Jakub Sobkowicz
Associate Editor
Loyola University Chicago School of Law, JD 2027
In January 2022, the Consumer Financial Protection Bureau (CFPB) set out to increase transparency in the pricing of financial services products by implementing rules to eliminate ‘junk fees’ that often obscure the true price of financial products. Through this initiative, the CFPB analyzed the impact of numerous types of fees across banking while simultaneously attracting the scrutiny of banking advocacy organizations such as the American Banking Association (ABA) and the US Chamber of Commerce. These advocacy organizations have challenged the constitutionality of the CFPB funding structure. The CFPB examines all categories of financial products in the search for ‘junk fees’, including recently uncovering paper bank statement fees for statements that were never printed or mailed, add-on products being charged to paid-off auto loan accounts, undisclosed fees imposed on international money transfers, and bank operating systems double-dipping on non-sufficient funds fees. While litigation has recently settled in the Supreme Court to determine that the CFPB is constitutionally funded under the Appropriations Clause, the most recent rule by the CFPB to limit ‘junk fees’ imposed on credit card accounts remains on hold following a decision to grant a Preliminary Injunction by the US District Court for the Northern District of Texas.
Perspective of the CFPB on credit card late fees
On March 5, 2024, the CFPB filed a Final Rule to amend § 1026.52(b) of Regulation Z, the Truth in Lending Act (TILA), to reduce the safe harbor provision for credit card late fees to $8. Prior to this rule, credit card issuers were able to charge late fees of $30 for the first offense and $41 for each subsequent late payment within a 6-month period. Additionally, the rule removes a current provision in TILA which provides for annual adjustments of the safe harbor dollar amount to reflect changes in inflation. Notably, the CFPB has targeted this rule only towards ‘Large Card Issuers’ which refers to any issuer with one million or more open credit card accounts.
The CFPB argues as the primary motive for the Rule that the current safe harbor provision allowing the $30/41 fee structure is inconsistent with the statutory requirements in TILA. The statute requires that fees be ‘reasonable and proportional to the omission or violation to which the fee relates’ and only allow banks to recover costs associated with the late payment. The CFPB believes that card issuers have leveraged the allowance for annual inflation adjustments to steadily increase late fees without providing evidence of increased recovery costs. As a secondary motive for the rule, the CFPB expresses concern, based on data from some large card issuers, that the current high fees could interfere with a consumer’s ability to make future payments on the account. In the 2022 CFPB biennial report to Congress on the consumer credit card market, the CFPB identified an increasing trend in late fees with consumers being charged $11.3 billion in 2021, increasing to $14.5 billion in 2022. Further, the CFPB acknowledged that late fees are the most significant fee assessed to cardholders in both dollar amount and frequency, including 37% of Americans having been charged a late fee between April 2023 and March 2024 based on a survey conducted by Nerdwallet. The CFPB is concerned that the increasing late fee trend perpetuates consumer debt cycles by layering these fees on top of other punitive consequences of late payments such as interest charges, loss of grace period, and negative credit reporting.
Litigation in opposition of the Final Rule
In response to the Rule, multiple banking advocacy organizations filed a Complaint arguing that the Rule makes credit cards less competitive and less accessible by preventing card issuers from collecting penalty fees. The plaintiffs expect that card issuers will respond to the lack of revenue from late fees by raising minimum payments, introducing annual fees, increasing interest rates, lowering credit limits, or offering fewer rewards. Therefore, the Rule will introduce negative consequences to all credit consumers, even if they responsibly make on-time payments. Additionally, the plaintiffs argue that late fees, which are largely known by consumers and accepted as appropriate, have been incorrectly labeled as a ‘junk fee’. The plaintiffs believe that the Rule unfairly rewrites the statutory text in TILA and denies card issuers their right created by Congress to charge a reasonable and proportional penalty fee for late payments that accounts for deterrence, the conduct of the cardholder, and the cost of recovery to the issuer.
Following the Complaint, the plaintiffs filed a Motion for Preliminary Injunction and an accompanying Brief in Support of the Motion which argues (1) that the CFPB created the Rule with funds drawn in violation of the Appropriations Clause, (2) the Rule violates TILA, and (3) there are various irreparable harms to card issuers. On May 10, 2024, the District Court granted the Motion for a Preliminary Injunction, finding a substantial likelihood of success on the merits that the funding structure of the CFPB is unconstitutional, based on a decision by the Fifth Circuit Court of Appeals. The court declined to address the argument of the statutory violations of TILA because the constitutionality argument was sufficient. On May 16, 2024, after the Injunction was granted, the Supreme Court reversed the holding by the Court of Appeals and confirmed the constitutionality of the CFPB funding structure. While the Injunction currently remains in place, litigation is likely to proceed now that the argument accepted by the court has been reversed.
Next targets for the CFPB and future impacts
Regardless of the conclusion of the litigation surrounding the Final Rule on late fees, the CFPB continues to explore opportunities to implement new rules limiting other ‘junk fees’, focusing next on overdraft fees. The Supreme Court’s decision to uphold the funding structure of the CFPB solidifies the regulatory authority of the CFPB and clears the way to publish new rule interpretations while limiting constitutional challenges from banking advocates. Although the argument that late fees are incorrectly being classified as ‘junk fees’ is compelling, especially when compared to other types of ‘junk fees’ that more significantly obscure the pricing of financial products, the CFPB is likely within its scope of authority to interpret the increasing trend of late fee charges to consumers as not reasonable and proportional. The outcome of these legal challenges between banking advocates and the CFPB serve as important opportunities for the courts to more clearly define the scope and influence of the CFPB as a regulatory authority over the banking industry.
However, as argued in the Complaint filing, card issuers are likely expected to respond to the decrease in late fee revenue by increasing other product pricing aspects. This response indicates a potentially long-term adversarial relationship between the CFPB and card issuers, which results in issuers continually adjusting pricing models to remain compliant with rule interpretations by the CFPB while also limiting profit losses. The resulting rapid changes in pricing could be counterproductive to the goal of the CFPB and lead to increased consumer confusion through obscurity in the true pricing of financial services products. To more successfully accomplish the goal of making financial product pricing transparent, the CFPB could consider more strict interpretations of other requirements in TILA related to proper term disclosures, product advertising, and information available on periodic statements. By focusing on the requirements that more closely relate to transparent communications to consumers instead of targeting specific fee requirements, the CFPB encourages stability in pricing models, allows issuers to more effectively compete through product pricing, and continues to work towards the goal of eliminating obscurity in the prices of financial services products.