The CFPB’s Final Rule Imposes Significant Restrictions on Credit Card Late Fees

On Tuesday, March 5, 2024, the Consumer Financial Protection Bureau (CFPB) issued a final rule (Final Rule) which amends provisions of Regulation Z, which implements the Truth in Lending Act (TILA).  The Final Rule amends the provisions related to the permissible late fee that a credit card issuer may impose on consumers who violate the terms and conditions of a credit card account subject to the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).  The CFPB says that the Final Rule will lower the typical credit card late fee from $32 to $8.

Under the current law, credit card issuers may impose late fees, not to exceed safe harbor thresholds of $30 for an initial missed payment and $41 for a subsequent missed payment, which are adjusted annually for inflation.  The Final Rule adopts a late fee safe harbor threshold of $8 for “larger card issuers,” or credit card issuers that have one million or more open credit accounts.  The safe harbor will not be subject to the automatic annual inflation adjustment, rather, the CFPB states that it will monitor market conditions and adjust the $8 late fee safe harbor threshold as necessary.  The Final Rule applies only to late fees does not impose new restrictions on other penalty fees, such as fees associated with returned payments or exceeding the credit limit.

Larger card issuers do have the ability to raise their late fees above the threshold so long as they can prove the higher fee is necessary to cover their annual collection costs, but they cannot consider losses and associated costs, such as post-charge off costs, as costs incurred for the purposes of the cost analysis provisions.

The Final Rule differs from the proposed rule that was published on February 1, 2023.  The proposed rule did not contain a proposed exemption for ‘small card issuers.’  Director Chopra noted in his statement that they did not find evidence that small card issuers were employing a fee churning business model, in contrast to the larger card issuers and that small card issuers generally gave consumers longer late fee courtesy periods.  Also absent from the Final Rule was a restriction that would have limited late fees to 25 percent of the required minimum payment that was late.  In choosing to not move forward with the 25 percent restriction, the CFPB noted that the benefits of the limitation did not outweigh considerations of credit card issuers’ abilities to recoup their pre-charge collection costs when they are using the $8 safe harbor threshold amount.

The Final Rule will become effective 60 days following publication in the Federal Register.