Federal Judge Overturns Cap on Credit Card Late Fees

Background: The CFPB Rule on Late Fees

The Consumer Financial Protection Bureau (CFPB) introduced a rule in 2023 to cap credit card late fees at $8, significantly reducing the average late fee of $32. The rule was based on the Credit CARD Act of 2009, which prohibits excessive late fees and requires that such fees be “reasonable and proportional.” The CFPB estimated that the rule would save consumers $10 billion annually and discourage credit card companies from relying on late fees as a major revenue source.

Under the rule, credit card issuers could still charge fees exceeding $8 if they could demonstrate that higher fees were necessary to cover the costs of late payments. The rule also allowed issuers to take other measures, such as raising interest rates or reducing credit limits, to deter late payments.

The Legal Challenge

Shortly after the rule was finalized, a coalition of banking and business groups, including the American Bankers Association and the U.S. Chamber of Commerce, filed a lawsuit in federal court. They argued that the CFPB had exceeded its statutory authority under the CARD Act and had failed to provide adequate justification for the $8 cap. The plaintiffs claimed that the rule would cause “irreparable harm” by reducing credit availability and forcing issuers to pass on costs to consumers who pay on time.

In December 2023, U.S. District Judge Mark Pittman issued a preliminary injunction, blocking the rule from taking effect. On March 7, 2024, Judge Pittman vacated the rule entirely, agreeing with the plaintiffs that the CFPB had violated the CARD Act by not allowing issuers to charge “reasonable and proportional” fees.

Reactions to the Ruling

The decision has drawn mixed reactions. Banking groups celebrated the ruling as a victory for consumers and financial institutions. In a joint statement, the American Bankers Association and other groups argued that the rule would have led to more late payments, lower credit scores, and reduced credit access for consumers.

Consumer advocates, however, criticized the ruling as a setback for consumer protection. Chi Chi Wu, a senior attorney at the National Consumer Law Center, stated, “This decision will allow big banks to exploit consumers to the tune of $10 billion annually by charging inflated late fees that far exceed what late payments cost them to collect.”

Implications for Consumers

With the rule vacated, credit card issuers can continue charging late fees that significantly exceed the $8 cap proposed by the CFPB. According to CFPB data, late fees generated approximately $14 billion in revenue for credit card companies in 2022. Consumer advocates warn that the ruling will disproportionately impact low-income households, who are more likely to incur late fees.

To avoid late fees, financial experts recommend setting up autopay for at least the minimum payment and signing up for bill reminders via text or email. Consumers who occasionally miss a payment may also request a fee waiver from their credit card issuer, as many issuers are willing to accommodate one-time lapses.

The Broader Context

The ruling is part of a broader shift in regulatory priorities under the Trump administration, which has sought to roll back several CFPB initiatives. The CFPB, established in the aftermath of the 2008 financial crisis, has faced significant challenges, including leadership changes and legal disputes over its authority.

While the CFPB initially defended the late fee rule, it later joined the banking groups in requesting that the rule be vacated. This shift reflects ongoing debates over the agency’s role in balancing consumer protection with industry interests.

The removal of the CFPB’s late fee cap underscores the complexities of financial regulation and its impact on consumers and businesses. While the ruling provides relief for credit card issuers, it raises concerns about the affordability and fairness of credit card fees for consumers. As the debate continues, consumers are encouraged to stay informed and adopt proactive measures to manage their credit responsibly.