As discussed here, earlier this week the Consumer Financial Protection Bureau (CFPB or Bureau) finalized its credit card late fee rule (Final Rule). The Final Rule sets a safe harbor amount for late fees at $8 and eliminates the annual inflation adjustments to that safe harbor amount, for larger card issuers. The timing of the Final Rule’s announcement, just days before the State of Union address, did not go unnoticed. President Biden highlighted this development in his speech, emphasizing his administration’s commitment to eliminating so-called hidden fees.
However, the administration’s efforts do not stop at late fees. They are assembling a Strike Force to combat unfair and illegal pricing. Led by the Department of Justice and the Federal Trade Commission, the Strike Force aims to “root out” illegal corporate behavior that raises prices through anti-competitive, unfair, deceptive, or fraudulent business practices.
The industry, however, is not standing idle. The announcement of the Final Rule on credit card late fees sparked immediate reaction. A collective of trade groups, including the U.S. Chamber of Commerce, Fort Worth Chamber of Commerce, Longview Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, and Texas Association of Business (collectively, the trade groups) filed a complaint in the U.S. District Court for the Northern District of Texas challenging the Final Rule.
The trade groups argue that in enacting the Final Rule “the CFPB violated the Appropriations Clause, exceeded its statutory authority, and offered deficient analysis and reasoning, all in order to achieve a pre-ordained outcome that will ultimately harm those consumers the CFPB is charged with protecting.” The trade groups further argue that the Final Rule’s effective date violates the Truth in Lending Act (TILA).
The complaint includes five counts. In the first count, the trade groups argue that the Final Rule should be invalidated because the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution, a claim that is currently pending before the U.S. Supreme Court in Community Financial Services Association v CFPB (CFSA case). Oral arguments in the CFSA case, discussed here, were heard in October. A decision is expected in the coming months.
In the subsequent counts, the trade groups argue that the Final Rule violates the Administrative Procedure Act (APA) because the CFPB: (i) violated the express requirements of the Credit Card Accountability Responsibility and Disclosure (CARD) Act by repealing the old safe harbor and establishing a new safe-harbor amount based on only a fraction of the costs incurred by issuers from late payments, and not allowing issuers to charge fees that sufficiently account for deterrence; (ii) did not rationally analyze or explain its decisions, nor base those decisions on substantial evidence, including by using inappropriate, incomplete, and non-public data to estimate card issuers’ costs and using deeply flawed analysis to dismiss concerns about the decreased deterrent effect of reducing late fees to $8; (iii) relied heavily upon the Federal Reserve’s Y-14M data that was not made available to the public for comment; and (iv) violated TILA by having its new credit card disclosures take effect prior to the October 1 date required by the statute.
Concurrently with the complaint, the trade groups filed a motion for preliminary injunction requesting that the court enjoin the Bureau from implementing the Final Rule against their members until the conclusion of the case.
Our Take:
The federal “war on fees” has become highly politicized and multifaceted, targeting the financial services industry specifically but also encompassing many other industries as well. The inevitable has happened, with the dispute spilling over into the courts, which may be the final arbiter on the legality and limits of the federal initiatives. As for the financial services industry in particular, it appears that litigation is becoming an integral part of the rulemaking process going forward.