# Credit Card Penalty Fees (Regulation Z)

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-05011

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** March 15, 2024
- **Citation:** 89 FR 19128

## Text

CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Part 1026
[Docket No. CFPB-2023-0010]
RIN 3170-AB15
Credit Card Penalty Fees (Regulation Z)

AGENCY:

Consumer Financial Protection Bureau.

ACTION:

Final rule; official interpretation.

SUMMARY:

The Consumer Financial Protection Bureau (CFPB or Bureau) amends Regulation Z, which implements the Truth in Lending Act (TILA), to address late fees charged by card issuers that together with their affiliates have one million or more open credit card accounts (referred to as “Larger Card Issuers” herein). This final rule adopts a late fee safe harbor threshold of $8 for those issuers and provides that the annual adjustments to reflect changes in the Consumer Price Index (CPI) do not apply to this $8 amount.

DATES:

Effective date:
May 14, 2024.

FOR FURTHER INFORMATION CONTACT:

Adrien Fernandez, Counsel; Krista Ayoub and Steve Wrone, Senior Counsels, Office of Regulations, at 202-435-7700. If you require this document in an alternative electronic format, please contact
CFPB_Accessibility@cfpb.gov.

SUPPLEMENTARY INFORMATION:

I. Summary of the Final Rule

The CFPB is amending provisions in Regulation Z, § 1026.52(b) and its accompanying commentary as they relate to credit card penalty fees.
1

Currently, under § 1026.52(b)(1), a card issuer must not impose a fee for violating the terms or other requirements of a credit card account under an open-end (not home-secured) consumer credit plan, such as a late payment, exceeding the credit limit, or a returned payment, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 1026.52(b)(1)(i) (so-called cost analysis provisions) or complies with the safe harbor provisions set forth in § 1026.52(b)(1)(ii). Section 1026.52(b)(1)(ii)(A) and (B) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.
2

The CFPB has determined that for Larger Card Issuers (
i.e.,
card issuers that together with their affiliates have one million or more open credit card accounts),
3

the discretionary safe harbor dollar amounts for late fees, as currently set forth in § 1026.52(b)(1)(ii)(A) and (B), are too high and, therefore, are not consistent with TILA's statutory requirement that such fees be reasonable and proportional to the omission or violation to which the fee relates. With respect to the current higher safe harbor threshold for late fees for certain subsequent violations, the CFPB also is concerned based on data from certain Larger Card Issuers that this amount is higher than is justified based on consumer conduct and to deter future violations and, indeed, a late fee that is too high could interfere with a consumer's ability to make future payments on the account.

1
When amending commentary, the Office of the Federal Register (OFR) requires reprinting of certain subsections being amended in their entirety rather than providing more targeted amendatory instructions. The sections of regulatory text and commentary included in this document show the language of those sections as amended by this final rule. In addition, the CFPB is releasing an unofficial, informal redline to assist industry and other stakeholders in reviewing the revisions by this final rule to the regulatory text and commentary of Regulation Z. This redline can be found on the CFPB's website,
https://files.consumerfinance.gov/f/documents/cfpb_unofficial-redline_credit-card-penalty-fees_final-rule_2024-01.pdf.
If any conflicts exist between the redline and the text of Regulation Z, its commentary, or this final rule, the documents published in the
Federal Register
are the controlling documents.

2
Although the safe harbors discussed above apply to charge card accounts, § 1026.52(b)(1)(ii)(C) provides an additional safe harbor when a charge card account becomes seriously delinquent.

3
This final rule does not define the term “Larger Card Issuer” in the regulatory or commentary text, but this document uses this term to aid understanding of the changes in this final rule and readability of the document. This document uses the term “Larger Card Issuers” to refer to card issuers that are not Smaller Card Issuers as defined in § 1026.52(b)(3) and thus are card issuers that together with their affiliates have one million or more open credit card accounts.

To address these concerns, this final rule amends § 1026.52(b) and its accompanying commentary to help ensure that the safe harbor sets late fees imposed by Larger Card Issuers at amounts that are consistent with the TILA's requirement that such fees be reasonable and proportional to the cost from an omission or violation. First, with respect to Larger Card Issuers, this final rule repeals the current safe harbor threshold amounts in § 1026.52(b)(1)(ii)(A) and (B), adopts in § 1026.52(b)(1)(ii) a late fee safe harbor dollar amount of $8, and eliminates for late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
4

Second, with respect to late fees imposed by Larger Card Issuers, this final rule provides that the current provision in § 1026.52(b)(1)(ii)(D) that provides for annual adjustments for the safe harbor dollar amounts to reflect changes in the CPI will not apply to the $8 safe harbor amount for those late fees. This final rule also amends comments 7(b)(11)-4, 52(a)(1)-1.i and iv, 60(a)(2)-5.ii, and sample forms in appendix G to revise current examples of late fee amounts to be consistent with the $8 safe harbor late fee amount discussed above.

4
This final rule does not amend the safe harbor set forth in § 1026.52(b)(1)(ii)(C) applicable to charge card accounts.

This final rule does not adopt the following revisions for Smaller Card Issuers as defined in new § 1026.52(b)(3): (1) repeal of the current safe harbor threshold amounts in § 1026.52(b)(1)(ii)(A) and (B), adoption of $8 late fee safe harbor threshold amount, and elimination of a higher late fee safe harbor dollar amount for subsequent violations; and (2) the elimination of the annual adjustments for the safe harbor threshold dollar amounts. This final rule defines the term “Smaller Card Issuer” in § 1026.52(b)(3) to mean a card issuer that together with its affiliates had fewer than one million open credit card accounts for the entire preceding calendar year.
5

For purposes of defining “Smaller Card Issuer,” this final rule incorporates the definition of “open credit card account” from § 1026.58(b)(6), which defines the term to mean a credit card account under an open-end (not home-secured) consumer credit plan and either: (1) The cardholder can obtain extensions of credit on the account; or (2) There is an outstanding balance on the account that has not been charged off. As discussed below, the safe harbors in § 1026.52(b)(1)(ii)(A) and (B), as revised in this final rule pursuant to the annual adjustments in § 1026.52(b)(1)(ii)(D), will continue to apply to late fees imposed by Smaller Card Issuers.

5
This final rule contains an exception if a card issuer together with its affiliates had fewer than one million open credit card accounts for the entire preceding calendar year but meets or exceeds that number of open credit card accounts in the current calendar year. In this case, this final rule provides that the card issuer will no longer be a Smaller Card Issuer as of 60 days after meeting or exceeding that number of open credit card accounts.
See
§ 1026.52(b)(3)(ii).

