Under current Regulation Z, card issuers are prohibited from charging a penalty fee on credit cards unless they have either (1) determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred as a result of the consumer’s violation; or (2) complied with the safe harbor fee limitation of $30 for the initial violation and $41 for subsequent violations that occur in the same or one of the next six billing cycles. The Consumer Financial Protection Bureau (CFPB) is concerned that use of this safe harbor for late fees is not reasonable and proportional to the harm incurred by financial institutions for a late payment. Thus, on February 1, the CFPB published a proposed rule to limit late fees charged by card issuers (the Proposed Rule).

Under the Proposed Rule, the CFPB is proposing to lower the safe harbor dollar amount for late fees to $8 and eliminate any increase in this amount for subsequent late payments that occur in the same or one of the next 6 billing cycles.

As Davenport Evans lawyer Tiffany Miller explains, this proposed cap on late fees has garnered significant attention from media sources. However, card issuers should also be aware of, and consider submitting comments on, several additional aspects of the Proposed Rule:

  • The Proposed Rule would eliminate the annual inflation adjustment for late fees that is otherwise permitted for other penalty fees under Regulation Z. Thus, as the CPI increases, there is no method under the Proposed Rule for the late fee safe harbor to similarly increase.
  • Currently, late fee amounts cannot exceed 100 percent of a consumer’s required minimum payment. Under the Proposed Rule, late fee amounts could not exceed 25 percent of the required minimum payment. Thus, late fees would be required to be lower than the $8 safe harbor amount when the minimum payment due from a consumer is $32 or less.
  • The Proposed Rule clarifies that, when an account has been charged off and the card issuer has written the account off as a loss, the issuer may not include any collection costs incurred post-charge off as part of the calculation to determine the card issuer’s total costs incurred as a result of the consumer’s violation. The CFPB deems such post- charge off costs to be related to mitigating loss rather than to a violation of the account terms.
  • While the Proposed Rule would not apply to penalty fees other than late fees, the CFPB is considering expanding the Proposed Rule to apply to other penalty fees, such as overlimit, returned payment, and declined access check fees. Alternatively, the CFPB is also considering eliminating the safe harbor entirely for penalty fees and requiring card issuers to solely use the cost analysis provisions to establish permissible fee amounts.
  • The CFPB is requesting comment on whether a 15-day grace period should be required that would prohibit card issuers from imposing a late fee if customers make payment within 15 calendar days of the payment due date.
  • Finally, the CFPB is considering whether, as a condition of using the late fee safe harbor, card issuers should be required to offer automatic payment options and provide notification to consumers of the payment due date within a certain number of days prior to the due date.

While media headlines might focus solely on the late fee cap, financial institutions should be reviewing and commenting on all aspects of the Proposed Rule that may prove problematic. Comments on the Proposed Rule are due the later of April 3, 2023 or 30 days after the Proposed Rule has been published in the Federal Register (which had not yet occurred as of the date of this writing).

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Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.