On March 5, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued its final credit card late fee rule (the “Final Rule”). The timing for publication of the final rule was widely perceived as coordinated with the President’s State of the Union address, and in his March 7, 2024 address, President Joe Biden did briefly mention the Final Rule, citing the reduction of credit card late fees to $8 and adding “I’m saving American families $20 billion a year with all the junk fees I’m eliminating.”

The much anticipated Final Rule, published 13 months after the CFPB first proposed its highly controversial $8 credit card late fee safe harbor cap in its February 1, 2023 Notice of Proposed Rulemaking (“NPRM”), published in the Federal Register on March 29, 2023, preserves most but not all of the changes – some high-profile, some subtle – that were floated in the NPRM, and adds some unanticipated new wrinkles. The consumer financial services industry, trade groups, and consumer advocates alike spent countless hours analyzing, critiquing, and predicting the effects of the proposed revisions to Regulation Z set forth in the NPRM, as reflected in over 57,000 comments filed with the CFPB.

Several financial industry trade associations have challenged the Final Rule in a lawsuit and motion for preliminary injunction filed March 7, 2024, which we will cover in upcoming blogs.

If it ultimately goes into effect, the Final Rule will drastically alter how this form of credit is made available to consumers. We have prepared a chart comparing the material provisions of the Final Rule to the NPRM and current Regulation Z. We have also summarized material provisions of the Final Rule below.

Material Provisions of the Final Rule

The Final Rule’s amendments to Regulation Z, Appendix G, and the Official Interpretations of Regulation Z include the following:

  • Except for “Smaller Card Issuers”, the credit card late fee safe harbor amount has been reduced to a flat $8 from the currently permitted $30, and $41 for repeat violations. A higher fee is not permitted for repeat violations.
  • “Smaller Card Issuers,” issuers that together with their affiliates have fewer than one million open credit card accounts in the past calendar year, are not subject to the $8 safe harbor and may still charge an increased late fee for repeat violations within 6 months. Smaller Card Issuers may charge $32 for a first late payment, and $43 for repeat violations within 6 months. If a Smaller Card Issuer exceeds the one million-card threshold, it will lose its designation as such after 60 days. Smaller Card Issuers are likely to comprise of 5% or less of the current market. The CFPB’s press release announcing the Final Rule asserts that Larger Card Issuers “account for more than 95% of total outstanding credit card balances.”
  • The alternative safe harbor for charge cards that permits a fee of 3% of the delinquent balance if a required payment-in-full is not made for two or more consecutive billing cycles remains in effect.
  • For all but Smaller Card Issuers, the annual inflation adjustment for the late fee safe harbor has been eliminated. For all card issuers, the annual inflation adjustment remains in place for other penalty fees. These will be adjusted to $32, and $43 for repeat violations within 6 months.
  • For issuers who seek to collect fees outside of the safe harbor, the Official Interpretation is revised to “clarify” that post-charge off collection costs must be excluded from any cost analysis used by a card issuer to determine penalty fee amounts (including late payment fees). A cost analysis must be performed to establish penalty fees that represent a reasonable proportion of the total costs incurred by the issuer as a result of a violation if an issuer elects to charge penalty fees based on such costs, rather than the safe harbor fees.

Notably, the Final Rule did not include a late fee cap of 25% of the required minimum payment, as was proposed in the NPRM. The existing Regulation Z prohibition against penalty fees that exceed the dollar amount associated with the violation, which in the case of a late payment fee is the amount of the minimum payment due, remains in place. The multiple fee rule also remains in effect, meaning an issuer may not charge two penalty fees based on a single event or transaction: for example, if a payment by check is returned for insufficient funds, resulting in a late payment, and neither violation has occurred in the prior 6 months, a Larger Card Issuer could impose either a late payment fee of $8 or a returned payment fee in a higher amount as disclosed and established under the cardholder agreement, but not both fees.

The Final Rule is to be effective 60 days after publication in the Federal Register, subject to any court-imposed postponement.

On March 21, 2024, from 1:00 p.m. to 2:00 p.m. ET, Ballard Spahr will hold a webinar to discuss the Final Rule and its myriad implications. To register, click here.