Should Banks Bow to the CFPB’s $8 Credit Card Late Fee, or Wait on the Courts (and the Election)?

In just two days, CFPB's final rule on credit card late payment fees became an applause point in President Biden's State of the Union attack on 'junk fees' — and the subject of a lawsuit in the same district that sent the CFPB funding issue to the U.S. Supreme Court. How should banks respond?

Bank credit card late fees have become a small but significant presidential campaign issue, even as overdraft fees are waiting in the wings.

Many voters may not feel a personal stake in many of the issues that dominate the political headlines each day, but most people do use credit cards and bank accounts. Credit card and overdraft issues fit neatly into President Joe Biden’s declared war on “junk fees.” And Biden has painted the Republicans as being in the banking industry’s corner. The President bragged in his address on March 7 that his administration had reduced down credit card late fees from “the current average of $32 down to $8.”

Actually, the ink was barely dry on the final regulation issued March 5 by the Consumer Financial Protection Bureau and it won’t be effective until two months after publication in the Federal Register. (The rule has since been published. In the absence of other action, it will become effective May 14.)

So Biden was a bit preliminary and opportunistic. And possibly even jumping the gun on the rule ever becoming effective.

On March 7, only hours before the President would in his address be citing the rule as one of the many things his administration has done for the common people, banking organizations filed suit in federal court to put the brakes on the final regulation. Some believed that the court might put an injunction on the rule right away. [In the event there was a series of surprises instead. See the update at the end of this article.]

Meanwhile, the House Financial Services Subcommittee on Financial Institutions and Monetary Policy, chaired by Kentucky Republican Andy Barr, held a hearing on March 7 focused on the alleged politicization of financial regulation. [Dig Deeper: Trends 2024: Prepare for Disruptive Activism from a Politicized CFPB]

In an opening statement, Barr charged that “the Biden administration is using would-be ‘independent’ regulators as political agents to circumvent Congress and drive leftist transformations in financial regulation to the detriment of consumers and communities.”

“The CFPB’s credit card late fees rulemaking represents the CFPB attempting to deliver a short-term bump in the polls for an administration desperate for a political win,” testified Lindsey Johnson, president and CEO of the Consumer Bankers Association. “The rulemaking is procedurally deficient and is based on a false portrayal of the CFPB’s own data. Most importantly, it would ultimately harm far more consumers than it purports to help.”

CFPB itself maintains a junk fees topic page on its website that contains links to many actions taken in relation to the matter plus related resources. This is a big deal for Rohit Chopra, CFPB’s director.

What CFPB Did With Credit Card Late Fees

The final rule on credit card late fees issued by the Consumer Financial Protection Bureau on March 5 did not by itself impose limitations on these fees. That has been in place since the Credit Card Accountability Responsibility and Disclosure Act of 2009 required the Federal Reserve to issue rules on late charges.

The framework of the Fed rule, which provided for adjustments, currently allows charges of up to $30 and up to $41 for subsequent late payments. (When introduced in 2010, the limits were $25 and $35, with periodic adjustments for inflation.) When the CFPB came into being under the Dodd-Frank Act of 2010, the new bureau inherited many Fed rules and responsibilities, including card regulation.

The bureau has now imposed a new ceiling of $8 per late payment. Institutions can, under the new rule, charge more, but they can only do so if they can demonstrate that the actual costs to the card issuer come to more than $8.

Observers note that the final rule differs little from the proposed rule, published in March 2023, in spite of tens of thousands of comments filed by consumers, consumerist organizations and banking interests. Industry association comments ran for dozens of single-spaced pages.

The new rules don’t apply to all card issuers. The rule as finalized would apply only to larger issuers, defined as those with at least 1 million open cardholder accounts. This accounts for the top 35 credit card issuers in the U.S., according to banking attorney Alan Kaplinsky of Ballard Spahr. There are roughly 3,900 bank and credit union issuers.

Kaplinsky believes this discrepancy in impact among card issuers will prove a major weakness in the CFPB’s arguments when the lawsuit is litigated. He says that this approach is based on the belief that smaller issuers charge lower late fees. However, a detailed research paper of March 8 from the Bank Policy Institute, a large bank organization, suggests that the bureau reached “simplistic and misleading conclusions about pricing disparities” in its analysis.

