Mar 29 -- The Consumer Financial Protection Bureau (Bureau) proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA. The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; provide that the current provision that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the late fee safe harbor amount; and provide that late fee amounts must not exceed 25 percent of the required payment. Comments should be received on or before May 3, 2023.
The Bureau proposes to amend provisions in § 1026.52(b) and its accompanying commentary as they relate to credit card late fees. Currently, under § 1026.52(b)(1), a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end consumer credit plan, such as a late payment, exceeding the credit limit, or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 1026.52(b)(1)(i) or complies with the safe harbor provisions set forth in § 1026.52(b)(1)(ii). Section 1026.52(b)(1)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $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.
The Bureau is concerned that (1) the safe harbor dollar amounts for late fees currently set forth in § 1026.52(b)(1)(ii) are not reasonable and proportional to the omission or violation to which the fee relates; (2) the current higher safe harbor threshold for late fees for subsequent violations of the same type in the same billing cycle or in one of the next six billing cycles is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with the consumers' ability to make future payments on the account; and (3) additional restrictions on late fees may be needed to ensure that late fees are reasonable and proportional. Because late fees are by far the most prevalent penalty fees charged by card issuers and the Bureau's current data primarily relates to late fees, the Bureau's proposed changes to the restrictions in § 1026.52(b) are limited to late fees at this time, although the Bureau seeks comments on whether the proposed amendments should apply to other penalty fees.
The proposal would amend § 1026.52(b) and its accompanying commentary to help ensure that late fees are reasonable and proportional. First, the proposal would amend § 1026.52(b)(1)(ii) to lower the safe harbor dollar amount for late fees to $8 and to no longer apply to late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles. Second, the proposal would provide that the current provision in § 1026.52(b)(1)(ii)(D) that provides for annual inflation adjustments for the safe harbor dollar amounts would not apply to the safe harbor amount for late fees.
Third, the proposal would amend § 1026.52(b)(2)(i)(A) to provide that late fee amounts must not exceed 25 percent of the required payment; currently, late fee amounts must not exceed 100 percent. The proposal also would amend comments 7(b)(11)-4, 52(a)(1)-1.i and iv, and 60(a)(2)-5.ii to revise current examples of late fee amounts to be consistent with the proposed $8 safe harbor late fee amount discussed above. The Bureau also solicits comment on whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 calendar days following the due date. In addition, the Bureau seeks comment on whether, as a condition of using the safe harbor for late fees, it may be appropriate to require card issuers to offer automatic payment options (such as for the minimum payment amount), or to provide notification of the payment due date within a certain number of days prior to the due date, or both.
The Bureau proposes one clarification that would apply to penalty fees generally. Specifically, the proposal would amend comment 52(b)(1)(i)-2.i to clarify that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. In addition, the Bureau solicits comment on several issues related to penalty fees generally. First, the Bureau solicits comment on whether the same or similar changes described above should be applied to other penalty fees, such as over-the-limit fees, returned-payment fees, and declined access check fees, or in the alternative, whether the Bureau should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees.
Second, the Bureau solicits comment on whether instead of revising the safe harbor provisions set forth in § 1026.52(b)(1)(ii) as they apply to late fees as discussed above, the Bureau should instead eliminate the safe harbor provisions in § 1026.52(b)(1)(ii) for late fees or should instead eliminate the safe harbor for all penalty fees, including late fees, over-the-limit fees, returned-payment fees, and declined access check fees. If the safe harbor provisions were eliminated, card issuers would need to use the cost analysis provisions set forth in § 1026.52(b)(1)(i) to determine the amount of the penalty fees (subject to the limitations in § 1026.52(b)(2)). The Bureau also solicits comment on whether, in that event, the cost analysis provisions would need to be amended and, if so, how.
Feb 1 -- CFPB Proposes Rule to Rein in Excessive Credit Card Late Fees: Proposed rule seeks to close loophole exploited by companies to hike fees with inflation [press release]
Today, the Consumer Financial Protection Bureau (CFPB) proposed a rule to curb excessive credit card late fees that cost American families about $12 billion each year. Major credit card issuers continue to profit off late fees that are protected by an expansive immunity provision. Credit card companies have also relied on this provision to hike fees with inflation, even if they face no additional collection costs. The proposed rule would help ensure that over the top late fee amounts are illegal. Based on the CFPB’s estimates, the proposal could reduce late fees by as much as $9 billion per year. . . .
When someone misses a payment due date, even if they paid a few hours after the deadline, the cardholder may be hit with an exorbitant late fee that far exceeds the credit card company’s costs to collect late payments. These excessive late fees may not be needed to deter late payments, nor be justified based on the consumer’s conduct in paying late. These late fees also may be on top of other consequences of paying late, such as a lost grace period on paying interest or a lower credit score, depending on how long the missed payment lasts.
Companies currently charge people as much as $41 for each missed payment, and these fees result in billions of dollars in annual junk fee revenue for credit card companies. The CFPB’s proposed changes, which would amend regulations implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), would ensure that late fees meet the Act’s requirement to be “reasonable and proportional” to the costs incurred by issuers to handle late payments. Specifically, the proposed rule would lower the immunity provision for late fees to $8 for a missed payment as well as end the automatic annual inflation adjustment. The proposed rule would also ban late fee amounts above 25% of the consumer’s required payment.
The Federal Reserve Board, by regulation, created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard. Over time, those provisions have risen with inflation to $30 for an initial late payment and $41 for subsequent late payments. The CFPB estimates that the income generated by the largest issuers from late fees is approximately five times greater than the collection costs that the companies incur for late payment violations. In 2020, for example, credit card companies charged approximately $12 billion in late fees, which represented more than 10% of all credit card interest and fees charged to consumers.
Today’s proposed rule follows a request for comment on junk fees, a research report, and an advance notice of proposed rulemaking on credit card late fees that the CFPB issued last year. The CFPB’s proposed changes would, if finalized:
Lower the immunity provision dollar amount for late fees to $8: The CFPB has preliminarily found that late fee income exceeds associated collection costs by a factor of five. Because the immunity provision currently allows issuers to charge late fees of up to $41, the CFPB believes that a late fee of $8 would be sufficient for most issuers to cover collection costs incurred as a result of late payments. The $8 immunity provision would apply to any missed payment. Companies would be able to charge above the immunity provision so long as they could prove the higher fee is necessary to cover their incurred collection costs.
End the automatic annual inflation adjustment: The CFPB’s proposal would eliminate the automatic annual inflation adjustment for the immunity provision amount. This adjustment is not required by law, nor is it necessarily reflective of how collection costs change over time. The CFPB would instead monitor market conditions and the immunity provision amount for potential adjustments as necessary.
Cap late fees at 25% of the required minimum payment: The current rule allows a card issuer to potentially charge a late fee that is 100% of the minimum payment owed by the cardholder. The CFPB proposes to restrict any late fee charge to 25% of the minimum payment to be more consistent with Congress’s intent to authorize only reasonable and proportional late fee amounts.
The proposal also seeks comment on other potential changes to CARD Act regulations. For instance, it requests comment on whether the CFPB’s proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.
Proposed Rule: https://www.consumerfinance.gov/rules-policy/notice-opportunities-comment/credit-card-penalty-fees-regulation-z/
Comments must be received on or before April 3, 2023, or within 30 days after publication of the Notice of Proposed Rulemaking in the Federal Register, whichever is later.
News release: https://www.consumerfinance.gov/about-us/newsroom/cfpb-proposes-rule-to-rein-in-excessive-credit-card-late-fees/