Pursuant to the annual adjustments for safe harbor dollar amounts in § 1026.52(b)(1)(ii)(D), this final rule revises the safe harbor threshold amounts in § 1026.52(b)(1)(ii)(A) and (B) to $32, except that it sets forth a safe harbor of $43 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles. These revised safe harbor threshold amounts of $32 and $43 apply to penalty fees other than late fees for all card issuers (
i.e.,
Smaller Card Issuers and Larger Card Issuers) as well as late fees imposed by Smaller Card Issuers, as noted above.

This final rule also amends comment 52(b)(1)(i)-2.i to make it explicitly clear that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. This clarification applies to all card issuers that use the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts, including late fees.

II. Background

A. The CARD Act

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) was signed into law on May 22, 2009.
6

The CARD Act primarily amended TILA
7

and instituted new substantive and disclosure requirements to establish fair and transparent practices for open-end consumer credit plans. The CARD Act added TILA section 149, which provides, among other things, that the amount of any penalty fee with respect to a credit card account under an open-end consumer credit plan in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee or any other penalty fee or charge, must be “reasonable and proportional” to such omission or violation.
8

6
Public Law 111-24, 123 Stat. 1734 (2009).

7
15 U.S.C. 1601
et seq.

8
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).

At the time of its passage, the CARD Act required the Board of Governors of the Federal Reserve System (Board) to issue rules establishing standards for assessing the reasonableness and proportionality of such penalty fees.
9

In issuing these rules, the CARD Act required the Board to consider (1) the cost incurred by the creditor from an omission or violation; (2) the deterrence of omissions or violations by the cardholder; (3) the conduct of the cardholder; and (4) such other factors deemed necessary or appropriate by the Board.
10

The CARD Act authorized the Board to establish different standards for different types of fees and charges, as appropriate.
11

The CARD Act also granted the Board discretion to provide an amount for any penalty fee or charge that is presumed to be reasonable and proportional to the omission or violation to which the fee or charge relates.
12

As discussed in more detail below, the authority to implement TILA, including TILA section 149, transferred from the Board to the CFPB in 2011.

9
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).

10
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(c)).

11
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(d)).

12
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. (1665d(e)).

B. The Board's Implementing Rule

On June 29, 2010, the Board issued a final rule implementing new TILA section 149 in its Regulation Z, 12 CFR 226.52(b) (2010 Final Rule).
13

The Board's Regulation Z, § 226.52(b) provided that a card issuer must not impose a fee for violating the terms or other requirements of a credit card account, such as a late payment, exceeding the credit limit, or returned payments, unless the issuer has determined that the dollar amount of the fee represents a reasonable proportion of the total costs incurred by the issuer for that type of violation as set forth in § 226.52(b)(1)(i). Alternatively, if the card issuer did not want to use the cost analysis provisions in § 226.52(b)(1)(i) to determine the late fee amount, the issuer could use the safe harbors set forth in § 226.52(b)(1)(ii).
14

The Board set the safe harbor amounts in § 226.52(b)(1)(ii) at $25 generally for penalty fees, except that it set forth a safe harbor of $35 for each subsequent violation of the same type that occurs during the same billing cycle or in one of the next six billing cycles.
15

Although the safe harbors discussed above applied to charge card accounts, the Board's Regulation Z, § 226.52(b)(1)(ii) also provided an additional safe harbor when a charge card account becomes seriously delinquent.
16

The Board's Regulation Z, § 226.52(b)(1)(ii)(D) provided that the safe harbor dollar amounts would be adjusted annually to the extent that changes in the CPI would result in an increase or decrease of $1.
17

13
75 FR 37526 (June 29, 2010).

14
12 CFR 226.52(b)(1).

15
12 CFR 226.52(b)(1)(ii)(A) and (B).

16
12 CFR 226.52(b)(1)(ii)(C).

17
12 CFR 226.52(b)(1)(ii)(D).

The Board's Regulation Z, § 226.52(b)(2) also contained other restrictions on card issuers for imposing penalty fees. Specifically, § 226.52(b)(2)(i) prohibited issuers from imposing penalty fees that exceed the dollar amount associated with the violation.
18

In addition, § 226.52(b)(2)(ii) prohibited issuers from imposing multiple penalty fees based on a single event or transaction.
19

18
12 CFR 226.52(b)(2)(i).

19
12 CFR 226.52(b)(2)(ii).

C. Transfer of Authority for TILA to the CFPB and the CFPB's Rule

The Board's 2010 Final Rule implementing TILA section 149 took effect on August 22, 2010.
20

Nearly one year later, on July 21, 2011, the Board's rulemaking authority to implement the provisions of TILA, including TILA section 149, transferred to the CFPB pursuant to sections 1061 and 1100A of the Consumer Financial Protection Act of 2010 (CFPA).
21

20
75 FR 37526 at 37526.

21
Public Law 111-203, 124 Stat. 1376, 1955-2113 (2010).

On December 22, 2011, the CFPB issued an interim final rule issuing its Regulation Z, 12 CFR part 1026, to reflect its assumption of rulemaking authority over TILA.
22

As set forth in the interim final rule, the CFPB's Regulation Z, § 1026.52(b) contained the same restrictions on penalty fees as set forth in the Board's Regulation Z, § 226.52(b).
23

22
76 FR 79768 (Dec. 22, 2011);
see also
81 FR 25323 (Apr. 28, 2016).

23
76 FR 79768 at 79822.

The dollar safe harbor amounts adopted by the Board in 2010 have been adjusted pursuant to § 1026.52(b)(1)(ii)(D).
24

Section 1026.52(b)(1)(ii) currently sets forth a safe harbor of $30 generally for penalty fees, except that it sets forth a safe harbor of $41 for each subsequent violation of the same type that occur during the same billing cycle or in one of the next six billing cycles.
25

24
Comment 52(b)(1)(ii)-2.

25
Although the safe harbors discussed above apply to charge card accounts, § 1026.52(b)(1)(ii)(C) provides an additional safe harbor when a charge card account becomes seriously delinquent. Specifically, § 1026.52(b)(1)(ii)(C) provides that, when a card issuer has not received the required payment for two or more consecutive billing cycles on a charge card account that requires payment of outstanding balances in full at the end of each billing cycle, it may impose a late payment fee that does not exceed 3 percent of the delinquent balance.

D. A Decade of the Late Fee Safe Harbor

In the wake of the Board's and the CFPB's implementation of TILA section 149, late fees represent almost all

penalty fee volume on credit cards. Over-the-limit fees are now practically nonexistent and fees for returned payments account for less than one percent of total fee volume based on Y-14+ data collected from a group of mass market and specialized issuers.
26

26
Consumer Fin. Prot. Bureau (CFPB),
The Consumer Credit Card Market,
at 62-67 (Oct. 2023) (2023 Report),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf. See
part V for a description of the Y-14+ data.

