Just days before it was slated to go into effect, a federal judge in Fort Worth, Texas, blocked the Biden administration’s rule limiting credit card late fees to $8. Although the rule was supposed to go into effect on May 14, the preliminary injunction has placed it on hold, likely until a Supreme Court ruling is reached.
U.S. District Judge Mark T. Pittman granted the preliminary injunction to a cadre of organizations, led by the U.S. Chamber of Commerce. The Chamber sued the Consumer Financial Protection Bureau after the late-fee rule was finalized in March.
This is far from the end of this fight. The decision wasn’t based on the specifics of the late fee rule but rather on a 2022 decision by the U.S. Court of Appeals for the Fifth Circuit that found that funding for the CFPB is unconstitutional. The case is awaiting a Supreme Court ruling, which is expected by the end of June.
Because of the pending case, Pittman did not specifically address the plaintiffs’ arguments, although he called them “compelling.” Legal experts have said that if the Supreme Court decides the CFPB’s funding is legitimate, the CFPB will likely seek to lift the preliminary injunction. Congress transferred authority for CARD Act rules, which set the current limits for late fees back in 2010, from the Federal Reserve to the CFPB.
The Texas court has become a popular venue for conservatives seeking a sympathetic ear. Despite Pittman’s attempt to transfer the case, citing the absence of banks affected by the rule in the Northern District of Texas, the U.S. Court of Appeals for the Fifth Circuit overturned that decision.
The Lay of the Land
For card issuers, the decision means that the CARD Act’s existing late fee rules will remain in place for now. This entails ensuring that any late fee is “reasonable and proportionate.” Under the current regulations, there’s a safe harbor provision, setting penalty fees at $30 initially, and increasing to $41 for subsequent violations within six cycles.
The new rule would have reduced that safe harbor late fee to $8 for large card Issuers, defined as those with one million or more open consumer credit card accounts. There would be no higher amount permitted for subsequent violations, and the $8 limit will not be adjusted for inflation, as had been the case with the existing limit.
[Editor’s Note: This article has been updated to reflect an update to the ruling]
On May 16, the Supreme Court ruled that the Consumer Financial Protection Board’s funding mechanism is constitutional, clearing the way for several items of interest to the payments industry to move forward. Among the CFPB’s pending agenda items:
Late Fees: A court in Texas had delayed a suit that would have prevented the CFPB from implementing its $8 maximum credit card late fee. It now looks as if there is no basis for that suit to continue, and the late fee is likely to take effect.
Digital Wallets: The CFPB has also been working to finalize a rule subjecting the largest digital payments providers and digital wallet operators to direct supervision by agency examiners. This also looks as if it will move forward, likely later this fall.
UDAAP: The American Banking Association and the U.S. Chamber of Commerce sued the CFPB after announcing that it had updated its exam manual by expanding the definition of unfair, deceptive, or abusive acts and practices (UDAAP) under the Dodd-Frank Act. This decision is currently under appeal and the suit may disappear altogether.
Open Banking: The CFPB’s proposed new rule that would enable customers to freely share their financial information with third-party financial service providers seems ready to move ahead as well.
