Credit card companies are getting ready for a fight over the Consumer Financial Protection Bureau's plan to cut credit card late fees to $8 from the current rate of between $31 and $40 — a move that could wipe out 75% of annual bank earnings from late fees.
Trade groups have already said they
"They should all sue," said Alan Kaplinsky, senior counsel at the law firm Ballard Spahr. "If the CFPB were acting properly, they would decide not to finalize any regulation until after the Supreme Court has decided the case early next year. All the final rules — and that includes the credit card late fee regulation — should be put on ice."
That argument is bolstered by a
"We have an administrative force that's out there that's moving forward in a very specific direction, regardless of the eventual outcomes," said Ed Groshans, senior policy and research analyst at Compass Point Research & Trading. "It's almost this type of spaghetti-making machine where they're just throwing as much stuff against the wall to see what sticks."
The CFPB's proposal would make several major changes. It reduces the late fee 'safe harbor' amount to a flat $8, compared to the current maximum of $30 for a first violation and $41 for subsequent violations. Credit card companies that set fees at or below the $8 safe harbor are protected from legal liability.
Those with late fees above $8 would have to show the CFPB their costs and losses associated with late payments to justify charging a higher amount. The CFPB's plan also would put an end to the automatic annual inflation adjustments for late payments, and would cap the late fee amount at 25% of the minimum payment. Technically, the CFPB will amend Regulation Z that implements the Truth in Lending Act.
CFPB Director Rohit Chopra has said the bureau wants to close a "regulatory loophole," that he claims has allowed credit card companies to charge "excessive" late fees for more than a decade. The issue is particularly timely given that consumers are borrowing heavily on their credit cards, driving balances up 17% in the first quarter, the highest pace in 20 years. Credit card balances stood at nearly $1 trillion at the end of the first quarter, up from about $840 billion one year earlier, according to a
Credit card companies plan to argue that the rule should be invalidated entirely because the CFPB skirted regulatory requirements before issuing its proposal. Some trade groups point to what they claim is political interference or bias, arguing that the CFPB worked hand-in-hand with the White House on the rule.
Trade groups point to President Biden's State of the Union Address in February, when he spoke as though the CFPB's rule had already gone into effect, saying, "[We are] cutting credit card late fees by 75 percent, from $30 to $8." Trade groups also claim that CFPB Director Rohit Chopra coordinated with the White House on the Biden Administration's campaign to eliminate so-called
The American Financial Services Association, whose members include large credit card companies and banks, has argued that Chopra "revealed the lack of an open mind," on the late fee rule by siding with the White House.
"Directives from the White House and CFPB statements made with this proposed rule's release are strong evidence that this proposed rule was not developed by an open-minded decision maker," said Celia Winslow, a senior vice president at the AFSA.
In response, a spokesman for the CFPB said that the bureau "will carefully consider all relevant feedback and data before making any decisions about a final rule. Allegations that the agency has already made final decisions are ungrounded and outright incorrect."
Industry plans to argue that the CFPB violated a relatively obscure federal rule, the Administrative Procedure Act, which prohibits federal rules from being enacted that are "arbitrary and capricious." But other experts think the industry has a high bar to prove that the bureau erred in issuing the rule.
Some industry experts think the best argument to overturn a final rule is that the CFPB failed to convene a
"I think the industry wins the first round of lawsuits because the CFPB did not do a small business review," Groshans said.
Other experts think the industry will have a hard time proving small credit card issuers are severely impacted.
One of the CFPB's core arguments is that it is upholding the Credit Card Accountability Responsibility and Disclosure Act of 2009, which requires that late fees be "reasonable and proportional."
The CFPB has solicited public feedback and data from credit card issuers through an Advance Notice of Proposed Rulemaking on credit card
Credit card issuers also plan to argue that the CFPB failed to take into account all the costs associated with collection efforts and lacked research to support dropping the safe harbor limit to $8. Small banks and credit unions have said the agency's analysis is flawed because it specifically excluded losses on charged-off accounts. The CFPB and
The U.S. Chamber of Commerce and bank trade groups also claim the CFPB has misinterpreted the CARD Act by only focusing on the costs of collecting on late payers. They claim the CFPB is trying to override language in the CARD Act that allows late fees to serve as both a deterrence, keeping consumers from paying late, and as a penalty to the cardholder. But Chopra has countered by saying the CARD Act was never intended to allow issuers to reap big profits."
"We do see that in some instances a card issuer can build a business model where it's very profitable to have customers be late and that's the sentiment that the CARD Act really sought to get out of the market," Chopra recently
Kaplinsky said the CFPB is "under pressure from the White House" to finish the late fee rule. He predicts the bureau will continue to be sued as industry tries to stop final rules from going into effect while the Supreme Court case is ongoing.
"Ironically, the Supreme Court fight is over the CFPB's funding, and they're going to be using a lot of that money to defend all these lawsuits, which seems like a waste of time."