Prior to the passage of the CARD Act in 2009, the average late fee was $33 for issuers in the CFPB's Credit Card Database (CCDB) which includes information on the full consumer and small business credit card portfolios of large credit card lenders, covering approximately 85 percent of all credit card accounts in the U.S. between April 2008 and April 2016.
27

With the effective date of the safe harbor threshold amounts in 2010, the average late fee in the CCDB declined by over $10 to $23 in the fourth quarter of 2010.
28

27
CFPB,
Card Act Report,
at 23 (Oct. 2013) (2013 Report),
https://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf.
From 2008 to 2015, the CFPB used the CCDB to measure the amount of average late fees to include in the CARD Act reports that the CFPB releases every two years. In its 2017 report, the CFPB started using the Y-14 data to measure the amount of average late fees to include in its CARD Act reports and began using the Y-14+ data to calculate metrics including average late fee beginning with its 2019 report.
See
part V for a description of the Y-14 and Y-14+ data.

28

Id.

However, from 2010 through the onset of the COVID-19 pandemic, issuers had steadily been charging consumers more in credit card late fees each year—growing to over $14 billion in total late fee volume for issuers contained in the Y-14+ data in 2019.
29

At the end of 2012, the average late fee for major issuers in the CCDB reached about $27.
30

It remained at about that level until rising to $28 in 2018 for issuers in the Y-14+, consistent with the first safe harbor adjustment to reflect changes in the CPI in 2014.
31

In 2019, the average late fee charged by credit card issuers in the Y-14+ rose to $31, approaching nominal pre-CARD Act levels.
32

In 2020, the average late fee for issuers in the Y-14+ data stayed at $31.
33

29
CFPB,
Credit Card Late Fees,
at 4 (Mar. 2022) (Late Fee Report),
https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees_report_2022-03.pdf.

30
2013 Report, at 23.

31
CFPB,
The Consumer Credit Card Market,
at 69 (Dec. 2019) (2019 Report),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2019.pdf.

32
Late Fee Report, at 6.

33
Late Fee Report, at 5; CFPB,
The Consumer Credit Card Market,
at 55 (Sept. 2021) (2021 Report),
https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2021.pdf.

Total late fee volume for issuers contained in the Y-14+ exceeded pre-pandemic levels in 2022, following declines in both 2020 and 2021 given record-high payment rates and public and private relief efforts, as discussed in the 2023 Proposal (88 FR 18906 (Mar. 29, 2023)).
34

Data published after the 2023 Proposal found issuers in the Y-14+ reported $14.5 billion in late fees in 2022, up from $11.3 billion in 2021, $11.9 billion in 2020, and slightly above $14.2 billion in 2019.
35

The average late fee increased from $31 in 2021 to $32 in 2022 across both first-time and repeat incidents of late payment, explaining part of the increase in total volume in 2022.
36

34
2021 Report, at 117; 2023 Report, at 65.

35
2023 Report, at 65.

36

Id.

E. Credit Card Issuers' Use of the Late Fee Safe Harbor

Currently, § 1026.52(b)(1)(ii) sets forth a safe harbor of $30 generally for a late payment, except that it sets forth a safe harbor of $41 for each subsequent late payment within the next six billing cycles. A card issuer is not required to use the cost analysis provisions in § 1026.52(b)(1)(i) to determine the amount of late fees if it complies with these safe harbor amounts.
37

37

See
comment 52(b)(1)-1.i.A.

As noted in the 2023 Proposal, an analysis by the CFPB in 2022 of credit card agreements submitted to the CFPB's Credit Card Agreement Database in the fourth quarter of 2020 found no evidence of any issuers using the cost analysis provisions to charge an amount higher than the safe harbor.
38

Most top issuers by outstanding balances have taken advantage of the increased safe harbors as annually adjusted to reflect changes in the CPI by increasing their fee amounts.
39

Eighteen of the top 20 issuers by outstanding balances contracted a maximum late fee at or near the higher safe harbor amount of $40 in 2020 based on analysis of the maximum late fee disclosed by an institution in agreements submitted to the CFPB's Credit Card Agreement Database in the fourth quarter of that year.
40

Yet, the most common maximum late fee disclosed in agreements submitted to the CFPB was $25, as driven by the practices of smaller banks and credit unions not in the top 20 issuers by asset size.
41

Finally, a small but growing number of issuers offer credit card products with no late fees.
42

38
Late Fee Report, at 14.

39

Id.

40

Id.
The Credit Card Agreement Database is available at
https://www.consumerfinance.gov/credit-cards/agreements.

41
Late Fee Report, at 14.

42

Id.
at 15.

An analysis by the CFPB in 2023 of credit card agreements submitted to the CFPB's Credit Card Agreement Database in the second quarter of 2023 was consistent with the 2022 results. The CFPB did not find evidence of issuers using the cost analysis provision to charge an amount higher than the safe harbor. Of the approximately 30 to 35 submitters that the CFPB would expect to be Larger Card Issuers, most of those issuers continued to contract at a maximum late fee at or near the higher safe harbor amount of $41 in 2023 with all Larger Card Issuers in the Y-14+ data charging a maximum late fee between $38 and $41. For Larger Card Issuers, the maximum late fee in their submitted agreements ranged from $20 to $41 with 13 issuers charging $40 and 11 charging $41. Smaller Card Issuers with more than 10,000 accounts submitting agreements to the CPFB's Credit Card Database continue to charge far below the late fee safe harbor. Only six Smaller Card Issuers for whom the CFPB has data charged a maximum late fee of $41. Over two-thirds of the sample of Smaller Issuers charge $25 or less per late payment and 10 already charge $8 or less.

Some Larger Card Issuers may be disincentivized to lower late fee amounts below the safe harbor, given that the industry as a whole continues to rely on late fees as a source of revenue and many consumers may not shop for credit cards based on the amount of the late fee. For the Larger Card Issuers in the Y-14+ data, late fees represented 10 percent of charges to consumers in 2020, but individual card issuers' revenue from late fees varied.
43

The share of late fees for Larger Card Issuers in the Y-14+ data ranged from approximately five to 30 percent of total consumer charges in 2019. Among issuers there is a strong correlation between reliance on late fees and concentration of subprime accounts. Yet, the industry as a whole continues to rely on late fees as a source of revenue.
44

43

Id.
at 13.

44

Id.
at 14.

