The CFPB’s $8 Late Fee Rule (Part 2)

The latest developments in what has become a saga.

When I entitled the previous edition of our article on the CFPB’s $8 late fee rule “Part 1,” I did so thinking the next part would be dedicated to deep diving into the 338 pages of the rule, which is supposed to go into effect on May 14. What I didn’t anticipate was the dizzying series of court actions that have taken place since then while our newsletter was on semi-hiatus with guest writers and then covering fintech in Asia. It’s been equal parts fascinating and mind-boggling to try and keep up with all the developments since the rule was released on March 5, but thankfully friend of the newsletter Alan Kaplinsky of Ballard Spahr has done absolutely amazing work keeping up with how the rule has gone through the court system, along with Chris Geidner of LawDork.com.

So in the repurposed “Part 2” of the CFPB Late Fee series, with the help of Alan and Chris, we’ll try to summarize everything that has happened in the last nearly two months since the rule was announced and now is twelve days from going live (or potentially eight days from being rejected - more on this below). Depending on the next week and a half, we may or may not have a Part 3 to this series.

As a recap from Part 1:

Following a proposal that was initially surfaced by the CFPB (that we covered last year), the CFPB has now finalized a rule which says that card issuers can no longer charge you (the consumer) statement late fees that exceed $8 per period. Initially, when the CARD act passed in 2009 and was implemented in 2010, the idea was that as a starting point, late fees would be capped at $25 for the first late fee occurrence and $35 for all subsequent late occurrences. However, there was a provision (the “automatic inflation adjustment” to allow this amount to be adjusted with inflation and currently, the amounts sit at $30 and $41 (which most issuers are either right at or at most, one dollar under from my anecdotal surveying).

The CFPB felt that the inflation adjustment was being abused and decided to act, stating that this will apply to those issuers that have over 1 million or more open accounts. They state that this will impact companies that make up 95% of all outstanding credit card debt. If issuers feel they need to charge certain fees to cover their collection costs, they can request permission from the CFPB.

In any case, let’s dig into what’s been happening:

March 5 - The CFPB issues its final credit card late fee rule.

March 7 - A lawsuit is filed in a Texas district court seeking to invalidate the rule. The plaintiffs argue the following (great breakdown by Alan and Ballard Spahr here of which we pull from):

• The CFPB’s funding mechanism is unconstitutional (an argument previously raised in a case that is currently pending before the Supreme Court)

• The rule violates the CARD Act requirement that the rule be “reasonable and proportional to the violation to which the fee or charge relates” [my comment - I’m actually in shock that the industry cited this part of the CARD Act, which was a consumer protection regulation clearly meant to ensure consumers are not charged excessive fees and would almost certainly not have been designed to ensure issuers get compensated accordingly]

• The rule violates the part of Dodd-Frank which states that the CFPB has to consider the “potential benefits and costs to consumers and covered persons including the potential reduction of access by consumers to consumer financial products and services resulting from such a rule”

• By being effective May 14, the rule violates TILA’s requirement which says “any amendment [to TILA must have] an effective date of October 1” which must be six months after the date of issuance. In this case, there was approximately a 60 day timeline after a March 5 issuance.

• A claim of poor analysis and lack of transparency around data and information around which the CFPB based its reasoning on settling for an $8 late fee - one point in the suit essentially says that the $8 was picked because it is almost exactly 75% less than the current $30 and something that President Biden promised a year ago, as a somewhat throwaway line in his initial announcement of a fight against junk fees that didn’t get much attention until a year later when the rule was finalized.

