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CFPB Issues Credit Card Penalty Fee Final Rule, Reduces Late Fees to $8

What Happened?

On March 5, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued the Credit Card Penalty Fees Final Rule (“Final Rule”), which reduces the safe harbor for the maximum late fee that large credit card issuers may charge to $8. This rule is effective on May 14, 2024.

Why Is It Important?

Background

The Credit Card Accountability Responsibility and Disclosure Act of 2009 provided that any penalty fee imposed on a consumer in connection to an omission or violation of a cardholder agreement under an open-end consumer credit plan must be “reasonable and proportional” to the omission and violation.[1] To implement this provision, Regulation Z provided that card issuers may not impose a fee for violating the terms of a credit card account under an open-end consumer credit plan (“Penalty Fee”) unless the issuer (1) undergoes a cost analysis and determines that the fee is reasonably proportional to the total costs incurred by the issuer for such violation, or (2) complies with the safe harbor provisions, which provide set amounts for Penalty Fees that card issuers may charge.[2]

Previously, the safe harbor for Penalty Fees were $30 for an initial violation and $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. These thresholds were adjusted annually to reflect changes to the Consumer Price Index (“CPI”).[3]

Final Rule

Under the Final Rule, the safe harbor threshold for late fees is limited to $8 and the annual adjustments to reflect changes in the CPI no longer apply to the $8 threshold. This new threshold only applies to “Large Card Issuers,” which are card issuers that have one million or more open credit card accounts.

The new late fee safe harbor threshold does not apply to Smaller Card Issuers. To qualify as a “Smaller Card Issuer,” the issuer, together with its affiliates, must have fewer than one million “open credit card accounts” from January through December of the preceding year.[4] If an issuer has one million or more open credit card accounts at any point in the current calendar year, it loses its status as a Smaller Card Issuer.[5] If the card issuer chooses to use the Regulation Z safe harbor provisions, the late fee safe harbor threshold of $8 is applicable to the issuer starting the 60th day after it meets or exceeds the threshold.[6] It will not qualify as a Smaller Card Issuer again until it has fewer than one million open credit card accounts in an entire preceding calendar year.

For other violations, the safe harbor amounts, adjusted to reflect changes to the CPI, are now $32 for an initial violation and $43 for subsequent violations of the same type that occurs during the same billing cycle or in one of the next six billing cycles.[7] Large Card Issuers may charge Penalty Fees pursuant to these safe harbors for other violations of the terms or requirements of an account.[8]  Smaller Card Issuers may continue to charge fees, including late fees, under the current safe harbor provisions.

Alternatively, if not relying on the safe harbor provisions, a card issuer may impose penalties on consumers for violations of their credit card account if the issuer undergoes a cost analysis and determines that the fee is reasonably proportional to the total costs incurred by the issuer for such violation. However, the Final Rule provides that when determining penalty fees, card issuers may not include any collection costs incurred after an account is charged-off in accordance with loan loss provisions.[9]  These restrictions and challenges in demonstrating that the fee is reasonably proportional to the total costs incurred by the issuer for violations make it difficult for card issuers to deviate from the safe harbors.

The U.S. Chamber of Commerce (the “USCC”) indicated that it would sue “immediately” to prevent the Final Rule from going into effect, arguing that the Final Rule will result in fewer card offerings and limit access to affordable credit for many consumers.[10] On March 7, 2024, two days after the CFPB issued its Final Rule, the USCC filed a lawsuit in the Northern District of Texas seeking an injunction to stop the CFPB from implementing the Final Rule.[11] Most recently, in an order on March 18, 2024, the U.S. District Judge Mark Pittman expressed concern over the choice of venue and has ordered briefing regarding the choice to determine whether the case should be transferred to another venue.[12]

What Do I Need to Do?

Large Card Issuers should ensure that their policies, procedures, and controls are updated to ensure compliance with the Final Rule by May 14th, pending the outcome of any litigation against the CFPB challenging the Final Rule. Smaller Card Issuers should monitor the number of open accounts that they and their affiliates have to ensure that they still qualify as Smaller Card Issuers and that they are charging the correct late fee penalties depending on their status.

[1] 15 USC § 1665d(a).

[2] 12 CFR § 1026.52(b)(1).

[3] 12 CFR §1026.52(b)(1)(ii)(D).

