Operational Impacts of the New CFPB Credit Card Late Fee Rule

On March 5, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued its final credit card late fee rule (the “Final Rule”), which, amongst other things, significantly reduces the late fee safe harbor cap for issuers other than “smaller card issuers” from the currently permitted $30 (and $41 for repeat violations) to a flat fee of $8 for all violations. In prior blogs, we have discussed the Final Rule and how it compares to Regulation Z and the previously Proposed Rule, and a legal challenge to the Final Rule brought by financial industry trade associations in a lawsuit and motion for preliminary injunction. Below, we discuss some of the operational impacts we expect to see when the Final Rule becomes effective.

Anticipated impacts of the Final Rule include:

• Revised disclosures: The CFPB’s justification for setting the effective date 60 days after publication in the Federal Register is that the Final Rule does not require any disclosure that differs from the current requirement, just a “mere alteration of the disclosed maximum late fee amounts.” 89 FR 19187-19188 (Mar. 15, 2024). However, the CFPB fails to account for the time and effort that will go into programming changes and revising cardholder agreements, disclosures, and marketing materials for – by the CFPB’s own estimate – 95% of the $1 trillion credit card market. During the 60-day time period, account opening disclosures will need to be revised, all existing paper inventory that reference late fees must be destroyed, statements will need to be reprogrammed, and websites will need to be updated. The same product, operations, IT, compliance and legal subject matter experts will be tasked to complete all these changes in a severely compressed period of time. When disclosure changes are rushed less change management testing can be performed and the risk of error rises.

• Challenges in setting a cost analysis-based late fee in lieu of the safe harbor amount: While the safe harbor penalty fee has been the industry standard, the reduction of that safe harbor fee to $8 under the Final Rule may result in issuers choosing to instead perform a cost analysis to establish penalty fees that represent a reasonable proportion of the total costs incurred by the issuer as a result of a violation if an issuer elects to charge penalty fees based on such costs, rather than the safe harbor fees. However, while it amends the Regulation Z Official Interpretation to state that post charge-off collection costs may not be included in the cost analysis (as further discussed below), the Final Rule fails to provide any affirmative guidance to enable issuers to determine how to perform a cost analysis that would satisfy the CFPB. Rather, the Final Rule Supplemental Information just reiterates that card issuers bear the burden of demonstrating that cost analysis-based late fees are reasonable and proportional to the costs incurred due to the violation. While the CFPB cites the ability of an issuer to use the cost analysis in setting a reasonable and proportional fee as a justification for the drastically lower safe harbor amount, any large issuer that does so should anticipate doing so under great regulatory scrutiny, with added risk of litigation.

• Detrimental effects on consumers – the possibility of higher APRs and other charges: In light of the drastic reduction of the late fee safe harbor amount and the fact that it will no longer be adjusted for inflation (except for smaller card issuers), it is reasonable to expect that the true cost impact of late payments will be incorporated into credit card pricing in the form of higher APRs imposed on many cardholders who pay on time. In fact, the CFPB anticipates this, stating in the commentary to the Proposed Rule that one option to cover collection costs if the $8 safe harbor fee is insufficient would be to “use interest rates or other charges to recover some of the costs of collecting late payments.” 88 FR 18919 (Mar. 29, 2023). Essentially, cardholders who pay on time will subsidize late payers through increased finance charges, or other charges as suggested by the CFPB.

• Effects and costs related to APR increases: An issuer that decides to increase APRs in an effort to cover late payment-related expenses would face added costs and burdens. In addition to the costs associated with change in terms notifications, issuers may be required to conduct and document periodic rate increase re-evaluations and adjustments. Since an increased APR cannot be applied to pre-existing balances or charges incurred within 14 days after notice of the increase, and subject to certain exceptions notice must be provided at least 45 days prior to the increase, it likely would take considerable time for an APR increase to offset costs associated with late payments. Further, if an APR increase is imposed on balances incurred in the future, the complexity of disclosing and administering multiple APRs will further add to issuers’ costs.

• Inability to recover actual credit losses related to charge-off: As noted above, the Regulation Z Official Interpretation is amended by the Final Rule to state that post-charge-off collection costs are excluded from the penalty fee calculation. Currently, the Regulation Z Official Interpretation, at 52(b)(1)(i)-2.i, provides that “Losses and associated costs (including the cost of holding reserves against potential losses and the cost of funding delinquent accounts)” are not to be taken into consideration in determining the cost incurred due to a violation in calculating a reasonable and proportional penalty fee. The Final Rule expressly expands this interpretation (for both larger card issuers and smaller card issuers) to exclude consideration of post-charge-off collection costs in the cost analysis of the late fee, further impairing issuer’s ability to set the fee based on the actual cost of default.

• Other consequences: A myriad of other potential results of the Final Rule that would affect cardholders and issuer operations, not addressed and apparently not taken into consideration by the CFPB, include possible increases in minimum monthly payments (requiring a 45-day change in terms notice), reductions in credit limits (might require adverse action notices), and the cancellation of some accounts (again, might require adverse action notices).

The Final Rule is to be effective May 14, 2024, 60 days after its publication in the Federal Register on March 15, 2024, subject to any court-imposed injunction resulting from litigation. We continue to monitor the litigation brought by financial industry trade groups that may impact the effective date of the Final Rule.