A judge has halted a federal financial regulator’s attempt to cap credit card late fees at $8, handing major banks and other card issuers a victory as their multibillion-dollar revenue hangs in the balance.
The limit on late fees, announced in March by the Consumer Financial Protection Bureau (CFPB), was set to take effect on May 14. It was one of several rule changes and regulations aimed at fulfilling President Joe Biden’s pledge to tackle what he called “junk fees.”
According to the CFPB, late fees represent more than 10 percent of the $130 billion issuers charged consumers in interest and fees. As a result, the agency expects that implementing the rule could save American consumers more than $10 billion a year by bringing down late fees to $8 from the current average of $30.
In a decision issued May 10, Judge Mark Pittman of the U.S. District Court for the Northern District of Texas granted the card issuers a preliminary injunction against the CFPB rule, citing a ruling nearly two years ago that declared CFPB’s funding mechanism unconstitutional.
The CFPB, an independent regulatory agency housed within the Federal Reserve system, receives its funding directly from the Federal Reserve, rather than from the typical congressional appropriations process.
Each year, the CFPB requests from the Federal Reserve an amount “reasonably necessary to carry out the Bureau’s functions,” not to exceed 12 percent of the Federal Reserve’s total operating expenses. The Federal Reserve, meanwhile, is funded through interest earned on the securities it owns and assessments it levies on banks.
As a result, the Fifth Circuit vacated the Payday Lending rule.
Judge Says Rule Likely Unconstitutional
Judge Pittman agreed with the Fifth Circuit’s conclusion, saying that those challenging the CFPB’s credit card rule will likely prevail.“The Fifth Circuit has held that the CFPB’s double-insulated funding scheme is unconstitutional,” he wrote. “Consequently, any regulations promulgated under that regime are likely unconstitutional as well.”
The Trump-appointed district judge didn’t rule on any of the claims brought by card issuers that the CFPB’s cap violated the Administrative Procedure Act, the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act, and other federal laws, although he said they made “compelling arguments” against the rule.
The U.S. Chamber of Commerce, a leading plaintiff in the case, welcomed the ruling as a win for both consumers who pay their credit card bills on time and businesses that “want to provide affordable credit.”
“The CFPB’s attempted micromanagement would have raised costs for most credit card users. And made it harder for businesses to meet consumers’ needs,” Maria Monaghan, counsel at the Chamber’s litigation arm, said in a statement. “The US Chamber will continue to hold the CFPB accountable in court.”
The American Bankers Association (ABA), which represents many of the nation’s largest credit card issuers, has called the $8 limit a “misguided political campaign” that could harm rather than help consumers.
“Late fees are a proven deterrent that encourage on‐time payments, help cover issuers’ costs associated with late payments, and allow issuers to manage their risks and sustain their business of providing credit,” the ABA argued in a statement submitted to the Senate Banking Committee. “Importantly, Late fees provide incentives to manage finances and help customers to avoid defaults and delinquencies, which can have adverse consequences.”
