Consumer Financial Protection Bureau Releases Final Rule on Credit Card Late Fees, with Overdraft Fees on Deck

Final Rule Cuts Credit Card Late Fees by More Than Two Thirds

On March 5, 2024, the Consumer Financial Protection Bureau (Bureau) announced the final rule governing late fees for consumer credit card payments, likely cutting the average fee from $32 to just $8.¹ The Bureau estimates the change will limit late fees for more than 95% of all outstanding balances in the credit card market.²

The rule operates by changing a safe harbor provision in Regulation Z for the pricing of late fee amounts for larger credit card issuers. Regulation Z implements the Truth in Lending Act, as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), and regulates the amounts any credit card issuer can charge for penalty fees, including late fees. Previously, larger credit card issuers could take advantage of the safe harbor to charge up to $30 for the first late payment and up to $41 for any subsequent late payment within the next six billing cycles, subject to an annual inflation adjustment.³ For larger credit card issuers, the Bureau’s rule cuts the safe harbor amount to $8. The Bureau estimates that the rule will save $10 billion per year for consumers, or about $220 per year for the 45 million people who are charged late fees.⁴ The National Consumer Law Center praises the rule and the impact it will have on consumers.⁵ The rule is fiercely opposed by financial-services industry trade groups, which have filed a lawsuit challenging the rule on a number of grounds.

Under the final rule, a larger credit card issuer is any issuer that, together with its affiliates, has one million or more open consumer credit card accounts.⁶ If larger credit card issuers want to charge a higher late fee amount than $8, they must comply with the alternative to the safe harbor under Regulation Z for pricing penalty fee amounts.⁷ Under the alternative, credit card issuers must price the particular penalty fee amount pursuant to an analysis of what would be a “reasonable proportion of total cost incurred as a result of the violation” assessed either for all accounts of the credit card issuer or accounts on a portfolio-by-portfolio basis, annually refresh such analysis, and lower the respective penalty fee amount when the updated analysis shows that costs have decreased.⁸ The rule also updates what types of costs can be included in any such analysis.⁹ To date, the vast majority of consumer credit card issuers rely on Regulation Z’s safe harbor for the pricing of their penalty fee amounts, including late fees, rather than the alternative that has more regulatory uncertainty.

For other types of penalty fees (e.g., returned payment fees), larger credit card issuers may take advantage of the more general safe harbor regime for penalty fees, which permits significantly higher fee amounts. As updated by the rule for inflation, this regime generally permits credit card issuers to charge up to $32 for the first violation of the terms of a consumer’s credit card agreement and up to $41 for any subsequent violation within the same billing cycle and the next six billing cycles.¹⁰ Such amounts are subject to an annual inflation adjustment.¹¹ Smaller credit card issuers may take advantage of the amounts permitted under the more general safe harbor regime for any type of penalty fee, including late fees.¹²

In support of the rulemaking, the Bureau relies on an analysis of Y-14M data collected by the Board of Governors of the Federal Reserve System.¹³ The Y-14M data is collected from bank holding companies with total consolidated assets greater than $50 billion and is used by the Federal Reserve Board for supervisory stress test models.¹⁴ Such information is not publicly available. In their analysis, the Bureau found that “revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.”¹⁵

The rule has an effective date of 60 days after publication in the Federal Register.¹⁶

Industry Challenge and Opposition to Credit Card Late Fee Rule

On March 7, 2024, two days after the final rule was announced, the Chamber of Commerce, the American Bankers Association (ABA), the Consumer Bankers Association, and the Texas Association of Business (Associations) sued the Bureau in the U.S. District Court for the Northern District of Texas.¹⁷ The lawsuit challenges the rule on a number of grounds. In addition to requesting that the court vacate the rule, the complaint requests that implementation of the rule be stayed pending resolution of the lawsuit.¹⁸ The Associations filed a motion for preliminary injunction to that effect on the same day.¹⁹

As concerns the substance of the challenge, the Associations’ arguments include these: 

• The Bureau’s funding structure is unconstitutional, which is already an issue pending before the U.S. Supreme Court.
• The rule violates the CARD Act by not considering, or not allowing consideration of, certain costs when determining permissible late fee amounts.
• The rulemaking process violates the Dodd-Frank Wall Street Reform and Consumer Protection Act by not considering the cost to consumers of reduced access to credit.
• The rulemaking process violates the Administrative Procedure Act because the Bureau did not reasonably and rationally explain its decisions or base its decisions on substantial evidence.
• The rulemaking process violates the Administrative Procedure Act because the Bureau did not make available the Y-14M data that was the basis of the Bureau’s conclusions.
• The rule violates the Truth in Lending Act by having an effective date of 60 days from publication in the Federal Register.²⁰

Apart from the lawsuit, the ABA warns that the rule will “not only reduce competition and increase the cost of credit, but will also result in more late payments, higher debt, lower credit scores and reduced credit access for those who need it most.”²¹ The Bank Policy Institute similarly asserts that the rule will force consumers who pay on time to pay more and make it more difficult for low- and moderate-income consumers to access credit.²²

