The Consumer Financial Protection Bureau (“CFPB”) received more than 225 public comments to its credit card late fee proposal (the “Proposed Rule”). As we have discussed, the Proposed Rule would make significant changes to the current rules for credit card late fees, including substantially reducing the safe harbor late fee amounts that card issuers can charge and eliminating annual inflation adjustments. We have previously discussed comments and concerns about the proposal from the Consumer Bankers Association, some members of Congress, and our client, Auriemma Roundtables. Another notable critique of the CFPB’s proposal was submitted by another federal agency, the U.S. Small Business Administration (“SBA”). In its May 2, 2023 comment letter, the SBA Office of Advocacy (“SBA Advocacy”) expressed its concern that the proposal is deficient under the Regulatory Flexibility Act, 5 U.S.C. § 6051 et seq. (“RFA”) and recommended that the CFPB “maintain the status quo for small entities until the CFPB has sufficient data to perform a more thorough analysis of the economic impact that the proposed rulemaking may have on small entities.”
The SBA comment letter represents the views of SBA Advocacy, an independent office within SBA established to represent the views of small entities before other federal agencies and Congress, and not necessarily the views of the larger agency. However, issues raised within the SBA comment letter are further validation of a concern we have had with the proposal, namely that the data supporting the CFPB’s Proposed Rule is pulled entirely from large financial institutions and the impact of the proposal on smaller issuers has not been assessed.
Under the RFA, as amended by the Small Business Regulatory Enforcement Fairness Act (“SBREFA”), federal agencies are required to assess the impact of the proposed rule on small entities and consider less burdensome alternatives for rules that are expected to have a significant impact on a substantial number of small entities. The CFPB bypassed this assessment, instead certifying that the proposed rule will not have a significant impact on a substantial number of small entities. While an agency may rely on a certification in lieu of an assessment (5 U.S.C. § 605(b)), there does not appear to be a factual basis to support the conclusion the CFPB reached in so certifying. This seems especially egregious where, as here (and discussed further below), the data relied upon in crafting the proposal came only from the largest market participants.
SBA Advocacy’s critique of the Proposed Rule is fourfold:
- The CFPB lacks the necessary data to develop a factual basis to certify that the Proposed Rule will not have a significant economic impact on a substantial number of small entities, as required by the RFA.
- The CFPB does not have sufficient information to indicate that small entities contribute to the problem that is targeted by the Proposed Rule.
- The Reasonableness Test, in which the issuer determines that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer, is not a viable option for smaller issuers, so the safe harbor amount needs to be set at an adequate amount to cover their costs.
- The Proposed Rule is problematic for small depository institutions, which impacts their consumers that rely on them, including small businesses. As an example, the SBA mentioned consumers who prefer the customer service of smaller banks (or other financial institutions) and having all their banking needs in one place that would be impacted if those smaller entities no longer offered credit cards, a basic financial product, because the safe harbor late fee won’t cover their actual costs of collection.
The SBA’s concerns about the data used by the CFPB not reflecting smaller issuers validates similar comments submitted in other comments to the Proposed Rule. For example, Auriemma Roundtables noted that the data used by the CFPB only came from the largest credit card issuers and did not include data from smaller issuers:
This data, which is based on de-identified account-level data collected by the Federal Reserve Board as part of its Y-14M (“Y-14”) data collection, is representative of bank holding companies with total consolidated assets of $100 billion or more that also have credit card portfolio balances in excess of $5 billion. Although the CFPB claims that the data represents more than 70% of the overall credit card market, it does not include information about smaller institutions, which are more likely to be market disrupters that increase competition and access to credit, two objectives the CFPB ostensibly promotes. Therefore, the limited data set cannot reasonably support the conclusions inferred by the CFPB about the overall credit card market.
Because of its concerns, SBA Advocacy concludes that “[i]mposing the requirements of this proposal on small depository institutions without fully understanding the consequences could be problematic for the small depository institutions and the consumers that rely on them.” Accordingly, it recommended that the CFPB maintain the status quo for small entities until a more thorough analysis of the economic impact on small entities is performed. It remains to be seen if the CFPB will delay the issuance of a final rule in order to perform additional data analysis specific to smaller entities or takes other steps, like convening a SBREFA panel. It is also unclear whether the CFPB would entertain a two-tiered fee structure or delay implementation for only a segment of credit card market participants.
We will continue to monitor any developments with the Proposed Rule, including any amendments to the proposal or additional analysis that may be performed as a result of the numerous comments submitted and concerns expressed about the proposal.