The Consumer Financial Protection Bureau was dealt a major blow by a federal judge who found that the bureau's rule cutting credit card late fees to $8 "clearly violates the CARD Act."
In an order on Friday, U.S. District Judge Mark T. Pittman, of the U.S. District Court for the Northern District of Texas, wrote that the U.S. Chamber of Commerce, the American Bankers Association and other trade groups that sued the CFPB earlier this year "are likely to succeed on the merits" of the case.
Pittman, a Trump appointee, found that the CFPB failed to take into account the deterrence effect of penalty fees when it ruled that late fees should be cut to a cost-based fee of just $8, under a safe harbor provision created by the Federal Reserve Board. Pittman wrote that the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the CARD Act, allows credit card issuers to impose penalty fees and that the bureau exceeded its authority.
"Congress assigned the CFPB as an umpire to call balls and strikes on the reasonableness and proportionality of penalty fees," Pittman wrote. "However, by issuing the Final Rule — which prevents card issuers from actually imposing penalty fees — the CFPB has impermissibly assumed the role of commissioner and established a strike-zone only large enough for pitches right down the middle."
Banks and credit card issuers are breathing a sigh of relief because the CFPB's rule would have wiped out
Ed Groshans, a senior policy and research analyst at Compass Point Research & Trading, said that Pittman's opinion signals that the CFPB will lose the lawsuit because it exceeded its statutory authority.
"This means the CFPB's late fee will be overturned, and the current late fee regulations will remain in place," Groshans said.
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Pittman rejected the CFPB's request to lift a temporary injunction that has blocked the bureau's credit card late fee rule from going into effect. Pittman also denied a motion by the CFPB to transfer the case to Washington, D.C., and ruled that the Fort Worth Chamber of Commerce has standing as a plaintiff in the case.
Pittman took issue with the CFPB's view that late fees, which the CARD Act states must be "reasonable and proportional," cannot include a "penalty fee" for the purpose of deterrence. Congress specified deterrence as one of four factors regulators must consider when establishing standards for late fees.
"Fees to cover 'costs' and fees that constitute 'penalties' are not the same thing," Pittman wrote. "A plain language reading reveals that the Final Rule violates the CFPB's statutory authority under the CARD Act. To begin, the CARD Act explicitly allows card issuers to impose 'penalty fee[s].'"
Pittman also said that "penalty fees include the potential for card issuers to charge more than just enough to cover costs."
Going forward, the judge is expected to set a schedule of when he wants a reply from the CFPB and a response from bank trade groups, which would take the case to mid-to-late January, when Donald Trump will be inaugurated.
"It's not over until it's over, but this was a very favorable opinion," Groshans said. "The CFPB has effectively lost this case, but the process still needs to play out."
The American Bankers Association applauded Pittman's order and claimed it demonstrated the strength of the case against the CFPB's late fee rule.
"We contend the CFPB violated federal law with the late fee rule, and this order shows a federal judge agrees," said Sarah Grano, an ABA spokeswoman.
