Bank trade groups are battling the Consumer Financial Protection Bureau in federal court to thwart the agency’s new $8 late fee cap rule, but so far they haven’t stopped the edict from moving toward implementation next month.
While a lawsuit seeking a preliminary injunction of the rule ping-ponged back and forth between Texas and Washington, D.C. courts in recent weeks, the clock kept ticking toward the rule’s May 14 effective date.
Credit card late fees range as high as $41 currently, and have been on the rise, according to the CFPB’s March 5 press release when the rule was issued. The card issuers collected $14 billion in late fees in 2022, equal to about 10% of interest and fees charged.
Card issuers are becoming increasingly nervous about preparations for complying with the new rule, say industry lawyers watching the case. Complying with the rule isn’t something bank card issuers can do overnight, said Joseph Schuster, a consumer financial services attorney at the law firm Ballard Spahr who focuses on regulatory issues.
“It is a fairly large endeavor,” Schuster said in an interview last week, regarding bank preparations for such a rule change. “They’re going down the path to preparing, and it’s a matter of when they begin to execute.”
While some lawyers believe the Fifth Circuit Court of Appeals, which has once again taken up the case, will side with the bank card issuers and against the CFPB, that’s increasingly less likely to happen before the rule takes effect, given the court’s recent lack of process.
“It’s looking more and more likely that the rule will go into effect,” Schuster said.
While the Fifth Circuit could expedite the proceedings as it leans toward siding with the plaintiffs, current court deliberations over one judge’s potential conflict of interests could slow down the process, said Keith Barnett, a financial services litigator at Troutman Pepper.
“There’s no doubt that issuers need to prepare for that — you always prepare for a worst case scenario,” Barnett said in an interview Wednesday.
Nonetheless, the court will be mindful of the impending May 14 effective date, Barnett said. “I believe the Fifth Circuit knows time is of the essence here,” he said.
To stop the rule from being implemented, the U.S. Chamber of Commerce teamed with the American Bankers Association and Consumer Bankers Association, among other trade groups, in a lawsuit against the CFPB filed on March 7. That was two days after the CFPB issued the new rule.
The CFPB, under the leadership of Director Rohit Chopra, has been on a campaign to eliminate what the agency and President Biden refer to as “junk fees,” including late fees imposed when credit card customers make late payments. A spokesperson for the CFPB declined to comment on the legal proceedings.
The card issuers that would be the hardest hit if the rule goes into effect are Capital One Financial, Bread Financial and Synchrony Financial, given their larger percentages of card holders likely to make late payments, according to a March 8 report from credit research firm S&P Global Ratings.
S&P estimated the three most exposed card issuers could each lose about a quarter of their revenue in the short term due to the CFPB’s new late fee cap.
Those companies are already contemplating mitigation strategies to “soften the blow to earnings over the years,” including increasing the interest rates they charge; changing private label agreements they have with merchants; and “reducing their exposure to the least creditworthy borrowers,” according to the S&P report.
“In response to the new CFPB rule, we are adjusting rates and fees to ensure that we can continue to provide safe and convenient credit to our customers and continue to offer them a full suite of benefits, tools and rewards,” a spokesperson for Synchrony said by email.
”Our teams have been diligently developing comprehensive mitigation strategies to help offset the financial impact to our business,” Bread said in an annual report to shareholders this month.
Freshfields attorney David Sewell also believes that the issuers are likely contemplating how they’ll comply with the new rule, but holding off on “concrete action” for the moment.
“The consensus view is that the 5th Circuit will intervene and the effective date will be pushed off, so the urgency to move toward implementation isn’t quite there yet,” Sewell said by email. “The calculus would change if we’re still waiting to hear from the 5th Circuit in, say, two weeks – at that point issuers may have no choice but to start gearing up for a sprint to compliance.”
