| Of Interest

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 60^th 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 14^th, 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.

A&B Abstract:

The Summer 2019 edition of the CFPB’s Supervisory Highlights indicates recent examination focuses for several categories of consumer credit products.

CFPB Issues New Edition of Supervisory Highlights

On September 19, the Consumer Financial Protection Bureau (“CFPB”) issued the Summer 2019 edition of Supervisory Highlights, detailing examination findings relating to automobile loan origination, credit card account management, debt collection, credit reporting, and mortgage origination.

Automobile Loan Origination

In the auto loan origination context, the CFPB discusses when the selling of add-on guaranteed asset protection (“GAP”) products may constitute an abusive act or practice as prohibited under the Consumer Financial Protection Act. (In the event of theft of or damage to a vehicle, GAP products cover the difference between the amount the consumer owes on an auto loan and the amount received from the insurer.) Specifically, the CFPB indicates that the selling of GAP products to consumers with a low LTV may be an abusive practice, as such consumers are unlikely to benefit from the product.

Credit Card Account Management

The Supervisory Highlights focuses on four sets of practices in connection with credit cards:

Failure to provide clear and conspicuous disclosures for certain pricing terms in online advertisements;
Disclosures required under Regulation Z in order for a credit card issuer to obtain or enforce a consensual security interest in funds that a consumer has on deposit with the issuer in order to offset credit card debt;
The use of deceptive threats of repossession or foreclosure in credit card collections; and
Deceptive acts and practices in the marketing of secured credit card accounts.

Debt Collection

In the debt collection context, the CFPB reports examination findings that debt collectors have claimed and collected from consumers “interest not authorized by the underlying contracts between the debt collectors and the creditors.” By misrepresenting the amount due on a debt, such conduct violate Section 807 of the Fair Debt Collection Practices Act.

Furnishing

The Supervisory Highlights includes five sets of findings relating to the furnishing of consumer information to consumer reporting companies (“CRCs”). Specifically, CFPB examiners identified failures of furnishers to:

timely conduct an investigation of, or respond to, notice of a dispute from CRC, in violation of Section 623(b)(1) of the Fair Credit Reporting Act;
report the results of dispute investigations to all CRCs to which they provided information about consumers;
promptly correct and update information previously furnished to a CRC that is incomplete or inaccurate;
provide notice to CRCs in connection with the reporting of information whose accuracy or completeness is disputed by a consumer; and
implement reasonable policies and procedures regarding the accuracy and integrity of information relating to consumers that is furnished to CRCs.

Mortgage Origination

Finally, the Supervisory Highlights discusses examination findings relating to the inaccurate disclosure of APR and total annual loan cost information for closed-end reverse mortgage transactions, in violation of Regulation Z.

Takeaway

Each edition of the Supervisory Highlights provides related industries a glimpse into the Bureau’s current examination priorities. Entities should take the opportunity to review the issues discussed above, as applicable to their business practices, to help ensure their own compliance with federal laws and regulations.