Banks Prepare Legal Assault on CFPB Credit Card Late Fee Rule

The Consumer Financial Protection Bureau’s landmark rule capping credit card late fees at $8 faces a bumpy path ahead, as industry groups eye legal challenges to block it from taking effect.

Banks have already blasted the regulation released Tuesday, arguing the CFPB used a shoddy process and incorrect math. Covered companies will soon have to slash their average credit card late fees, down from an average $30 for a first missed payment and $41 for any missed payments within the following six months.

The rule threatens to cut back on late-fee profits for big banks such as Capital One Financial Corp., JPMorgan Chase & Co., and Bank of America Corp. that have at least 1 million open accounts, while exempting smaller banks and credit unions. The CFPB said banks generated $14 billion in credit card late fee income in 2022.

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The US Chamber of Commerce on Tuesday said it plans to file a lawsuit “imminently” challenging the regulation. Supporters of the rule say its consumer benefits outweigh the costs to banks, but a lawsuit filed in a court friendly to legal challenges could put the rule on ice.

“We think it will be brought in a sympathetic district where industry is likely to get the rule’s implementation delayed while the case is considered,” Ian Katz, a policy analyst at Capital Alpha Partners, said in a client note.

Political Points

The Biden administration has been touting the credit card late fee restrictions as part of its campaign against so-called junk fees. President Joe Biden is expected to highlight the rule as part of his work to cut costs for consumers in his March 7 State of the Union address.

The political backdrop of the rule drew the ire of Republican lawmakers.

House Financial Services Committee Chairman Patrick McHenry (N.C.) said Tuesday the rule is an example of the Biden administration weaponizing financial regulators during an election year.

Sen. Tim Scott (S.C.), the top Republican on the Senate Banking Committee, has already vowed to try to repeal the rule using the Congressional Review Act, which allows Congress to quickly vote against regulations lawmakers don’t like. That attempt is unlikely to succeed because Biden would veto any resolution Congress might pass.

A lawsuit, on the other hand, would at least delay the rule’s implementation and potentially kill it outright. The rule is set to take effect 60 days after publication in the Federal Register.

The final rule is largely unchanged from the CFPB’s original February 2023 proposal, so banks have had time to build their case against the process the agency used to develop the regulation. The changes mostly pertained to when banks cross the 1 million open-account threshold for covered entities.

‘Junk’ Analysis?

Since the proposal came out, the CFPB has issued a series of reports it says highlights the amount of excess profits big banks get out of credit card late fees and interest rates.

The latest report, issued in February, found that increases in credit card annual percentage rates generated $25 billion in excess profits last year.

The CFPB’s rule also eliminates banks’ ability to raise credit card late fees based on inflation, repealing a provision put in place by the Federal Reserve when it was charged with overseeing late fees under the 2009 Credit Card Accountability Responsibility and Disclosure Act.

Banks and card issuers that want to charge higher late fees would have to get approval from the CFPB under the rule.

“Today’s rule ends the era of big credit card companies hiding behind the excuse of inflation when they hike fees on borrowers and boost their own bottom lines,” CFPB Director Rohit Chopra said in a statement.

Banks say the research the CFPB put out to support its late fee rulemaking is fundamentally flawed.

Bank Policy Institute President and CEO Greg Baer said the CFPB used “junk economic analysis” in crafting the rule.

“Given the rule’s multiple deficiencies and shortcomings, its fate is likely to be resolved in federal court,” Baer, whose group represents Capital One, Bank of America, and other credit card giants, said in a statement.

Billions at Risk

Banks have billions of reasons to fight the rule.

The CFPB said 45 million consumers would save an average of $220 per year under the new curbs. The agency’s limits on late fees could cost banks up to $9 billion in aggregate, according to a Feb. 1 Bloomberg Intelligence report.

“These reforms will make a real difference for millions of Americans who are living paycheck to paycheck and working hard to keep up with their payments and other household expenses,” Chuck Bell, advocacy program director at Consumer Reports, said in a statement.

Banks themselves are already reporting the CFPB’s rule could cut into their earnings.

Synchrony Financial, which partners with retailers and others to provide branded cards, said its late fee revenue could drop by $800 million from its fourth quarter 2023 levels should the rule take effect. The company said its earnings per share could fall to $0.25, a drop of $0.15.

Banks also say the rule would harm consumers.

Those who pay on time will end up seeing higher costs, and those who fall behind may get stuck with more debt since interest rates on revolving balances will have to go up to recoup some of the lost fee income, banks say. There will also be a smaller downside to missing credit card payments, lenders argue.

“This final rule will benefit a small minority of frequent late-payers by offsetting the costs of their late payments by increasing costs amongst the 74 percent of cardholders that pay their bills on time,” Consumer Bankers Association President and CEO Lindsey Johnson said in a statement, referencing data from a 2022 CFPB report.

Reducing late fees also eliminates a key risk-management tool for banks looking to ensure they don’t face a wave of missed payments, she added. As costs go up, card issuers are likely to reduce offerings to subprime borrowers who pose bigger risks of missed payments, Johnson said.

But the CFPB and the Biden administration say the rule will ultimately benefit consumers, brushing aside complaints from banks and potential lawsuits.

“In credit cards, like so many corners of the economy today, consumers are beset by junk fees and forced to navigate a market dominated by relatively few, powerful players who control the market,” Chopra said.