[4] 12 CFR § 1026.52(b)(3). “Affiliate” means any company that controls, is controlled by, or is under common control with another company, as set forth in the Bank Holding Company Act of 1956 (12 U.S.C. §§ 1841 et seq.). Id. “Open credit card accounts” are credit card accounts under an open end (not home secured) consumer credit plan where either (1) the cardholder can obtain extensions of credit on the account or (2) there is an outstanding balance on the account that has not been charged off. 12 C.F.R. § 1026.52(b)(6). An account that has been suspended temporarily is considered an open credit card account. Id.

[5] 12 CFR § 1026.52(b)(3).

[6] Id.

[7] 12 CFR §1026.52(b)(1)(ii)(A), (B).

[8] 12 CFR §1026.52(b)(1)(ii).

[9] 12 CFR §1026.52(b)(1)(i), Comment 2.i

[10] U.S. Chamber of Commerce, U.S. Chamber Opposes New CFPB Credit Card Late Fees Rule That Limits Access to Affordable Consumer Credit (March 5, 2024), https://www.uschamber.com/finance/u-s-chamber-opposes-new-cfpb-credit-card-late-fees-rule-that-limits-access-to-affordable-consumer-credit.

[11] U.S. Chamber of Commerce, U.S. Chamber Files Lawsuit Against Consumer Financial Protection Bureau to Protect Credit Card Users (March 7, 2024), https://www.uschamber.com/finance/u-s-chamber-files-lawsuit-against-consumer-financial-protection-bureau-to-protect-credit-card-users.

[12] Order, Doc. 45 at 1, Mar. 18, 2024, No. 4:24-cv-00213-P, https://fingfx.thomsonreuters.com/gfx/legaldocs/dwvkeqowrvm/03192024cfpb_venue.pdf.

CFPB’s War on Mortgage Fees Continues

What Happened?

Immediately following President Biden’s State of the Union Address announcing plans to lower homebuyer and refinancing costs, the CFPB issued a blog post seeking public input on how mortgage closing costs impact consumers. The CFPB also announced that it will work to monitor closing costs and, “as necessary, issue rules and guidance to improve competition, choice and affordability.” Significantly, the CFPB also signaled that it will continue to use its supervision and enforcement tools for companies that fail to comply with the law.

Why Is It Important?

The CFPB is putting companies on notice that the Bureau will be taking a close look at the total loans costs for originating a residential mortgage loan, including origination fees, appraisal fees, credit report fees, title insurance, discount points, and other fees. In particular, the CFPB is paying “significant attention to the recent rise in discount points,” and seems concerned with the lack of competition in connection with certain fees, such as lender’s title insurance and credit reports. The CFPB also has expressed concerns with how companies may charge lender credits and fees that are financed into the loan amount (through higher interest rates or mortgage insurance payments).

While the CFPB’s blog post does not identify any specific laws, it does provide some clues. First, the Bureau is concerned that some closing costs are high and increasing due to lack of competition. According to the Bureau, “[b]orrowers are required to pay for many of the costs associated with closing a home loan but cannot pick the provider and do not benefit from the service.” Taking unreasonable advantage of the inability of a consumer to protect their interests in selecting or using a consumer financial product or service could be construed as abusive under the Dodd-Frank Act’s UDAAP statute.

Because certain fees are fixed and don’t fluctuate with the loan size or interest rate, the Bureau is concerned that such fees could disproportionately impact borrowers with smaller loans, such as low-income borrowers, first-time borrowers, or Black or Hispanic borrowers.  This could present a fair lending problem under the Equal Credit Opportunity Act. Indeed, the CFPB already has announced that, pursuant to its authority to prevent unfair, deceptive, and abusive acts or practices (“UDAAPs”), the Bureau will begin examining institutions for alleged discriminatory conduct that the Bureau deems to be unfair.

Of course, Congress passed the Dodd-Frank Act to address many of the above concerns, and the TRID Rule already attempts to ensure that consumers are provided with greater and more timely information on the nature and costs of the residential real estate settlement process and are protected from unnecessarily high settlement charges.

What Do I Need to Do?

The CFPB is sending a strong message to the industry that closing fees will be receiving scrutiny from the CFPB.  And knowing that the CFPB has been on a hiring spree in its enforcement division, now is a good time to take a close look at the fees being charged from both a UDAAP and fair lending perspective.  The team at Alston & Bird has deep knowledge on mortgage fees and is happy to assist with such a review.

CFPB and FTC Amicus Brief Signals Stance on “Pay-to-Pay” Fees under FDCPA

What Happened?

