On February 1, the CFPB announced a newly proposed rule aimed at ensuring that late fees charged on consumer credit card accounts are “reasonable and proportional” to late payments. If finalized, the proposed rule would amend Regulation Z, which implements the Truth in Lending Act (“TILA”), in the following ways:

• Lower the safe harbor amount for late fees. To account for the costs incurred to collect on late payments, TILA permits credit card companies to assess late fees to consumers of up to $41 per missed payment. The CFPB estimates, however, that card issuers generate income under this “safe harbor” provision that is approximately five times greater than the costs incurred from late payment violations. The proposed rule would lower the safe harbor amount to $8 per missed payment. Credit card companies seeking to assess late fees in excess of the proposed $8 safe harbor amount would be required to provide proof that the fee amounts are proportional to collection costs.

• End automatic annual inflation adjustment. Under TILA, the safe harbor amount is automatically adjusted each year based on annual inflation. The proposed rule would eliminate the automatic inflation adjustment and the CFPB would instead monitor market conditions and propose manual adjustments to the safe harbor amount accordingly.

• Lower the current cap on late fees. TILA presently allows card issuers to charge late fees of up to 100% of the minimum payment owed by the cardholder. The proposed rule would restrict such late fee charges to 25% of the minimum payment owed.

Putting it into Practice: The CFPB has made reining in excessive credit card late fees a high priority over the past year (see previous blog posts here, here, and here). In addition to this rule proposal, the CFPB has recently issued a request for comment on junk fees, a research report detailing the amount that credit card companies charged for late fees in 2020, and an advanced notice of proposed rulemaking with respect to late fees. These actions further evidence a broader regulatory focus on credit card transactions and disclosures that has been growing in recent years. Credit card companies and other financial institutions subject to the proposed rule changes should therefore review their late fee assessment policies and consider whether any modifications are necessary to remain compliant with the updated regulations.