COMMENT CALL: As we pointed out in a previous Compliance Courier, the CFPB is on a mission to curb what it calls excessive “junk fees” charged by banks, credit unions and other companies. As part of that undertaking, the CFPB has now published a proposed rule that would reduce the dollar amounts of late fees and reduce the safe harbor amount.
Current limits
During 2010, a number of Reg. Z rules took effect under the Credit Card Accountability, Responsibility, and Disclosure Act (the CARD Act). Among other things, the rules say that penalty charges, like late payment and over-the-limit fees, must be reasonable and proportional to the violation. Card issuers can either base their penalty fees on a reasonable proportion of the costs they incur because of a specific type of violation, or they can use a “safe harbor,” imposing fees within certain dollar limits for a first violation and higher limits for more violations of the same type during the next six billing cycles. The CARD Act requires the CFPB to calculate annual adjustments to these safe harbors. Over time, those late fees safe harbor limits have risen with inflation to $30 for an initial late payment and $41 for subsequent late payments.
Proposed changes
The proposal would make three changes to the Truth in Lending / Reg. Z credit card regulations:
- The changes would lower the “safe harbor” dollar amount for late fees to $8 for any missed payment and eliminate the higher safe harbor dollar amount for late fees for subsequent violations of the same type. A card issuer would be able to charge more than the safe harbor amount if it could prove the higher fee is necessary to cover incurred collection costs.
- The new rules would eliminate the automatic annual inflation adjustment for the safe harbor amount. The CFPB would instead monitor market conditions and make adjustments as necessary.
- The proposal would cap late fees at 25% of the consumer’s required minimum payment. Card issuers now potentially charge a late fee that is 100% of the cardholder’s minimum payment owed.
The CFPB is also asking for feedback on other possible changes to its credit card regulations, including “whether the proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.”
Resources
The CFPB released an unofficial redline of the proposal to help stakeholders review the proposed changes, as well as a report titled Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies. The report analyzes the relationship between late fee revenue and pre-charge-off collection costs for certain large credit card issuers. According to the report, “revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.”
Make your voice heard
Comments on the proposal are due by April 3, or 30 days after publication in the Federal Register, whichever is later.
The League will submit a comment letter opposing the changes, on behalf of our Wisconsin credit unions, but we need your input. Please reach out to Paul Guttormsson at The League by March 27 with your comments, which we can incorporate anonymously into our letter.
Let us know how the changes would impact your credit card program and your credit union’s bottom line. The more “real world” information we can include in our letter, the more persuasive it will be.