CFPB asks Texas court to vacate credit card late fee rule

The Consumer Financial Protection Bureau has sided with bank trade groups in asking a federal court to dismiss the credit card late fee rule. The CFPB's chief legal officer claimed in court documents that the bureau under the Biden administration violated the law by refusing to allow banks to collect penalty fees on credit cards. 

Industry-watchers expected the bureau to settle  the litigation. The rule would have cut credit card late fees to $8 from $32 currently. Ending the lawsuit and getting rid of the rule saves the credit card industry an estimated $10 billion a year.

On Monday, the CFPB filed a joint motion with the American Bankers Association and five other trade group plaintiffs in the U.S. District Court for the Northern District of Texas to vacate the late fee rule, ending a year of contentious litigation. 

Mark Paoletta, the CFPB's chief legal officer, said the rule violated the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act, which allows credit card issuers to charge penalty fees that are "reasonable and proportional" to the violations. 

The settlement was expected after U.S. District Judge Mark T. Pittman ruled in December that the rule "clearly violates the CARD Act." 

The case is expected to be dismissed with prejudice, and once it is signed by the judge the rule will be permanently closed and cannot be refiled or reopened in the same court. 

"The parties agree that, in the Late Fee Rule, the Bureau violated the CARD Act by failing to allow card issuers to "charge penalty fees reasonable and proportional to violations," as set out by the Court," Paoletta wrote, in a motion with the court for a consent judgment. "Thus, the Late Fee Rule is contrary to law, in violation of the Administrative Procedure Act."

Bank trades groups were pleased to resolve the legal challenge. The U.S. Chamber of Commerce led the trade groups initially in suing CFPB last March over the final rule. The trade groups continue to claim that cutting credit card late fees would harm consumers.

"This is a win for consumers and common sense," the trade groups said in a statement. "If the CFPB's rule had gone into effect, it would have resulted in more late payments, lower credit scores, higher interest rates and reduced credit access for those who need it most."

Bank trade groups also claimed the rule would have reduced the incentive for consumers to pay their bills on time. 

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The industry pushback against the rule issued by former Biden-era CFPB Director Rohit Chopra was palpable given that credit card issuers collect more than $14 billion a year in late fees. Trade groups questioned how the CFPB came up with the $8 late fee amount, which the CFPB said was based on data the bureau collected from banks showing the true cost of collections. 

Technically, the late fee rule repealed an existing safe harbor and adopted a new, lower safe harbor amount of $8 that the CFPB under Chopra claimed was "reasonable and proportional" to the late payment. 

The CFPB and bank trade groups asked the court jointly to dismiss all claims and the parties agreed that "such dismissal would not in any way foreclose constitutional or statutory challenges to other Bureau regulations." 

Both the CFPB and trade groups agreed to pay their own legal costs and fees.

The bank trade groups that sued the bureau last year include the Fort Worth Chamber of Commerce, Long View Chamber of Commerce, Consumer Bankers Association and Texas Association of Business.