The CFPB takes aim, in particular, at the frequency with which late fees are imposed and their disproportionate impact on low-income populations.1
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was enacted to limit, among other things, the charging of junk fees, over-the-limit fees, and how much credit card issuers could charge for late fees. In 2010, the Federal Reserve Board voted to implement provisions of the CARD Act prohibiting the generation of more revenue from late fees than was necessary to cover the cost of late payments. In voting to implement these provisions, the Fed created an immunity provision for the charging of late fees that permitted issuers to charge fees up to a safe harbor amount. As long as the issuers' late fee amounts remained below the safe harbor limit, issuers would not be subject to regulatory scrutiny pertaining to the CARD Act's or Board's curbs on late fees, even if the charging of such late fees went beyond the amounts necessary simply to cover the cost of late payments. The Board's safe harbor fees were subject to annual inflation adjustments.
The regulations and guidance described above have not evolved much over the past decade, and so continue to govern the state of play for issuers that charge late fees. For most issuers, including most of the largest credit card issuers, credit card agreements impose late fee amounts in line with the safe harbor thresholds first set by the Fed, and now maintained by the CFPB in Regulation Z.2
CFPB's March 2022 Late Fee Report
Though Director Chopra has repeatedly expressed skepticism of late fee practices during the first year of his tenure and the CFPB has previously criticized a variety of fee practices, the Bureau's March 2022 release of a report outlining the current state of late fees included the first published commentary criticizing the practice. That report, entitled "Credit Card Late Fees," outlined several key findings:
- The credit card market continues to generate sizable profit from late fees and is not merely recouping the costs of late payments.
- Eighteen of the top 20 credit card issuers set late fees at or near the established safe harbor limit.
- Subprime and private label cards "are particularly susceptible" to late fees.
- Late fee volume fell when COVID-19 stimulus checks arrived in 2020 and 2021.
- Late fee revenue comes disproportionately from people living in low-income and minority neighborhoods.
CFPB's June 2022 Late Fee ANPR
Last week, the CFPB published an Advance Notice of Proposed Rulemaking (ANPR) on the subject of late fees, which may push the Bureau to change from criticizing the credit card industry's late fee practices from mere criticism to specific action.3 The ANPR seeks:
- Additional information about the Federal Reserve Board's 2010 immunity/safe harbor provisions for late fees;
- Data about credit card late fees and late payments, including an assessment of whether those fees are "reasonable and proportional";
- Data about card issuers' revenue and expenses, the potential deterrent effect of late fees, and the role late fees play in credit card companies' profitability; and
- Information relating to the relationship between the increase of credit card late fees and the increase of the rate of inflation.4
The information sought speaks to the current CFPB's displeasure with the safe harbor provisions implemented by the Fed in 2010 because the fees escaped scrutiny even if they were “not necessary to deter a late payment and generated excess profits.” Director Chopra, speaking on the ANPR, specifically notes that "[c]redit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago. This effort is particularly timely since current rules might give companies the incentive to impose big hikes based on inflation."
To direct the CFPB's queries into late fee practices, the ANPR seeks comment from the industry, consumer groups, and the public on the following questions:5
- How do credit card issuers set late fee amounts? How is the fee determined to be considered reasonable or proportionate, or at least related, to the actual costs to the card issuer? How is the fee related to the statement balance?
- Are revenue goals a factor in determining late fees? How do they figure into profitability for the card issuers?
- What are card issuers' costs and losses associated with late payments?
- Do late fees have a deterrent effect? Does the amount have a deterrent effect? Do card issuers impose other consequences other than late fees when payments are late?
The deadline for submitting comments on the ANPR is July 22, 2022. DWT is assisting clients in the submission of comments to the CFPB by the deadline, and will continue to monitor the CFPB's evolving position on credit card late fees and the safe harbor.