If you’re an avid watcher of the Consumer Financial Protection Bureau (CFPB or bureau) like I am, then you’ve no doubt been paying close attention to the bureau’s war on fees. As we’ve blogged about previously, the CFPB has been targeting nearly every type of fee – from overdraft and non-sufficient funds fees, to paper statement fees and returned item fees. Last week the bureau took another step in this war when it released its final rule on credit card late fees, which President Biden even touted during his State of the Union Address.
The America’s Credit Unions Compliance Team will release a full section-by-section analysis of the rule in the near future. For now, let’s cover some frequently-asked-questions (FAQ) about the final rule:
When does this final rule take effect?
The final rule states that it will become effective 60 days after publication in the federal register. The rule was published on March 15, 2024 and the federal register lists an effective date of May 14, 2024.
It should also be noted, however, that this final rule is already embroiled in litigation, which could potentially result in a stay of the effective date.
What are the current amounts a credit union may charge for credit card late fees? How does the final rule change this?
Prior to the effective date of this final rule, credit unions were permitted in section 1026.52(b) to charge a “penalty fee” when the member violates the terms of the account. Penalty fees could cover over-the-credit-limit fees and returned payment fees, but most commonly these provisions were used for late payment fees. For the rest of this blog, we’ll refer to these fees as “late payment fees.”
Credit unions were required to charge fees that were a “a reasonable proportion of the total costs incurred” as a result of the late payment. Rather than having to calculate the exact cost caused by late payments and other account violations – and potentially have to defend those amounts in court – credit unions could choose to use the safe harbor amounts provided in section 1026.52(b)(1)(ii), which permitted a credit union to charge $30 for the first late payment and $41 for any subsequent late payment which occurs within one of the next six billing cycles. Those amounts are adjusted annually to reflect inflation and other factors.
This new final rule would limit those safe harbor amounts to just $8. When using the safe harbor, the limit for late payment fees would be $8, regardless of whether it is the first late payment or a subsequent late payment. Additionally, the $8 limit will not be adjusted annually.
Which credit unions are affected by these changes?
The rule provides an exclusion for “small card issuers.” A credit union will be deemed to be a “small card issuer” if the credit union, together with its affiliates, “had fewer than one million open credit card accounts… for the entire preceding calendar year.” Notably, “affiliate” is defined to mean “any company that controls, is controlled by, or is under common control with another company…”
Thus, when determining if a credit union is subject to the new $8 limit on credit card late fees, a credit union will want to review the number of open credit card accounts the credit union had for the entire proceeding calendar year, as well as any open credit card accounts that its affiliates had. If the number is one million or more, the $8 limit discussed above will apply. If the number of accounts is less than 1 million, then the $8 limit will not apply. Instead, those “small card issuers” will be able to continue charging the amounts discussed above, which have undergone their annual adjustment for 2024 and which will be (when this rule becomes effective) $32 for the first late payment and $43 for subsequent late payments which occur during one of the next six billing cycles. Here’s a chart to explain:
| Less than 1 million open credit card accounts (small card issuer) | 1 million or more open credit card accounts | |
| First late credit card payment | $32 | $8 |
| Any late payment which occurs during the next six billing cycles after the first missed payment | $43 | $8 |
In the final rule, the CFPB states that “at least four federal credit unions” are likely to be covered by the $8 limits. However, the final rule did not state how the CFPB reached that number.
The final rule also notes that a small card issuer may lose its “small issuer” status. It states:
“If a card issuer together with its affiliates had fewer than one million open credit card accounts for the entire preceding calendar year but meets or exceeds that number of open credit card accounts in the current calendar year, the card issuer will no longer be a smaller card issuer… as of 60 days after meeting or exceeding that number of open credit card accounts.”
(emphasis added).
What downstream effects might this rule have?
While small card issuers are not subject to the $8 limit, it is possible that this requirement could “trickle down” to small issuers due to competitive pressures. For example, if consumers are aware that large card issuers only charge $8 for late payments, but that a small issuer is still charging $32, the consumer may choose to use the large issuer for their credit needs. Thus, small card issuers may feel pressure to lower their late fees to remain competitive with large card issuers.
America’s Credit Unions’ advocacy team will continue to fight the bureau’s war on fees, and the compliance team will provide more updates and analysis on developments as they occur.