As noted in the 2023 Proposal, many consumers may not shop for credit cards based on the amount of late fees, which also may lessen card issuers incentive to charge late fees lower than the safe harbor amount. Survey data suggest that other factors, such as rewards, annual fees, and annual percentage rate(s)

(APR), drive credit card usage.
45

In addition, recent academic work
46

directly observed that credit card offers highlight rewards, annual fees, and APRs more than late fees based on the position of the information and the size of the font.
47

Only 6.06 percent of the 611,797 card offers in their data spanning from 1999 to 2007 mentioned late fees on the front page, with an average font size of 9.56. In contrast, (1) rewards were displayed on the front page 93.68 to 100 percent of the time (depending on the type of rewards) with an average font size of 12.12 to 16.56; (2) the annual fee was disclosed on the front page 78.02 percent of the time with an average font size of 13.39; and (3) APRs were displayed on the front page 27.95 percent of the time with an average font size of 13.02. The CFPB notes that the authors of the study explained that most of the analysis reported in the paper excludes the post-2007 data to abstract from the impact of the 2008 financial crisis and the CARD Act.
48

However, the authors also stated that “the main results are qualitatively and quantitatively very similar if we include data until 2016.”
49

Since the CFPB issued the 2023 Proposal, other survey data indicate that late fee amounts are less impactful to consumers than annual fees, rewards, intro sign-up bonuses, credit limits, other benefits, and promotional or ongoing interest rates when deciding whether to apply for a new credit card or choosing whether to use an existing credit card.
50

45
Karen Augustine,
U.S. Consumers and Credit: Rising Usage,
Mercator Advisory Group, at 40 (2018).

46
Hong Ru & Antoinette Schoar,
Do Credit Card Companies Screen for Behavioural Biases?
(Feb. 21, 2023), BIS Working Paper No. 842,
https://ssrn.com/abstract=3549532.

47

Id.
This survey used detailed information from Comperemedia on more than 1.3 million individual credit card offers that were sent to a set of representative households in the United States between 1999 and 2016. Thus, the CFPB expects that this survey likely focused on Larger Card Issuers, which represent the bulk of the credit card market in terms of outstanding balances.
Id.
at 3.

48

Id.
at 12.

49

Id.

50
Auriemma Consulting Group, Impact of Late Fee and Interchange Regulation, Variable Rates, and Credit Card Value Proposition Preferences (Oct. 2023).

F. Consumer Impact of Late Fees

As noted in the 2023 Proposal, late fees represented over one-tenth of the $120 billion issuers in the Y-14+ charged to consumers in interest and fees in 2019, totaling over $14 billion in that year.
51

Since the CPFB issued the 2023 Proposal, this remains true as late fees represented over one-tenth of the more than $130 billion issuers in the Y-14+ charged to consumers in interest and fees in 2022, totaling over $14 billion that year.
52

A small share of accounts in low credit score tiers incur a high proportion of late fees.
53

Overall, the average deep subprime account in the Y-14 data
54

was charged $138 in late fees in 2019, compared with $11 for the average superprime account.
55

The higher incidence of late fees for accounts in lower tiers, combined with higher average charges for repeat late fees within six billing cycles of the initial late fee, drives this disparity.
56

51
Late Fee Report, at 4.

52
2023 Report, at 65.

53
Late Fee Report, at 7; 2023 Report, at 65.

54
The Y-14 data are discussed in more detail in part V.

55
Late Fee Report, at 8.

56

Id.

Credit card accounts in the Y-14 data held by cardholders living in the U.S.' poorest neighborhoods paid twice as much on average in total late fees than those in the richest areas.
57

Cardholders in majority-Black areas paid more in late fees for each card they held with major credit card issuers in 2019 than majority white areas.
58

And people in areas with the lowest rates of economic mobility paid nearly $10 more in late fee charges per account compared to people in areas with the highest rates of economic mobility.
59

57

Id.
at 9.

58

Id.
at 10.

59

Id.
at 11.

G. Other Consequences to Consumers of Late Payment

When a consumer does not make at least the minimum payment by the periodic statement due date, a late fee may not be the only consequence. However, the effect of a missed payment depends on cardholder conduct both prior to and after the due date.

For cardholders who typically pay their balance in full every month (so-called transactors), a late payment generally means both a late fee and new interest incurred for carrying or revolving a balance. For the cardholders who do not roll over a balance in the month before or after a late fee is assessed, the loss of a grace period
60

and coinciding interest charges may pose a similar or even greater burden than the late fee itself. For cardholders who regularly revolve a balance from one month to the next, a late fee is the main financial consequence of a missed payment if the payment is made prior to the next statement due date, as the additional interest charges on the unpaid minimum amount due for a limited number of days will likely be minimal.

60
A grace period is a period within which credit extended may be repaid without incurring a finance charge due to a periodic interest rate.
See, e.g.,
§ 1026.6(b)(2)(v) and comments 5(b)(2)(ii)-3.i and 54(a)(1)-2.

However, if a consumer does not make at least the minimum payment due for more than one billing cycle, non-payment may carry more severe consequences. After approximately 30 days, consumers' credit scores may decline after issuers report the delinquency to credit bureaus. A card issuer also may take actions to reprice new transactions on the account according to a penalty rate, if permitted under § 1026.55(b)(3).
61

After 60 days, issuers may take action to reprice the entire outstanding balance on the account according to a penalty rate, if permitted under § 1026.55(b)(4). At any point as an account becomes more delinquent, an issuer may take steps to reduce a cardholder's credit line or suspend use of the card, limit their earning or redemption of rewards, or increase outreach to collect the outstanding debt. After 180 days of delinquency, an issuer will typically close and charge off the credit card account which may carry a large and long-term financial penalty for a consumer.

61
If a consumer does not make the required payment by the due date, § 1026.55(b)(3) permits a card issuer to take actions to reprice new transactions on the account according to a penalty rate in certain circumstances. The CFPB understands, however, that most card issuers do not take actions to reprice new transactions to the penalty rate until the consumer is more than 60 days late. 2021 Report, at 51.

III. Summary of Rulemaking Process

A. Advance Notice of Proposed Rulemaking

On June 22, 2022, the CFPB issued an advance notice of proposed rulemaking (ANPR) seeking information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers' revenue and expenses.
62

The CFPB received 43 comments in response to the ANPR.

62
87 FR 38679 (June 29, 2022).

Consumer group commenters generally made a number of recommendations with respect to restrictions on late fees, including that the CFPB should more closely tailor the late fee safe harbor to the amount of the debt owed by the cardholder, such as by establishing a sliding scale for the safe harbor amount so that late fees are proportional to the account balance.

Card issuers and their trade associations that commented on the ANPR generally opposed revisions to

Regulation Z's safe harbor provisions related to late fees, including lowering the safe harbor amounts. Several industry trade association commenters also asserted that because lowering the safe harbor would have a significant impact on small financial institutions, the CFPB must comply with the Small Business Regulatory Enforcement Fairness Act (SBREFA) by convening a SBREFA panel in any late fee rulemaking.

B. 2023 Proposal

On February 1, 2023, the CFPB issued a notice of proposed rulemaking containing several proposed amendments to Regulation Z, which implements TILA, to better ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under TILA. This notice of proposed rulemaking was published in the
Federal Register
on March 29, 2023 (2023 Proposal).
63

The CFPB generally proposed that the final rule, if adopted, would take effect 60 days after publication in the
Federal Register
.

