CFPB Targeting Credit Card Late Fees in League-Opposed Proposed Rule

Source: S&P Global Market Intelligence

The Consumer Financial Protection Bureau moved Wednesday to slash what is effectively a regulatory cap on most credit card late fees, unveiling a proposal for tougher fee limits that the banking industry is slamming as "extreme."

The CFPB proposed cutting the immunity provision for late fees to $8 for a missed payment and ending the automatic annual inflation adjustment. It also seeks to ban late fee amounts above 25% of the consumer's required payments.

The agency estimates the proposed rule could reduce late fees by about $9 billion per year.

"The proposal would take a heavy shot at banks that have counted on late fees," Ian Katz, managing director at Capital Alpha Partners LLP, wrote in a note.

While credit issuers have been expecting proposed cuts, "At first glimpse, the headline cap on fees is likely greater than the average expectation, and thus will be seen as a net negative," John Hecht, an analyst with Jefferies, wrote in a Feb. 1 note.

Given the meaningful expected financial impact, companies are likely to take their opposition to the courts if the rule becomes final as is, analysts said.

"This [proposal] should be viewed as a negative for the whole credit card issuer space," BTIG analyst Isaac Boltansky wrote in a Feb. 1 note. "If this rule is finalized without a material softening in 2H23, as the CFPB suggests, we would expect an almost immediate legal challenge that could push the fight over this issue into the back half of 2024, where other legal challenges and the presidential election will become a part of the calculus.

"The process of implementing the proposed rule could take years as it moves through the formal rulemaking process, according to Jefferies' Hecht, who pointed to other recent rulemaking processes that have spanned from three years to over 10 years. Likely legal challenges could only prolong the timeline, he wrote.

"Industry participants suggest they will fight this in the court system," he wrote. "Based on our expectations that this process will take several quarters; we believe there is sufficient time to consider fees or price changes to offset some/much of this impact. "Legal challenges are extremely likely ... but we view market perceptions as overly optimistic that these challenges will prevent the rule from going into effect," the analyst wrote in a Feb. 1 note.

Related: CFPB issues CUNA-opposed proposal on credit card late fees
Related: Berger: CFPB’s credit card late fee proposal ‘amounts to financial chaos’
Related: CFPB News Release
Related: CFPB Proposed Rule