This week, the Consumer Financial Protection Bureau (CFPB) arbitrarily promulgated a proposed rule to impose restrictions on fees lenders can charge on delinquent credit card payments.
Without any direction from Congress, the proposed rule (1) changes the safe harbor dollar amount for late fees from $30, or $41 for subsequent late payment violations, to a strict threshold of $8 while prohibiting any higher amount for future delinquencies; (2) removes the safe harbor late fee adjustment to account for inflation; and (3) caps late fees at 25 percent of the total payment due.
Eighty-three percent of Americans own at least one credit card. Hamstringing lenders’ ability to charge late fees that are commensurate with the level of delinquency could drastically reduce the availability of credit. It may also incentivize borrowers to neglect their payments.
The result of implementing these changes will reduce the capacity for lenders to fund revolving lines of credit that consumers rely on every day to go grocery shopping, fill their car with gas, and pay utility bills.
Since last year the Biden Administration has been targeting industries throughout the American economy to regulate how they collect fees. Without this fee income to cover expenses, services such as offering revolving lines of credit on a credit card transaction or providing customer service to borrowers could be severely reduced if not eliminated altogether.
The CFPB has arbitrarily determined that the changes in the proposed rule are “reasonable and proportional.” In reality, these changes further empower the federal government to expand its reach into contracts between private parties while simultaneously circumventing the representatives that are elected by Americans that will be directly harmed by these adjustments.
If a late fee complies with the 25 percent cap but is more than the $8 safe harbor threshold, the CFPB would have significant leeway to decide whether the fee amount is “reasonable and proportional” to the costs incurred by the lenders.
The proposed rule’s lack of clear authority from Congress and its failure to produce a thorough economic analysis to “cogently explain why it has exercised its discretion in a given manner” could violate the Administrative Procedure Act (APA) and be deemed arbitrary and capricious. The rule also likely fails the major questions doctrine, especially in the wake of the seminal ruling in West Virginia v. EPA. The CFPB is also taking advantage of its “double-insulated” funding structure, which has already been ruled unconstitutional by the U.S. Court of Appeals for the Fifth Circuit, to unilaterally control the direction of the credit card market.
To deter duplicitous behavior, current regulations require specific disclosures and limits on credit card fees. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires disclosures and heavily regulates fees charged on deposit accounts and cards.
Democrats, such as Senator Elizabeth Warren (D-Mass.), previously applauded current regulations implying that the requirements from the CARD Act are effective in promoting transparency. Sen. Warren stated that the:
“CARD Act was designed to reduce surprises in re-pricing of accounts and to take a major step in improving the overall transparency of credit card costs. As a result of the CARD Act, consumers now have better information about how much they are paying for credit and how much they might save on interest if they pay down their balances more quickly than they might otherwise have planned.”
She also discussed the CARD Act’s strong bipartisan support, and how President Obama affirmed that the legislation would “uphold ‘basic standards of fairness, transparency, and accountability.’”
Restrictions already currently exist on credit card fees. The lack of evidence and need for additional regulation of credit card fees remains to be seen. The CFPB fails to prove that there is an existing problem under the current regulatory framework.
Congress should immediately hold Director Rohit Chopra and the CFPB accountable by exposing the CFPB’s lack of legal authority to promulgate a rule that resolves no existing market failure.