Maryland Legal Alert for Financial Services
CFPB Bans Excessive Late Fees by Large Credit Card Issuers
On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a new rule to amend Regulation Z (Reg. Z), which implements the Truth in Lending Act (TILA). Reg. Z prohibits credit card issuers from imposing a fee for violating the terms or requirements of a credit card account, such as a late payment fee, unless the issuer has determined that the fee is reasonable in light of costs incurred as a result of the violation.
The CFPB’s new rule, which is expected to go into effect May 14, 2024, will reduce the safe harbor late fee penalty threshold from $32 to $8 for large credit card issuers (issuers that have one million or more open accounts).
Additionally, the rule will end automatic inflation adjustments for the late fee safe harbor amount and require large issuers to prove that the imposition of fees in excess of the safe harbor threshold is necessary to recoup collection costs. The rule closes a loophole resulting from provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act included a safe harbor provision which allowed for a $30 late penalty fee and a $41 late penalty fee for similar violations during the same billing cycle or subsequent billing cycles for seriously delinquent accounts. The lowered late fee safe harbor is a result of the CFPB’s belief that the CARD Act safe harbor amounts were much higher than actual card issuer collection costs and were therefore inconsistent with TILA’s requirement that such fees be reasonable and proportional to the related violation.
For more information, contact Christopher R. Rahl or Tamia J. Morris.