• Issuers will suffer 1) higher compliance, training, and customer service costs [my response - we’re talking about changing a number, something issuers have never complained about when going the other way which they have been doing for years] 2) risk of enforcement actions because it will be impossible to approve and print the required physical disclosures by the effective date [my response - that’s interesting because card issuers have been just fine with the 45 day timeline of change in terms which has been part of the CARD Act since 2009 and is usually enough for issuers to make changes adverse to the customer] 3) loss of late fee revenue including by issuers who aren’t subject to the rule but will feel pressure due to the forced competition on fees that will be created by those who have to change the amount 4) increased collection costs because the rule will make consumers more likely to make late payments [my response - I can’t get my head around this thinking. A lower late fee is going to increase the likelihood that consumers heading to collections won’t pay it? Seriously?] 5) changed economics of accounts that would not have been approved had issuers known the fee would be $8 [my response - can’t you argue the same thing about accounts that were rejected that would have been approved had issuers not increased their late fee from 25 to 28 to 30 in the past? Sunk cost is sunk cost, not worth complaining about.] 6) loss of customer goodwill if issuers are forced to reduce their late fees to $8 and subsequently raise them due to cost analysis or litigation [my response to both of these - issuers deciding it’s worth taking the compliance fine/penalty hit to violate the rule, or issuers deciding to litigate the rule - are decisions entirely up to the issuer, so if they lose customer goodwill, I don’t see why you’d blame the CFPB]

The case is initially assigned to Judge Terry Means, but he requests it to be reassigned given his senior/inactive status.

March 8 - Industry watchdog Accountable.us reveals that the judge set to preside over the litigation of the case, Reed O’Connor, invested as much as $45,000 in institutions filing the lawsuit, including $15,000 in Capital One, $15,000 in Visa, and $15,000 in foreign bank stock. In addition, they call out his ties to the Federalist Society including speaking with them, which seems to signal unmistakable bias on his part.

March 14 - O’Connor recuses himself after the revelations and the case is reassigned to Judge Mark Pittman. This is now the third judge assigned to the case and it’s been just one week.

March 18 - Pittman enters an order questioning whether Texas is the right venue to hear the lawsuit given only one of the plaintiffs actually appears to have any tie to Texas, and references well-known case In re Volkswagen from 2008 as consideration, given it set a landmark precedent on public and private factors to consider when determining whether to transfer the jurisdiction/location of a case. He provides a specific schedule giving the industry (plaintiffs) until Thursday (March 21) to explain why Texas should remain the venue, and defendants (the government/CFPB) until the next week (Monday) to respond. He also points out that the government can signal an intent to file a motion to transfer the next day (Tuesday March 19) and file by that Thursday, giving the industry till the next Monday (March 25) to respond. In addition to Volkswagen, this is in line with other decisions made by the overseeing Fifth Circuit Court of Appeals, which has oversight into all Texas cases and which has made it clear that venue should be prioritized over all other substantive proceedings (See Pg 3 at the link). Super detailed and straightforward, right?

March 19 - Apparently not. The industry plaintiffs ask the judge to forget the venue issue and rule on their motion for a preliminary injunction (which would essentially stop the clock on the CFPB’s 60 day rule while the case is being heard).

March 20 - Pittman denies the request.

March 21 - The CFPB files its motion for a transfer of venue.

March 25 - In their response, the plaintiffs/industry file their opposition to the change in venue request. The same day, they appeal the denial of their motion for a preliminary injunction to the aforementioned Fifth Circuit.

March 28 - While the plaintiffs/industry/Chamber of Commerce wait for the response to their appeal, Pittman grants the transfer request.

March 29 - The plaintiffs file a petition for mandamus with the Fifth Circuit - essentially asking them to force the case to be brought back. Before the Fifth Circuit can respond, the case gets officially transferred to a DC court as evidenced by the creation of a docket number and assignment of a judge (Amy Berman Jackson). What happens next is where things get confusing - I’ll hand it over to Chris:

Also on March 29, a panel of the Fifth Circuit — Judges Carl Stewart (Clinton), James Graves (Obama), and Andy Oldham (Trump) — granted what appeared to have been an incorrectly worded order. It stated, “IT IS ORDERED that appellants’ motion for stay of the District Court’s transfer order pending appeal is administratively stayed until 10:00 a.m. on March 30, 2024.“ If the motion is stayed, which is what the order stated, then nothing changed. A little more than 14 hours later, at nearly 1:30 a.m. CT March 30, the same panel issued another order: “IT IS ORDERED that the District Court’s transfer order is administratively stayed until 5:00 PM on Tuesday, April 2, 2024.” That would have been right, but, by then, the D.C. court already had the case.