Looking Ahead: Proposed Rule on Overdraft Fees

Despite the pushback, the Bureau is looking to continue its fight against so-called junk fees with a proposed rule on overdraft fees. The proposed rule, released on January 17, 2024, would limit the overdraft fees large financial institutions can charge by narrowing an exception in Regulation Z for overdrafts that were not previously agreed to in writing.²³ In Regulation Z, such overdraft fees are excluded from the definition of a finance charge.²⁴ For decades, banks have been able to offer overdraft services pursuant to the exception without making the required disclosures and protections for credit under Regulation Z. Banks have already come out against the Bureau’s proposed action, explaining that it will make it significantly harder for banks to offer overdraft protection to consumers.²⁵

Under the proposed rule, a larger financial institution is any insured depository institution or credit union that, together with its affiliates, has more than $10 billion in assets.²⁶ The proposed rule would subject any overdraft fee of a larger financial institution that is in excess of a “break-even” threshold to Regulation Z’s open-end credit provisions and credit card provisions if an overdraft can be obtained through the use of an access device, such as a card.²⁷ For overdrafts subject to regulation under Regulation Z’s credit card provisions, these requirements include conducting an ability-to-pay analysis before extending credit and providing application as well as account-opening disclosures.²⁸ Further, the proposed rule would require nonexempt overdraft fees to be managed in a separate credit account and would apply the prohibition on conditioning an extension of credit on a preauthorized transfer pursuant to Regulation E, which implements the Electronic Fund Transfers Act.²⁹ As a practical matter, it seems that these compliance requirements will severely restrict overdraft fees in excess of break-even amounts by larger financial institutions and may effectively eliminate such fees in the market — which is likely the intent of the Bureau.

Instead of complying with requirements applicable to open-end accounts and credit cards, larger financial institutions will be able price their overdraft fees to ensure they are break-even in one of two ways.³⁰ These two options have similarities with the two methods for pricing credit card penalty fees discussed above. Under the overdraft rule, larger financial institutions could charge up to the amount of a fee established as a safe harbor by Regulation Z. The Bureau is considering setting the safe harbor overdraft fee amount at $3, $6, $7, or $14 and is seeking comment on the appropriate amount.³¹ Currently, the Bureau estimates a typical overdraft fee is $35.³² Alternatively, larger financial institutions could calculate their own total direct costs and charge-off losses for providing nonexempt overdrafts in the previous year and calculate a pro rata fee amount pursuant to standards that will be provided by Regulation Z.³³

The rule is open for comment until April 1, 2024.³⁴

¹ Consumer Financial Protection Bureau, Credit Card Penalty Fees (Regulation Z) (March 5, 2024), available here.

² Id.

³ Id.

⁴ Id.

⁵ National Consumer Law Center, “CFPB Rule Prohibiting Excessive Credit Card Late Charges Will Save Consumers Billions in Junk Fees” (March 5, 2024), available here.

⁶ Consumer Financial Protection Bureau, Credit Card Penalty Fees (Regulation Z) (March 5, 2024), available here.

⁷ Id.

⁸ Regulation Z, 12 C.F.R. § 1026.52(b)(1)(i).

⁹ Consumer Financial Protection Bureau, Credit Card Penalty Fees (Regulation Z) (March 5, 2024), available here.

¹⁰ Id.

¹¹ Id.

¹² Id.

¹³ Id.

¹⁴ Id.

¹⁵ Id.

¹⁶ Id.

¹⁷ Complaint, Chamber of Commerce of the United States of America, et. al. v. Consumer Financial Protection Bureau, et. al., (N.D. Tex. Mar. 7, 2024) (No. 4:24-CV-213). Available here.

¹⁸ Id.

¹⁹ Motion for Preliminary Injunction, Chamber of Commerce of the United States of America, et. al. v. Consumer Financial Protection Bureau, et. al. (N.D. Tex. Mar. 7, 2024) (No. 4:24-CV-213), ECF No. 3.

²⁰ Id.

²¹ American Bankers Association, “ABA Statement on CFPB’s Final Credit Card Late Fee Rule” (March 5, 2024), available here.

²² Bank Policy Institute, “CFPB Finalizes Rule to Increase Costs for Responsible Consumers that Pay Bills on Time” (March 5, 2024), available here.

²³ Consumer Financial Protection Bureau, Overdraft Lending: Very Large Financial Institutions (January 17, 2024), available here.

²⁴ Regulation Z, 12 C.F.R. § 1026.4(c)(3).

²⁵ American Bankers Association, “ABA Statement on CFPB’s Proposed Rule to Limit Overdraft Protection” (January 17, 2024), available here.

²⁶ Consumer Financial Protection Bureau, Overdraft Lending: Very Large Financial Institutions (January 17, 2024), available here.

²⁷ Id.

²⁸ Id.

²⁹ Id.

³⁰ Id.

³¹ Id.

³² Id. 

³³ Id. 

³⁴ Id.