63
88 FR 18906 (Mar. 29, 2023).

As described more fully below, the CFPB proposed to amend provisions in § 1026.52(b) and its accompanying commentary as they relate to credit card late fees. Because late fees are by far the most prevalent penalty fees charged by card issuers and the CFPB's current data primarily relate to late fees, the CFPB's proposed changes to the restrictions in § 1026.52(b) were limited to late fees, although the CFPB solicited comments on whether the proposed amendments should apply to other penalty fees.

The proposal would have amended § 1026.52(b) and its accompanying commentary to help ensure that late fees are reasonable and proportional. First, the proposal would have amended § 1026.52(b)(1)(ii) to lower the safe harbor dollar amount for late fees to $8 and to no longer apply to late fees a higher safe harbor dollar amount for subsequent violations of the same type that occur during the same billing cycle or in one of the next six billing cycles.
64

Second, the proposal would have provided that the current provision in § 1026.52(b)(1)(ii)(D) that provides for annual adjustments to reflect changes in the CPI for the safe harbor dollar amounts would not apply to the safe harbor amount for late fees. Third, the proposal would have amended § 1026.52(b)(2)(i)(A) to provide that late fee amounts must not exceed 25 percent of the required payment; currently, late fee amounts must not exceed 100 percent. The proposal also would have amended comments 7(b)(11)-4, 52(a)(1)-1.i and iv, and 60(a)(2)-5.ii to revise current examples of late fee amounts to be consistent with the proposed $8 safe harbor late fee amount. The CFPB also solicited comment on whether card issuers should be prohibited from imposing late fees on consumers that make the required payment within 15 calendar days following the due date. In addition, the CFPB solicited comment on whether, as a condition of using the safe harbor for late fees, it may be appropriate to require card issuers to offer automatic payment options (such as for the minimum payment amount), or to provide notification of the payment due date within a certain number of days prior to the due date, or both.

64
The proposal would not have amended the safe harbor set forth in § 1026.52(b)(1)(ii)(C) applicable to charge card accounts.

The CFPB proposed one clarification that would have applied to penalty fees generally. Specifically, the proposal would have amended comment 52(b)(1)(i)-2.i to make it explicitly clear that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions. In addition, the CFPB solicited comment on several issues related to penalty fees generally. First, the CFPB solicited comment on whether the same or similar changes described above should be applied to other penalty fees, such as over-the-limit fees, returned-payment fees, and declined access check fees, or in the alternative, whether the CFPB should finalize the proposed safe harbor for late fees and eliminate the safe harbors for other penalty fees. Second, the CFPB solicited comment on whether instead of revising the safe harbor provisions set forth in § 1026.52(b)(1)(ii) as they apply to late fees as discussed above, the CFPB should instead eliminate the safe harbor provisions in § 1026.52(b)(1)(ii) for late fees or should instead eliminate the safe harbor for all penalty fees, including late fees, over-the-limit fees, returned-payment fees, and declined access check fees. If the safe harbor provisions were eliminated, card issuers would need to use the cost analysis provisions set forth in § 1026.52(b)(1)(i) to determine the amount of the penalty fees (subject to the limitations in § 1026.52(b)(2)). The CFPB also solicited comment on whether, in that event, the cost analysis provisions would need to be amended and, if so, how.

The CFPB received approximately 57,900 responses to the 2023 Proposal. Of those responses, around 56,800 were from consumers that generally supported the 2023 Proposal. The vast majority of these consumer letters had the same content, and specifically supported the proposed $8 safe harbor threshold amount for late fees. In certain consumer letters, consumers who supported the proposal included additional information, such as their experiences with late fees. Some consumers who supported the proposal indicated they had limited income and that even a small late fee can impact consumers on a tight budget. Some consumers who supported the proposal indicated that they were charged a late fee in the past because (1) their mailed payment was not received by the card issuer by the due date because of slower postal service; (2) they paid on the due date but after the cut off time on the due date; (3) they forgot to pay on time because of vacations, medical issues, or family issues; or (4) they experienced cash flow issues because of unexpected expenses, such as an illness, and in some cases were not able to change the due date for their payments.

Around 350 individual consumers, including approximately 170 individuals who identified themselves as “bankers” who submitted the same letter, opposed the proposed $8 safe harbor amount. The individuals who identified themselves as bankers asserted that the CFPB should withdraw the proposal and restart the rulemaking process after taking into consideration small business' input through the SBREFA process.

Consumer group commenters generally supported the 2023 Proposal. These consumer group commenters expressed strong support for: (1) the CFPB's proposed safe harbor of $8 for credit card late fees; and (2) the CFPB's proposal to limit the dollar amount associated with a late payment to 25 percent of the required minimum periodic payment due immediately prior to assessment of the late payment.

The CFPB received around 100 comment letters from industry commenters. Industry commenters generally opposed the proposal, including the following proposed changes: (1) lowering the late fee safe harbor amount to $8 and eliminating the higher safe harbor amount for subsequent late payments; (2) eliminating the annual adjustment provisions for late fee amounts; (3) limiting late fee amounts to 25 percent of the require minimum payment; and (4) clarifying that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any

collection costs that are incurred after an account is charged off pursuant to loan loss provisions.

One Member of Congress was concerned about the impact of the 2023 Proposal on small issuers. This commenter advised that the CFPB either work to ensure that the cost analysis provisions—an alternative to the safe harbor—would not impose undue burdens on small issuers or that the CFPB consider a separate safe harbor for small issuers that more accurately reflects their unique costs.

The Office of Advocacy, an independent office within the Small Business Administration (SBA), expressed concern that the CFPB's analysis of pre-charge-off costs from the Y-14 issuers does not accurately represent the collection costs for late payments of smaller issuers. The agency also criticized the CFPB for insufficiently considering the extent to which the proposed $8 safe harbor amount would cover the collection costs of smaller issuers.

The CFPB also received comments from other types of entities, namely several academics, law firms, and financial regulatory advocacy groups. The comments from these entities varied, with some of these entities generally supporting the 2023 Proposal, and some of them generally opposing it. These comments, as well as the other comments received by the CFPB on the 2023 Proposal, are discussed in more detail below in part VII.

C. CARD Act Consultation With Certain Federal Agencies

Consistent with the CARD Act, the CFPB consulted with the following agencies regarding rules that implement TILA section 149, both before issuing the 2023 Proposal and before issuing this final rule: (1) the Comptroller of the Currency; (2) the Board of Directors of the Federal Deposit Insurance Corporation (FDIC); and (3) the National Credit Union Administration Board.
65

The CFPB also consulted with the Board and several other Federal agencies, before issuing the 2023 Proposal and before issuing this final rule, as discussed in part IX.