On February 27, the Consumer Finance Protection Bureau (CFPB) and the Federal Trade Commission (FTC) filed an amicus brief in the 11th Circuit case Glover and Booze v. Ocwen Loan Servicing, LLC arguing that certain convenience fees charged by mortgage servicer debt collectors are prohibited by the Fair Debt Collection Practices Act (FDCPA).  This brief comes on the heels of an amicus brief Alston & Bird LLP filed on behalf of the Mortgage Bankers Association (MBA).  In its brief, the MBA urged the 11th Circuit to uphold the legality of the fees at issue.

While litigation surrounding convenience fees has spiked in recent years, there is no consensus on whether convenience fees violate the FDCPA.  Federal courts split on the issue, as there is little guidance at the circuit court level, and the issue before the 11th Circuit is one of first impression.  Consequently, the 11th Circuit’s ruling could significantly impact what fees a debt collector is permitted to charge, both within that circuit and nationwide.

Why is it Important?

Convenience fees or what the agencies refer to as “pay-to-pay” fees are the fees charged by servicers to borrowers for the use of expedited payment methods like paying online or over the phone.  Borrowers have free alternative payment methods available (e.g., mailing a check) but choose to pay for the convenience of a faster payment method.

Section 1692f(1) of the FDCPA provides that a “debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt,” including the “collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  The CFPB and FTC argues that Section 1692f(1)’s prohibition extends to the collection of pay-to-pay fees by debt collectors unless such fees are expressly authorized by the agreement creating the debt or affirmatively authorized by law.

First, the agencies contend that pay-to-pay fees fit squarely with the provision’s prohibition on collecting “any amount” in connection with a debt and that charging this fee constitutes a “collection” under the FDCPA.  Specifically, the agencies attempt to counter Ocwen’s argument that the fees in question are not “amounts” covered by Section 1692f(1) because the provision is limited to amounts “incidental to” the underlying debt. They argue that fees need not be “incidental to” the debt in order to fall within the scope of Section 1692f(1). In making this point, the agencies claim the term “including” as used is the provision’s parenthetical suggests that the list of examples is not an exhaustive list of all the “amounts” covered by the provision.  Further, the agencies attempt to counter Ocwen’s argument that a “collection” under the FDCPA refers only to the demand for payment of an amount owed (i.e., a debt). They argue that Ocwen’s understanding of “collects” is contrary to the plain meaning of the word; rather, the scope of Section 1692f(1) is much broader and encompasses collection of any amount , not just those which are owed.

Next, focusing on the FDCPA’s exception for fees “permitted by law,” the agencies contend that a fee is not permitted by law if it is authorized by a valid contract (that implicitly authorizes the fee as a matter of state common law). The agencies suggest if such fees could be authorized by any valid agreement, the first category of collectable fees defined by Section 1692(f)(1)—those “expressly authorized by the agreement creating the debt”—would be superfluous. Lastly, the Agencies argue neither the Electronic Funds Transfer Act nor the Truth in Lending Act – the two federal laws Ocwen relies on in its argument – affirmatively authorizes pay-to-pay fees.

What Do You Need to Do?

Stay tuned. The 11th Circuit has jurisdiction over federal cases originating in Alabama, Florida, and Georgia. Its ruling is likely to have a significant impact on whether debt collectors may charge convenience fees to borrowers in those states, and it could be cited as persuasive precedent in courts nationwide.

CFPB’s Proposed Insufficient Fund Fee Rule – Narrow in Scope with Potential for Greater Impact

What Happened?

On January 24, 2024, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a proposed rule that would prohibit covered financial institutions from imposing a nonsufficient funds (NSF) fee when consumers initiate transactions that are instantaneously or near instantaneously declined (the Proposed Rule). According to the CFPB, such fees are not based on the transaction amount or processing cost and take unreasonable advantage of a consumer’s lack of understanding of the material risk, costs or conditions of the product or service. In the Preamble to the Proposed Rule, the CFPB recognizes that “currently covered financial institutions rarely charge NSF fees on covered transactions” and, thus, the “CFPB is proposing this rule primarily as a preventive measure.” With that said, the Proposed Rule is significant in that the Bureau also clarifies its approach to assessing abusive practices.

Why is it Important?

