Auriemma Roundtables, a leading provider of business intelligence solutions to the consumer finance industry, together with First National Bank of Omaha and a group of several other premier consumer financial services firms, has filed a comment (the “Auriemma Roundtables Comment”) on the credit card penalty fees proposal (the “Proposed Rule”) issued by the Consumer Financial Protection Bureau (CFPB). Ballard Spahr LLP served as counsel to Auriemma Roundtables in preparing the Auriemma Roundtables Comment.
The Auriemma Roundtables Comment discusses in detail the Proposed Rule’s numerous deficiencies. The Proposed Rule, if enacted, would drastically alter the existing, well-reasoned regulatory framework governing credit card late fees, as summarized in our earlier blog published when the Proposed Rule was announced. As explained in detail in the Auriemma Roundtables Comment, the Proposed Rule’s adoption would violate procedural and substantive law, and would raise significant public policy issues. The CFPB failed to provide sufficient data or any other basis that would support the Proposed Rule.
Key points explored in the Auriemma Roundtables Comment include the following:
- The adoption of the Proposed Rule would violate the federal Administrative Procedure Act (APA): because the Proposed Rule (i) is arbitrary and capricious, (ii) exceeds the CFPB’s statutory authority, and (iii) if promulgated, will have been adopted without observance of the procedures required by law, its adoption would violate the APA. In particular, the Auriemma Roundtables Comment asserts the Proposed rule is arbitrary and capricious because, among other deficiencies:
(i) the data forming the premise of the CFPB’s position fails to take into consideration a substantial and important segment of the market; and (ii) the data is not publicly available, leaving the public no meaningful opportunity to review or comment on its accuracy or application in support of rulemaking that could have enormous economic and public policy consequences.
- The significant reductions in the credit card late fee cap and safe harbor proposed by the CFPB would fail to comply with the requirements of the Truth in Lending Act (“TILA”), which requires that any rule related to a penalty fee must take into consideration “(1) the cost incurred by the creditor from such omission or violation; (2) the deterrence of such omission or violation by the cardholder; [and] (3) the conduct of the cardholder; ….” See 15 U.S.C. § 1665d(c). By relying nearly solely on Y-14 data and due to the nature of such data, the CFPB failed to address these vital requirements in the Proposed Rule. TILA further requires that penalty fees must be “reasonable and proportional” to the violation the fee is designed to address, but the late fee limitations in the Proposed Rule fail to bear such a relationship to the violation.
- The Proposed Rule raises significant public policy concerns with a high risk of negative consequences for consumers, credit card issuers, and smaller issuers in particular. These include the risk that the nominal late fee permitted under the Proposed Rule actually would serve to encourage cardholders to miss payments, resulting in additional negative impacts such as the loss of grace periods on purchases and increased risk of higher debt, higher delinquency rates, lower credit scores, and lower available credit. The Auriemma Roundtables Comment describes how the Proposed Rule also would have a detrimental effect on cardholders who pay on time:
The drastic reduction of the late fee under the Proposed Rule, and the fact that the safe harbor amount would no longer be adjusted for inflation, means the true cost of the impact of late payments will be incorporated into credit card pricing in the form of higher APRs imposed on all cardholders.
The Auriemma Roundtables Comment also emphasizes the likelihood of the Proposed Rule encouraging irresponsible financial behavior by replacing the current deterrent late fee structure with a more nominal late fee that is more likely to be ignored or seen as a type of convenience fee. Indeed, in the Supplemental Information, the Proposed Rule suggests that paying late is the same thing as obtaining a further loan.
For these and a number of other reasons, Auriemma Roundtables and its clients urged the CFPB not to adopt the Proposed Rule.