65
15 U.S.C. 1665d(b) and 1665d(e).

IV. Legal Authority

A. Section 1022 of the CFPA

Section 1022(b)(1) of the CFPA authorizes the CFPB to prescribe rules “as may be necessary or appropriate to enable the CFPB to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”
66

Among other statutes, the CFPA and TILA are Federal consumer financial laws.
67

Accordingly, in issuing this final rule, the CFPB exercises its authority under the CFPA section 1022(b)(1) to prescribe rules under TILA and the CFPA that carry out the purposes and objectives and prevent evasion of those laws.

66
12 U.S.C. 5512(b)(1).

67
CFPA section 1002(14); codified at 12 U.S.C. 5481(14) (defining “Federal consumer financial law” to include the “enumerated consumer laws” and the provisions of the CFPA); CFPA section 1002(12); codified at 12 U.S.C. 5481(12) (defining “enumerated consumer laws” to include TILA).

B. The Truth in Lending Act

As amended by the CFPA, TILA section 105(a)
68

directs the CFPB to prescribe regulations to carry out the purposes of TILA, and provides that such regulations may contain additional requirements, classifications, differentiations, or other provisions, and may provide for such adjustments and exceptions for all or any class of transactions, that, in the judgment of the CFPB, are necessary or proper to effectuate the purposes of TILA, to prevent circumvention or evasion thereof, or to facilitate compliance. Pursuant to TILA section 102(a), a purpose of TILA is to assure a meaningful disclosure of credit terms to enable the consumer to avoid the uninformed use of credit and compare more readily the various credit terms available to the consumer. This stated purpose is tied to Congress' finding that economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit.
69

Thus, strengthened competition among financial institutions is a goal of TILA, achieved through the effectuation of TILA's purposes.

68
15 U.S.C. 1604(a).

69
TILA section 102(a), codified at 15 U.S.C. 1601(a).

As described above, the CARD Act was signed into law on May 22, 2009,
70

and the Act amended TILA
71

by adding section 149, which provides, among other things, that the amount of any penalty fee with respect to a credit card account under an open-end consumer credit plan in connection with any omission with respect to, or violation of, the cardholder agreement, including any late payment fee or any other penalty fee or charge, must be “reasonable and proportional” to such omission or violation.
72

70
Public Law 111-24, 123 Stat. 1734 (2009).

71
15 U.S.C. 1601
et seq.

72
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(a)).

At the time of its passage, the CARD Act added section 149(b) to TILA, which required the Board to issue rules establishing standards for assessing the reasonableness and proportionality of such penalty fees, with a statutory deadline of February 22, 2010, for issuing this required rule.
73

Section 149(d) also authorized the Board to establish different standards for different types of fees and charges, as appropriate.
74

The CARD Act also allowed, but did not require, the Board to issue rules to provide for a safe harbor amount for any such penalty fee that is presumed to be reasonable and proportional to such omissions or violations.
75

This grant of discretionary authority did not include a deadline. The Board issued a rule on June 29, 2010, completing the required rulemaking (now contained in the CFPB's Regulation Z, 12 CFR 1026.52(b)(1)(i)). That required rulemaking included cost analysis provisions that enabled issuers to determine the late fee amount that were reasonable and appropriate under the statute. In addition, the Board exercised its discretionary power to include optional safe harbor provisions that issuers could elect to use as an alternative to the cost analysis provisions (now contained in the CFPB's Regulation Z, 12 CFR 1026.52(b)(1)(ii)).

73
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(b)).

74
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(d)).

75
CARD Act section 102, 123 Stat. 1740 (15 U.S.C. 1665d(e)).

On July 21, 2011, the Board's rulemaking authority to implement the provisions of TILA, including the discretionary authority to issue rules regarding penalty fee safe harbors in TILA section 149(e), transferred to the CFPB pursuant to sections 1061 and 1100A of the CFPA.
76

76
Public Law 111-203, 124 Stat. 1376 (2010).

For the reasons discussed in this final rule, the CFPB is amending certain provisions in Regulation Z that impact the amount of late fees that Larger Card Issuers can charge.

With respect to late fees charged, pursuant to section 149(e), the CFPB has analyzed whether the current safe harbor threshold amounts for late fees should be presumed to be reasonable and proportional to a cardholder's omission or violation. In considering whether and what is the appropriate amount for the safe harbor, the CFPB

looked to whether the safe harbor is a “reasonable and proportional” fee, as originally prescribed by the Board, such that any fee under the safe harbor amount should be presumed to have met that standard. In addition, the CFPB is guided by, but was not required to consider, the four statutory factors applicable to the Board's 2010 Final Rule: (1) the cost incurred by the creditor from an omission or violation; (2) the deterrence of omissions or violations by the cardholder; (3) the conduct of the cardholder; and (4) such other factors deemed necessary or appropriate.

As described below and pursuant to its rulemaking authority under TILA sections 105(a) and 149(e),
77

the CFPB has determined that the current safe harbor thresholds are too high with respect to late fees charged by Larger Card Issuers, and therefore, repeals the safe harbor provisions with respect to late fees charged by those issuers. The CFPB then establishes a new safe harbor of $8 applicable to late fees charged by Larger Card Issuers. Separately, at this time and as described below, the CFPB is not exercising its discretionary authority to impose the new $8 threshold amount on Smaller Card Issuers.

77
15 U.S.C. 1604(a).

V. Data Considered for This Rulemaking

A. The CFPB's Proposal

The CFPB considered four primary data sources in developing the 2023 Proposal, as described below: (1) Y-14; (2) Y-14+; (3) credit card debt collection data received from an information order made pursuant to section 1022(c)(4) of the CFPA; and (4) the CFPB's Credit Card Agreement Database.

Y-14 Data

First, as explained in the 2023 Proposal, the CFPB relied upon data that the Board collects as part of its Y-14M (Y-14) data.
78

Since June 2012, the Board has collected these data monthly from bank holding companies with total consolidated assets exceeding $50 billion (from June 2012 to November 2019) and exceeding $100 billion (from December 2019 to present).
79

For this collection, surveyed financial institutions report comprehensive data on their assets on the last business day of each calendar month. These data are used to support the Board's supervisory stress test models and provide one source of data for the CFPB's biennial report to Congress on the consumer credit card market.

78

See
Bd. of Governors of the Fed. Rsrv. Sys., Report Forms FR Y-14M,
https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDYnbIw+U9pka3sMtCMopzoV
(for more information on the Y-14M collection). The CFPB is one of several government agencies with whom the Board shares the data. Information in the Y-14 data do not include any personal identifiers. Additionally, accounts associated with the same consumer are not linked across or within issuers. The Y-14 data also do not include transaction-level data pertaining to consumer purchases.