Background

In January 2022, the CFPB launched an initiative to reduce certain fees charged by banks and other companies under its jurisdiction, by issuing a Request for Information (Fee RFI) seeking public comment regarding fees that are not “subject to competitive processes that ensure fair pricing.” The CFPB continues to focus on these so-called “junk fees,” which the Bureau described in its Fee RFI, in part, as “fees that far exceed the marginal cost of the service they purport to cover, implying that companies are not just shifting costs to consumers, but rather, taking advantage of a captive relationship with the consumers to drive excess profits.” The Bureau’s attention is now on NSF fees.

The Proposed Rule

The Proposed Rule may be narrow in scope, but much broader in potential impact. It would prohibit a “financial institution” from charging an NSF fee to a consumer who attempts to withdraw, debit, pay, or transfer funds from their “account” that is declined instantaneously or near instantaneously by the “financial institution.” For purposes of the Proposed Rule, the term “account” and “financial institution” are defined consistent with Regulation E. Thus, a financial institution includes a bank, savings association, credit union, or any other person that directly or indirectly holds an account belonging to a consumer, or that issues an access device and agrees with a consumer to provide electronic fund transfer services. An account is defined equally broad to include: (i) checking, savings, or other consumer asset account held by a financial institution (directly or indirectly), including certain club accounts, established primarily for personal, family or household purposes, and (ii) a prepaid account. An account would not include, among others, escrow accounts for real estate taxes or insurance or an occasional or incidental credit balance in a credit plan. It is also worth noting that, according to the CFPB, checks and ACH transactions are not covered by the rule unless they evolve in a way to be cleared instantaneously.

While the scope of the Proposed Rule is narrow, the Bureau’s interpretation of abusiveness as articulated in the Proposed Rule is not. By way of background, Section 1031 of the Consumer Financial Protection Act (CFPA) prohibits unfair, deceptive, or abusive acts or practices (UDAAPs) under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The Proposed Rule finds that charging an NSF fee in instantaneously or near instantaneously declined transactions violates the “lack of understanding” prong of the abusiveness standard. Under the CFPB’s Policy Statement on Abusive Acts or Practices, the “lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service” concerns gaps in understanding affecting consumer decision making.

The Proposed Rule attempts to fine tune the “lack of understanding” analysis by distinguishing prior comments the Bureau made in its 2020 Payday Lending Rule, by clarifying that:

  • “[L]ack of understanding under the abusiveness standard of UDAAP is not synonymous with reasonable avoidability under the unfairness standard.”
  • Magnitude and risk of harm are distinct and should have no bearing on a “lack of understanding” analysis.
  • A consumer’s lack of understanding should not be characterized as general or specific as such framework is unhelpful in determining whether consumers understand the material risks, costs or conditions of a financial product or service.

Under the Proposed Rule, the Bureau has preliminarily determined that the charging of such fee is abusive under Section 1031(d) of the CFPA as it would take “unreasonable advantage of consumers’ lack [of] understanding of the material risks, costs, or conditions associated with their deposit accounts” and that “covered financial institutions that charge NSF fees on covered transactions would be benefiting from negative consumer outcomes that result from…a consumer’s lack of understanding.”

The Bureau summarily dismissed that such risks could be mitigated, as disclosure would be too costly, too unfeasible, and unlikely to eliminate the risk. Rather, “[d]rawing on its experience and expertise regarding consumer behavior, the CFPB believes that if a transaction entails material risks or costs and consumers derive minimum or no benefit from the transaction, it is generally reasonable to conclude that consumers who nonetheless went ahead with the transaction did not understand the material risks, costs or the conditions to those risks or costs.”

In other words, the CFPB appears to believe that no consumer would initiate a transaction knowing that they have insufficient funds and that a fee could be charged if their transaction is declined, despite the fact that (1) the vast majority of consumers have readily available access to their bank account balances, (2) such fees are generally disclosed to consumers, and (3) consumers contractually agree to pay such fees.

What Do You Need to Do?

While the Proposed Rule has limited application, the Bureau’s interpretation of the abusiveness standard could have far broader implications, as the Bureau could deem as abusive any fee which it determines provides little to no consumer benefit. For example, it is unclear what would stop the Bureau from prohibiting other fees as abusive, based on a determination that such fees provide little to no consumer benefit and that financial institutions are “benefiting from negative consumer outcomes that result from…a consumer’s lack of understanding,” given that the Bureau’s rationale appears to give little regard to consumer disclosures or contract law.

Therefore, given the potential downstream implications of the CFPB’s broad interpretation of abusiveness, companies subject to the CFPB’s jurisdiction should carefully review the Proposed Rule and consider submitting a comment letter, even if the Proposed Rule itself would not directly apply to the company. The Proposed Rule’s comment period expires on March 25, 2024.

