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Thompson Hine LLP, a full-service business law firm with approximately 400 lawyers in 8 offices, was ranked number 1 in the category “Most innovative North American law firms: New working models” by The Financial Times and was 1 of 7 firms shortlisted for The American Lawyer’s inaugural Legal Services Innovation Award. The firm has been recognized by the National Law Journal as a Legal Technology Trailblazer and featured by Bloomberg for its innovative service delivery models, which drive accuracy and predictability. The firm’s commitment to innovation is embodied in Thompson Hine SmartPaTHTM – a smarter way to work – predictable, efficient and aligned with client goals. For more information, please visit ThompsonHine.com and ThompsonHine.com/SmartPaTH.

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On March 5, the Consumer Financial Protection Bureau (CFPB) issued the Credit Card Penalty Fees Final Rule (Final Rule), which amends Regulation Z, the Truth in Lending Act’s (TILA) implementing regulation, to reduce the late fee safe harbor threshold for large credit card issuers.

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Presently, card issuers of all sizes may impose fees based on the costs the card issuer incurs<a> </a>when a consumer violates the account terms, but most opt to impose fees under the regulatory safe harbor. Pursuant to that safe harbor, the card issuer may charge $30 for the first violation, $41 if the card issuer has previously imposed a fee for a violation of the same type that occurred during the same billing cycle or one of the next six billing cycles, or 3% of the delinquent balance on a credit card account that requires payment of the balance in full at the end of each billing cycle if the card issuer has not received the required balance for two or more consecutive billing cycles.

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The Final Rule differentiates between large and smaller card issuers. For large card issuers, the Final Rule caps late fees at $8 per month. For large card issuers charging fees for “other types of violations” and for smaller card issuers charging late fees or other fees, the Final Rule amends the safe harbor to $32, and then $43 if the card issuer has previously imposed a fee for a violation of the same type that occurred during the same billing cycle or one of the next six billing cycles, or 3% of the delinquent balance on a credit card account that requires payment of the balance in full at the end of each billing cycle if the card issuer has not received the required balance for two or more consecutive billing cycles. Stated differently, the Final Rule caps late fees for large card issuers at $8 per month while increasing the late fees that smaller card issuers could charge under the applicable safe harbor provisions. And although the regulation states that the CFPB will adjust the fee amount for “other violations” based on annual changes in the Consumer Price Index, no such requirement exists for the $8 late fee safe harbor.

The U.S. Supreme Court heard oral arguments in October 2023 in a case to determine whether the CFPB’s funding structure is constitutional, and critics of the CFPB submit that this pending decision is justification alone to stay implementation of the Final Rule.

On March 7, the U.S. Chamber of Commerce and bank trade groups sued the CFPB in the U.S. District Court for the Northern District of Texas, alleging that the CFPB’s funding structure is unconstitutional; the Final Rule only considers a subset of card issuers’ costs in setting late fees and fails to sufficiently consider costs to consumers such as the potential reduced access to credit in violation of the CARD and Dodd-Frank Acts; the Final Rule is arbitrary and capricious for a number of reasons, including its failure to explain why the late fee safe harbor should depend on the number of accounts opened by the card issuer or why adjustments for inflation should apply to the safe harbor for smaller card issuers but not larger ones; the CFPB violated the Administrative Procedures Act by basing the Final Rule on a subset of data that was not made publicly available; and the CFPB violated TILA, which requires that new consumer-credit disclosures have a six-month effective date, whereas the Final Rule takes effect in 60 days.

On the other hand, President Biden touted the Final Rule in his State of the Union address, saying, “My administration just announced we’re cutting credit card late fees from $33 to $8,” and, “I’m saving American families $20 billion a year with all the junk fees I’m eliminating.”

Although some industry participants anticipate that litigation challenges may delay the Final Rule’s implementation, financial institutions cannot be caught flat-footed and are rightfully seeking guidance to prepare for implementation of the operational changes required to comply with the Final Rule. We recommend that financial institutions seek advice regarding the implementation of all regulatory amendments and work with their internal business operations, compliance, finance, risk, and regulatory units to ensure compliance.

<em>This advisory bulletin may be reproduced, in whole or in part, with the prior permission of Thompson Hine LLP and acknowledgment of its source and copyright. This publication is intended to inform clients about legal matters of current interest. It is not intended as legal advice. Readers should not act upon the information contained in it without professional counsel.</em>

<em>This document may be considered attorney advertising in some jurisdictions.</em>

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CFPB Issues Final Rule on Credit Card Penalty Fees Under Reg Z

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