79
In the 2023 Proposal, the CFPB incorrectly indicated that the Y-14 data from June 2012 to the present is collected from bank holding companies with total consolidated assets exceeding $50 billion. In fact, in December 2019, the Board adjusted the cutoff threshold from $50 million to $100 billion. This difference in the threshold to submit Y-14 data does not impact the CFPB's analysis because the CFPB was merely describing the issuers covered by that data, which the CFPB still used in its totality. The increased threshold did not impact the analysis of pre-charge-off collection costs set forth in the section-by-section of § 1026.52(b)(1)(ii) because that analysis focused on periods after 2019.

The Y-14 data contain confidential supervisory information.
80

Given this and as detailed in the 2023 Proposal, the CFPB could not release the raw data, but did provide the data in summary form and explained the source of the data, the analysis, and the metrics used in its analysis. The 2023 Proposal began by explaining that these data contain reported information on the following four metrics used in developing the 2023 Proposal:

80
The Board's instructions to Y-14 issuers provide: As these data will be collected as part of the supervisory process, they are subject to confidential treatment under exemption 8 of the Freedom of Information Act. 5 U.S.C. 552(b)(8). In addition, commercial and financial information contained in these information collections may be exempt from disclosure under Exemption 4. 5 U.S.C. 552(b)(4). Disclosure determinations would be made on a case-by-case basis.
https://www.federalreserve.gov/apps/reportingforms/Download/DownloadAttachment?guid=dce3da6a-55b4-4fb4-8730-3fec04d32627.

Late Fee Income:
Reported net fee income assessed for late or nonpayment accounts in a given domestic credit card portfolio by card type (
e.g.,
general purpose or private label). This is late fee income for the CFPB's purposes in developing the 2023 Proposal.

Collection Costs:
Reported costs incurred to collect problem credits that include the total collection cost of delinquent, recovery, and bankrupt accounts. Issuers report these aggregate costs monthly for their domestic credit card portfolios and separately by credit card type.
81

These reported costs do not include projected losses, and the dollar amount of charge-offs and any associated recoveries.
82

81
Types include General Purpose, Private Label, Business, and Corporate cards.

82
Issuers report projected losses, the dollar amount of charge-offs and any associated recoveries, interest expense, and loan loss provisions separately.

Late Fee Amount:
Reported amount of the late fee charged on a particular account in a particular month.

Total Required Payments:
Reported total payment amount on a particular account in a particular month, including any missed payments or fees that were required to be paid in a particular billing cycle. This typically includes the minimum payment due, past due payments, and any amount reported as over the credit limit.

As described in the 2023 Proposal, the Y-14 data received by the CFPB covered the period from the middle of 2012 through September 2022 and are provided by certain Larger Card Issuers that account for just under 70 percent of outstanding balances on U.S. consumer credit cards as of year-end 2020. With respect to credit card data, the 2023 Proposal explained that, for purposes of its analysis, the CFPB generally used the complete portfolio data (including late fee income and collection costs) for all the Y-14 issuers included in the data collection. The 2023 Proposal also explained that the analysis generally used a random 40 percent subsample of account information (including late fee amounts and total required payments) reported by card issuers included in the data collection. For the purposes of the analysis using these data in the 2023 Proposal, the CFPB only considered account- and portfolio-level data for issuers in a given month for consumer general purpose and private label credit cards for which there existed data on late fee income, collection costs, late fee amounts, and total required payments in the Y-14 data.

Determination of Post-Charge-Off Collection Costs Using Credit Card Debt Collection Data Received From an Information Order Made Pursuant to Section 1022(c)(4) of the CFPA

In the 2023 Proposal, the CFPB stated its understanding that collection costs in the Y-14 data are total collection costs, therefore include both pre-charge-off and post-charge-off collection costs because, as described in the 2023 Proposal, the Board requires that issuers report in the Y-14 data “costs incurred to collect problem credits that include
the total collection cost
of delinquent, recovery, and bankrupt accounts” (emphasis added). While the line item reported to the Board for the Y-14 data relates to total collection costs, the Board's 2010 Final Rule generally explains that the collection costs used for determining late fees under the cost analysis provisions in § 1026.52(b)(1)(i) are limited to the use of pre-charge off collection costs. As explained in the 2023 Proposal and as the Board noted in

that 2010 Final Rule “it would be inconsistent with the purpose of the [CARD Act] to permit card issuers to begin recovering losses and associated costs through penalty fees rather than through upfront rates.”
83

The Board further noted that “it would be inconsistent with TILA section 149(c)(1) to permit the costs of the loss to be included as `costs incurred by the creditor from [an] omission or violation,' which could be construed to mean that it is appropriate to exclude losses where—as here—card issuers do not incur losses as a result of the overwhelming majority of violations.”
84

83
75 FR 37526 at 37538.

84

Id.

The CFPB did not propose to amend the Board's rule in this respect and further noted that this limitation was appropriate given that card issuers write accounts off as a loss when an account has been charged off; therefore, any cost in collecting amounts owed to a card issuer that incurred post-charge-off is related to mitigating a loss as opposed to the cost of a violation of the account terms.
85

85
In the 2023 Proposal, the CFPB proposed to amend comment 52(b)(1)(i)-2.i to make it explicitly clear that costs for purposes of the cost analysis provisions in § 1026.52(b)(1)(i) for determining penalty fee amounts do not include any collection costs that are incurred after an account is charged off pursuant to loan loss provisions.

Given that the rule's cost analysis provisions in § 1026.52(b)(1)(i) limit the collection costs to costs that are incurred pre-charge off, consistent with the statute, the CFPB similarly limited its calculation of the appropriate safe harbor to this pre-charge off cost in the Y-14 data by excluding the post-charge-off collection costs. As explained in the 2023 Proposal, to do this, the CFPB estimated the percentage of collection costs that may occur after charge-off so that they could be excluded from the collection costs in the Y-14 data.

To determine what percentage of Y-14 data were pre-charge off, the CFPB examined confidential information gathered in the course of its statutory functions
86

on commissions paid to third-party debt collectors for charged-off accounts that six major card issuers paid in 2019 and 2020, representing 91 percent of balances and 93 percent of collection costs among portfolios with positive collection expenses reported in the Y-14 data in the twelve months leading up to August 2022.
87

In the 2023 Proposal, the CFPB noted that the most significant post-charge-off collection costs are likely to be commissions paid to third-party debt collectors for charged-off accounts. The CFPB stated its understanding that such commission payments, made to third-party debt collection companies, would be made almost exclusively in connection with accounts that have been charged off, and represent a conservative estimate of post-charge-off collection costs, as there may be other costs associated with collections post-charge-off beyond such commission payments.