 

CFPB Issues FCRA Advisory Opinions Addressing Background Screenings and Credit File Sharing Practices

What Happened?

On January 11, 2024, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued two separate advisory opinions interpreting consumer reporting agencies’ (“CRAs”) obligations under the Fair Credit Reporting Act (“FCRA”). First, the Bureau issued an advisory opinion on background check reports, which highlights that such reports must be complete, accurate, and free of information that is duplicative, outdated, expunged, sealed, or otherwise legally restricted from public access (the “Background Screening Opinion”). The Bureau’s second advisory opinion addresses file disclosure obligations under the FCRA, and “highlights that people are entitled to receive all information contained in their consumer file at the time they request it, along with the source or sources of the information contained within, including both the original and any intermediary or vendor source” (the “File Disclosure Opinion”).  The Bureau issued the advisory opinions to “ensure that the consumer reporting system produces accurate and reliable information and does not keep people from accessing their personal data.”

Why Is It Important?

The Background Screening Opinion

Section 607(b) of the FCRA requires that CRAs “follow reasonable procedures to assure maximum possible accuracy of the information concerning the individual about whom the report relates.” The Background Screening Opinion asserts that “[i]n many instances, background screening reports contain inaccurate information about consumers,” such as information about the wrong consumer, information that is duplicative, or that omits existing disposition information. The Bureau also found that some background screening reports “include arrests, convictions, or other court records that should not be included because they have been expunged or sealed or otherwise legally restricted from public access.”

Accordingly, the CFPB issued the Background Screening Opinion to “underscore obligations that the FCRA imposes when background screening reports are provided and used.” Specifically, the opinion affirms that CRAs must comply with their FCRA obligation to “follow reasonable procedures to assure maximum possible accuracy” under section 607(b). Specifically, the Background Screening Opinion provides that:

  • A CRA that reports public record information does not comply with section 607(b) if the CRA does not have reasonable procedures in place to ensure that the CRA:
    • does not report duplicative information or information that has been expunged, sealed, or otherwise legally restricted from public access in a manner that would prevent the user from obtaining it directly from the government entities that maintain the records, and
    • includes any existing disposition information if it reports arrests, criminal charges, eviction proceedings, or other court filings.
  • When CRAs include adverse information in consumer reports, the occurrence of the adverse event starts the running of the reporting period for adverse items under FCRA 605(a)(5), which is not restarted or reopened by the occurrence of subsequent events.
  • A non-conviction disposition (i.e., a dismissal or a similar disposition of criminal charges such as dropped charges or an acquittal) of a criminal charge cannot be reported beyond the 7-year period that begins to run at the time of the charge.

Accordingly, the Background Screening Opinion provides that CRAs “thus must ensure that they do not report adverse information beyond the reporting period” in section 605(a)(5) of the FCRA “and must at all times have reasonable procedures in place to prevent reporting of information that is duplicative or legally restricted from public access and to ensure that any existing disposition information is included if court filings are reported.”

The File Disclosure Opinion

Under the FCRA, CRAs are generally required to disclose to consumers all information in their file upon request. Specifically, section 609(a) of the FCRA provides that, upon request, a CRA must clearly and accurately disclose to the consumer “[a]ll information in the consumer’s file at the time of the request,” including the sources of the information. A “file” is defined as “all of the information on that consumer that is recorded and retained by a [CRA], regardless of how the information is stored.”

The File Disclosure Opinion clarifies that an individual requesting their files:

  • Only needs to make a request for their report and provide proper identification – they do not need to use specific language or industry jargon to be provided their complete file.
  • Must be provided their complete file with clear and accurate information that is presented in a way an average person could understand.
  • Must be provided the information in a format that will assist them in identifying inaccuracies, exercising their rights to dispute any incomplete or inaccurate information, and understanding when they are being impacted by adverse information.
  • Must be provided with the sources of the information in their file, including both the original and any intermediary or vendor source or sources.

What Do You Need to Do?

These advisory opinions follow President Biden’s October, 2023 Executive Order on the Safe, Secure and Trustworthy Development and Use of Artificial Intelligence (the “EO”).  Among other obligations, the EO encourages the CFPB to consider using its authority to use appropriate technologies including AI tools to ensure compliance with FCRA to address discrimination against protected groups.  These advisory opinions serve as a reminder of the importance of ensuring compliance with the FCRA, and that the use of data can lead to discriminatory outcomes under Federal law.