Chamber, bank trade groups sue the CFPB over credit card late fee rule

Andrew Harrer/Bloomberg

The U.S. Chamber of Commerce and five trade groups on Thursday sued the Consumer Financial Protection Bureau to halt the implementation of a rule that would reduce credit card late fees to $8. 

The lawsuit was filed two days after the CFPB issued a final rule cutting credit card late fees to $8 from $32, as part of a wide-ranging effort by the Biden administration to crack down on unfair or hidden fees. The lawsuit claims the CFPB did not explain how it reached the conclusion that an $8 late fee was appropriate, an omission the groups claim is "arbitrary and capricious," in violation of the Administrative Procedure Act. 

The lawsuit was expected given that CFPB Director Rohit Chopra, who was also named in the suit, has said the rule would slash credit card late fees by $10 billion a year. The credit card industry collects more than $14 billion a year in late fee revenue.

The suit was filed in the U.S. District Court for the Northern District of Texas by the Chamber of Commerce, three trade groups in Texas, the American Bankers Association and the Consumer Bankers Association. 

"We have reluctantly been forced to sue a federal regulator because the CFPB has ignored industry and other stakeholder comments demonstrating that this rule exceeds the bureau's statutory authority and will hurt rather than help consumers," said Rob Nichols, president and CEO of the American Bankers Association. "This rule is about politics, not policy, and we look forward to the court's review."  

Nichols said the $8 late fee constituted a cap, and was set below banks' actual costs. Bank trade groups claim the rule would lead to more late payments, increased debt, reduced credit access and higher annual percentage rates for all consumers.

The lawsuit states that the CFPB is preventing credit card issuers from collecting "reasonable and proportional" late fees in violation of the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act. In addition, the suit alleges the CFPB is unconstitutional because the bureau relies on funding from the Federal Reserve, in violation of the appropriations clause — a challenge to the bureau's existence that the Supreme Court is expected to decide by June. 

The late fee rule applies only to the largest 30 to 35 credit card issuers that account for more than 95% of total outstanding balances. Smaller banks and credit unions will not be affected.  

The lawsuit states that the CFPB relied on non-public data collected by the Federal Reserve Boards Capital Assessments and Stress Testing survey, known as Y-14M data, which is collected from financial holding companies with at least $100 billion in assets. The CFPB, which is a bureau of the Federal Reserve System, relied on the Y-14 data to determine the costs of collection by large credit card issuers. 

The U.S. Chamber referred to the information as "secret data collected from only the largest banks for a different purpose and by a different agency."

"Considering the importance of the Y-14M data to the CFPB's conclusions, the failure to make the data publicly available in at least an anonymized form violated the Administrative Procedure Act, and the Final Rule must be set aside," the lawsuit states. 

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The late fee rule involved a two-step process in which the CFPB determined that the Federal Reserve Board in 2010 created a safe harbor that set late fees too high. Separately, the CFPB concluded in its analysis that late fees should be set at $8, based on data collected from the industry. The CFPB claims that the data shows late fees are more than five times the cost of collection. 

Legal experts said the trade groups have to win on two different fronts because the rule includes a severability clause that allows any part of the rule that is stayed or determined to be invalid by a court to be severed while the rest of the rule goes into effect. 

The final credit card rule states: "In particular, if the $8 safe harbor for Larger Card Issuers is stayed or determined to be invalid, the conclusion to repeal the existing safe harbor is severable and shall continue in effect."

A court could potentially strike down the $8 late fee, but still determine that the safe harbor limits were too high, leaving credit card issuers without a safe harbor. As a result, based on the final rule, issuers would still have to justify their late fees to the CFPB based on actual costs.

Lindsey Johnson, president and CEO of the Consumer Bankers Association, said late fees serve a purpose.

"In addition to covering the costs to underwrite consumers and protect consumers from fraud, fees help encourage consumers to pay on time," Johnson said in a press release. "By jamming through new regulations that reduce the consequences of a late payment to less than the cost of a sandwich, the CFPB is essentially saying it's OK to pay one's credit card bill late."

The three Texas trade groups that were part of the lawsuit include the Fort Worth Chamber of Commerce, Longview Chamber of Commerce and Texas Association of Business.