April 1 - Putting aside whether the stay has any validity, the Fifth Circuit requests the CFPB respond within 24 hours to the petition for mandamus aka the request for the case to be sent back.

April 2 - The CFPB responds by calling what the plaintiffs/industry are requesting as a “feat of alchemy” and cites past decisions, including those made by the Supreme Court, regarding forcing a specific venue to hear a case as something that has been well established as not in the spirit of the law. Meanwhile, the Fifth Circuit extends the questionable stay on transfer to April 5.

April 5 - The Fifth Circuit goes against its own precedent from In Re Volkswagen (and In Re Apple from 2023, as noted earlier) and orders that the transfer be cancelled (and that essentially, they take over the case). As noted by Chris, in a dissent Judge Stephen Higginson noted ““[T]he majority’s grant of mandamus also threatens to impossibly hamstring district courts by effectively declaring that our district judges cannot manage their dockets to sequence threshold questions before difficult merits questions and cannot transfer cases if there are motions pending…[district court judges will now simply have to] accede to a plaintiff’s insistence for a ruling in less than two weeks from assignment of the case.”

April 8 - Politico publishes a piece digging into financial disclosures that reveal Fifth Circuit judge Don Willett, who wrote the majority opinion regarding sending the case back to Texas, has stock holdings in Citi and raise questions about a possible conflict of interest. Almost immediately, the CFPB files a letter with the court requesting his recusal.

April 10 - Judge Amy Berman Jackson closes the case in the DC Court. All eyes are on the Fifth Circuit now. In the meantime, 30 days have passed since the rule was finalized and the compliance deadline looms closer.

April 11 - The industry responds with its own view on the request for recusal in a nine-page filing (the CFPB’s initial request is 2 pages).

April 17 - The Committee on Codes of Conduct of the Judicial Conference of the United States concludes that Willette does not have to recuse himself from the case.

April 18 - The CFPB files a petition for panel rehearing of the decision to vacate the transfer order back to DC. They claim that the Fifth Circuit’s determination that the Texas court prevented a valid injunction was based on bad information, namely that disclosures about late fees would need to be printed by March 29, and states that TILA does not require advance notice for a reduction in the maximum late fee - indeed, what we noted earlier about the 45 day window being intended to give consumers enough time to prepare to pay more in fees, not less (why would they need to prepare to pay less in fees)? Essentially, as the regulator enforcing this very rule, they signal that the spirit of the 45 day advance notice was to protect consumers (which doesn’t apply here due to the potential decrease on the table).

April 19 - The Fifth Circuit issues a notice setting an expedited briefing schedule regarding the appeal that they are now overseeing regarding the industry requesting an injunction on the rule (which as of this date is still slated to go into effect on May 14). Originally, the plaintiffs were to file their briefs by May 6, however that timeline is moved to April 26. However, the rest of the schedule still cuts past the effective date - as they request the CFPB to file their response to the injunction request by May 13, and the reply brief must be filed by the plaintiffs by May 17. The bets are that the Fifth Circuit will file an emergency injunction before May 14 and this entire process will be moot, allowing the rule to be litigated without the clock ticking (and all this jurisdictional drama).

April 26 - As expected, the industry/Chamber/plaintiffs file their brief supporting an injunction.

May 1 - In a somewhat fascinating move, the Fifth Circuit sends the case back to the district court that had tried to transfer the case elsewhere, with the instructions that they must rule by May 10 on whether or not an injunction should be imposed on the $8 rule. This would happen to be 4 days before the rule is supposed to go into effect, meaning that if the court says that the request for injunction is denied, the industry has four days left to become compliant. This is also while the matter of the CFPB’s request for re-hearing regarding transferring the case is still pending.

And that’s where we stand as of May 3. We will definitely be tracking updates to this case and if it goes live, we’ll be digging into the guts of it.