CFPB proposes to overturn longstanding credit card late fee safe harbor

Against strong objections from the American Bankers Association, the Consumer Financial Protection Bureau and the White House today proposed to eliminate a longstanding safe harbor that banks of all sizes rely upon when setting late fees on credit card payments. Citing “excessive credit card late fees,” the CFPB proposed slashing the safe harbor dollar amount for late fees from $30 to $8 and eliminating a higher safe harbor dollar amount for late fees for subsequent violations of the same type; eliminating the annual inflation adjustment for the safe harbor amount that was provided by the Federal Reserve Board in 2010; and capping late fee amounts at 25% of the required payment.

In a notice of proposed rulemaking, the CFPB is proposing to amend Regulation Z, which implements the Truth in Lending Act, because in its view, the current safe dollar amount for late fees in the regulation is “not reasonable or proportional” to the violation to which the fee relates. The CFPB issued an advanced notice of proposed rulemaking last year, to which ABA and others responded, urging caution regarding any changes to the time-tested safe harbor. At that time and in subsequent letters, the financial industry has reminded CFPB that it has failed to follow a required process for determining the impact of its rulemaking on small credit card issuers.

ABA President and CEO Rob Nichols blasted the agency’s decision, saying it would harm consumers by reducing competition and access to credit. “If the proposal is enacted, credit card issuers will be forced to adjust to the new risks by reducing credit lines, tightening standards for new accounts and raising APRs for all consumers, including the millions who pay on time,” he said.

ABA and business groups have previously raised concerns about the legality of the process CFPB used to arrive at the rulemaking, noting the agency is required to seek input early in the rulemaking process from small banks likely to be affected by new regulation. Nichols noted that those concerns were never resolved. Any reduction in the late fee safe harbor would have significant adverse effects on a substantial number of community banks and credit unions with assets below $850 million, many of which would be forced to exit the credit card market, he said.