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Card Issuers’ Conundrum: Act on the New Rule or Sit Tight?

Even though the rule set a short, 60-day deadline for implementation of the new fees, ” I am advising clients not to do anything yet,” says Alan Kaplinsky, a veteran CFPB watcher. He is senior counsel of Ballard Spahr’s Consumer Financial Services Group, and its former practice group leader.

Nonetheless, Andrew Davidson, senior vice president and chief insights officer at Comperemedia, a Mintel company, notes that some card issuers had already amended their credit card late fees, in anticipation of the rule. For example, One Main, which specializes in cards for subprime customers, began promoting an $8 late fee, cut from as much as $40, on its BrightWay card in November 2023, when the CFPB’s then-proposed rule was still pending.

Even if the lawsuit ultimately fails and the rule goes into effect, possibly with a delay due to legal developments, Davidson doesn’t see banks’ income going away. “Card issuers will just source this revenue from somewhere else,” he says. “They’re not going to give it up.”

Indeed, both Johnson’s testimony for CBA and the brief filed in the banking associations’ lawsuit explicitly predict that while the rule will provide relief for consumers who pay late, the pain will be shifted through other pricing onto people who pay on time.

Davidson notes that a couple of larger issuers have started charging for paper statements in anticipation of the rule going through. Capital One has increased balance transfer fees to 4% from 3%. He suspects these measures are beginning of card issuers’ strategies for making up lost fee revenue.

Davidson doubts that card issuers will hike interest rates, as they have already risen substantially in the wake of the Federal Reserve’s inflation fight. But he does think that as the Fed eases off and the Fed funds rate and the prime rate begin to come down, card issuers will drop their rates more slowly than they otherwise would have.

Read more:

Seeking to Torpedo CFPB’s Final Rule in Federal Court

The lawsuit challenging the fee cap was filed by the U.S Chamber of Commerce and affiliated groups and two banking associations, including the American Bankers Association and the Consumer Bankers Association in the U.S. District Court for the Northern District of Texas.

Why in Texas and not in Washington or in New York or California? Kaplinsky explains that the northern Texas federal district court is seen as a conservative venue, where the request that the final rule be killed might get a favorable reaction. He adds that if, and likely when, the lawsuit is appealed, the Fifth Circuit Court of Appeals has a similar reputation. And much to the point, the appeals case currently before the U.S. Supreme Court concerning the CFPB’s funding mechanism — Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau — originated from this conservative appeals court.

The plaintiffs’ complaint against the CFPB runs for 42 detailed pages, plus a request for a preliminary injunction pausing the final rule.

Among the points made in the brief:

• CFPB ignored the deterrent effect of late charges in its rule, despite “the overwhelming weight of empirical evidence relating to the deterrent effect of fees.”

• The overall tone of the final rule suggests there are no grounds on which the CFPB would find late fees higher than $8 acceptable.

• Much of the research underlying the pricing analysis that led to the $8 level comes from non-public data. Specifically, CFPB drew it from bank holding company reports filed with the Federal Reserve. The data is based on a section that is not intended to be a scientific gathering of cost information. The brief says that the instructions for the form are ambiguous and that respondents’ answers tend to be inconsistent.

• In addition, the dataset just mentioned covers 2016-2022, “a period of relatively low credit card delinquency.”

Update: In an official order responding to the trade groups’ filing, Judge Mark Pittman of the Northern District, who is presiding over the case, questioned whether either the Northern District or its Fort Wayne division were appropriate venues for the matter. He gave the plaintiffs a March 21 deadline to respond to his concern, and CFPB until the end of the court’s day on March 25 to respond to that filing.

“The Court is weary that there appears to be an attenuated nexus to the Fort Worth Division, given only one plaintiff of the six in this matter has even a remote tie to the Fort Worth Division,” wrote Judge Pittman. He said that he would decide whether the case should be moved to another venue after seeing the two parties’ responses.

In a LinkedIn post Alan Kaplinsky called the judge’s move “a curveball,” something the trade groups clearly weren’t expecting.

In a subsequent filing, the trade groups requested that the judge rule on the request for a preliminary injunction before ruling on the venue issue. On March 20 Judge Pittman denied that request.

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