ABSTRACT: The banking industry and financial services business groups did not wait long to file litigation challenging a recent rule enacted by the Consumer Financial Protection Bureau looking to limit the fees credit card issuers can charge for late payments.

We have our eyes on recent litigation arising out of the Northern District of Texas. On March 7, 2024, a lawsuit challenging a new rule issued by the Consumer Financial Protection Bureau (“CFPB”) on March 5th, 2024, was filed by the American Bankers Association and other financial services business groups (collectively the “ABA”). The TILA has a statutory requirement that fees, such as late fees, be reasonable and proportional to the omission or violation to which the fee relates, and the CFPB determined current late fees exceeded the reasonable and proportional statutory limit.

Summary of the New Rule

The CFPB issued a final rule amending Regulation Z of the Truth in Lending Act (“TILA”). The new rule caps fees for large credit card issuers, allowing a charge of no more than $8 when a consumer makes a late payment on their credit card. The prior version of Regulation Z capped late payment fees at $30.00 for first time offenses and $41.00 for each subsequent violation. The Final Rule also removes a provision which automatically adjusted the ceiling for late fees to keep pace with inflation. If the rule becomes effective, it will apply to approximately 95% of all credit cards issued in the United States.

The final rule does allow banks to seek to charge a higher fee if they can demonstrate a higher cost in collecting penalties after late payment occurs, but the credit card companies cannot include the cost of collection efforts in making that demonstration.

Litigation Commenced Immediately

The banking industry and business groups did not wait long to challenge the CFPB’s Final Rule. On March 7th, 2024, the Chamber of Commerce of the United States of America, The American Bankers Association, and other business groups filed litigation in the Northern District of Texas challenging the CFPB’s Final Rule. The ABA alleges that the CFPB’s final rule is not only unlawful, but also that the Rule violates the appropriations clause of the United States Constitution and exceeds the CFPB’s statutory authority. The ABA has asked the Texas District Court to vacate the Final Rule.

History of the TILA and Regulation Z

Congress enacted the credit card Accountability Responsibility and Disclosure Act in 2009. The Card Act includes a series of provisions governing credit card terms and conditions, including penalties or for late fees requiring the same to be reasonable and proportional. Congress delegated to the CFPB the duty to establish standards for assessing whether the amount of any penalty fee is reasonable and proportional. In setting those standards, the CFPB is charged with considering, among other things, the deterrent effect of a late fee, the conduct of the cardholder, and the cost card issuers incur because of late payments. The ABA argues the provisions of the Card Act demonstrate Congress’s recognition that for penalty fees to be effective, they must be sufficient to deter late payments, account for the conduct of late payments by consumers, and compensate card issuers for the costs incurred from late payments. The ABA contends of the Final Rule does not satisfy the charge of Congress in delegating the authority to the CFPB to enforce the Card Act. The ABA also argues that the new Rule will harm credit card users who pay their bills on time because of an increase likely to occur in the minimum payments, annual fees, or APRs or for credit card issuers to offer fewer rewards to all customers.

Challenges to the CFPB’s New Rule

The ABA argues the CFPB exercised flawed statutory interpretation and rule-making authority in issuing the Final Rule. Specifically, the ABA argues the CFPB adopted a new standard linked solely to the issuers costs and ignored other requirements. Congress charged the CFPB with considering and making new rules. The ABA also argues that CFPB’s flawed statutory interpretation is particularly evidenced in the context of cardholders who are repeatedly late in making their payments. The Final Rule does not allow a higher fee for subsequent late payments and thus has no additional deterrent effect on repeat late payers as opposed to persons who are only late on a single instance.

The ABA also argues that the CFPB improperly relied on non-public data in issuing the Final Rule.

The ABA and other business groups also reiterate a challenge to the CFPB’s funding structure, which has been challenged in other litigation. See our prior blog entries on the challenge to the CFPB’s funding structure for additional information.

In addition to the legal challenge brought by the ABA, it is likely that the legislature will seek to repeal the CFPB’s new Rule, and Tim Scott, Senator of South Carolina, has already vowed to pursue legislative repeal of the same.

Baker Sterchi attorneys will continue to monitor the litigation arising out of the CFPB’s Final Rule. Contact our Financial Services Practice Group for more information.