86
The CFPB collected these confidential data through an information order pursuant to section 1022(c)(4) of the CFPA.

87
As part of its review of the practices of credit card issuers for its biennial review of the consumer credit card market, the CFPB surveys several large issuers to better understand practices and trends in credit card debt collection. These data provided in response to data filing orders served as the basis of this calculation. For more information on these data,
see
2021 Report, at 17.

As explained in the 2023 Proposal, the methodology for estimating post-charge-off commissions considered the amount of charged-off balances and then estimated the commission on the volume of recovered balances by using the recovery and commission rates. For example, if an issuer had a total of $1 million in newly charged-off balances in a given year, a cumulative recovery rate for that year of five percent, and a post-charge-off commission rate of 20 percent, the CFPB estimated the post-charge-off commission costs to be $10,000. As noted in the proposal, to calculate the post-charge-off collection costs as a share of total cost of collections, the CFPB then divided the estimated post-charge-off commission costs by the total collection costs the bank reported in the Y-14 data. For issuers who sell debt, the cost of collections calculation used charge-off balances net of asset sales. The commission rate for each issuer is an average weighted by the share of post-charge-off balances in each tier placement (
e.g.,
primary, secondary, and tertiary placements).

Based on these commission expenses that these six major card issuers paid in 2019 and 2020 to third-party debt collectors for charged-off accounts, the CFPB explained in the 2023 Proposal that it estimated that these post-charge-off costs are around 25 percent of total collection costs for these issuers; the average ratio was 27 percent in 2019 and 21 percent in 2020. In 2019, the median ratio of estimated post-charge-off commission costs to annual collection costs in the Y-14 for individual issuers was 28 percent; in 2020, it was 23 percent. Based on these data, in the 2023 Proposal, the CFPB estimated that pre-charge-off collection costs were equal to 75 percent of the collection costs included in the Y-14 data for purposes of its analysis related to the proposed changes to the safe harbor thresholds for late fees in § 1026.52(b)(1)(ii).

Y-14+ Data

As discussed in the 2023 Proposal, the CFPB also considered Y-14+ data in developing the proposal. The Y-14+ data include confidential information gathered in the course of statutory functions from the Board's Y-14 data and a diverse group of specialized issuers.
88

The additional data that included specialized issuers were used to calculate the average late fee charged by Y-14+ issuers in 2019 and 2020. As explained in the proposal, in 2019, the average late fee charged by issuers in the Y-14+ data was $31. In the proposal, the CFPB noted that because the average late fee charged by the Y-14+ issuers is lower than the current maximum safe harbor of $41 and yet issuers still generate late fee income that is more than five times the ensuing (estimated) pre-charge-off collection costs since August 2021, the CFPB preliminarily concluded that $8 is likely to recover the average issuer's pre-charge-off collection costs. In addition, in the proposal, the CFPB used the average late fee charged by Y-14+ issuers in 2020 in forming its expectation that the proposed $8 amount would have a proportionately smaller impact on smaller issuers' late fee income, due to smaller issuers' having lower late fee amounts. In 2020, the average late fee for issuers in the Y-14+ data was $31. The CFPB noted that it collects card agreements from more smaller issuers than issuers for which the CFPB has financial data. Based on the CFPB's 2022 review of agreements from over 500 credit card issuers having more than 10,000 credit card accounts, the CFPB established that issuers outside the top 20 by outstanding credit card balances charged smaller late fees in 2020 than issuers within the top 20.

88
The CFPB received the information from the specialized issuers through an information order pursuant to section 1022(c)(4) of the CFPA which provides that the CFPB will treat the information received in response to the order in accordance with its confidentiality regulations at 12 CFR 1070.40 through 1070.48.

CFPB's Credit Card Agreement Database

In the 2023 Proposal, the CFPB discussed a 2022 review conducted by the CFPB of credit card agreements submitted to the CFPB's Credit Card Agreement Database in the fourth quarter of 2020 to determine the maximum late fee amount charged across agreements by issuers submitting to that database. As discussed above, the 2023 Proposal relied on these data in

developing preliminary conclusions about the potential impact the proposed $8 late fee safe harbor threshold amount would have on card issuers, including smaller issuers.

B. CFPB Revenue and Collection Costs Report

At the time it issued the 2023 Proposal, the CFPB also published a related report, “Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies” (Revenue-Costs Report).
89

Although the CFPB recognized that it could not publish the confidential Y-14 data, as discussed above, the Revenue-Costs Report provides additional information on the monthly values for the aggregate late fee revenue and collection costs for general purpose and private label credit cards in the Y-14 data since 2016. The Revenue-Costs Report includes the total number of accounts in these portfolios, aggregate interest revenue for these accounts, the CFPB's estimate of pre-charge-off collection costs, total account balances, and the weighted ratio of late fee income to estimated pre-charge-off collection costs.
90

The CFPB provided this information in order to enable commenters to better understand how the CFPB determined the relationship between late fee revenue and pre-charge-off collection costs for Y-14 issuers for purposes of the 2023 Proposal. The Revenue-Costs Report shows that revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.

89
CFPB,
Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies
(Revenue-Costs Report) (Feb. 2023),
https://files.consumerfinance.gov/f/documents/cfpb_credit-card-late-fees-revenue-collection-costs-large-bank_2023-01.pdf
.

90
Since not every issuer in the Y-14 data reports values for every month, the Revenue-Costs Report also included the number of portfolios that are included in the aggregate for the applicable month.

C. Comments Received Related to Data and Analysis

Using Y-14 Data Without Releasing Underlying Data

Several credit unions, industry trade associations, and individuals on behalf of a credit union, one law firm representing several card issuers, and one academic commenter criticized the CFPB for failure to release the underlying Y-14 data. These commenters asserted they did not have the ability to understand or evaluate the CFPB's proposal in a thorough and meaningful way or to replicate the CFPB's analysis due to the lack of insight into the underlying data, methodology used, and analyses that form the basis of the 2023 Proposal. Several of these commenters asserted that the failure to disclose the raw Y-14 data relied upon in the rulemaking conflicts with requirements under section 553 of the Administrative Procedure Act (APA).
91

91
5 U.S.C. 553(b), (c).

One of the credit union commenters urged the CFPB to provide a breakdown of the components used to arrive at the proposed $8 late fee safe harbor and the source of the data. One of the industry trade association commenters noted that the CFPB failed to provide a clearly defined list of data inputs that banks provide in reporting collection costs on the Y-14 data. The law firm representing several card issuers asserted that, although the CFPB compiled and released a set of aggregated and anonymized values at the same time as the proposal, it did not include an explanation of which Y-14 data fields it used to populate the document, how and why the CFPB designated the data for inclusion in the categories the document sets forth, or how the CFPB ensured that the data categorizations were consistent from bank to bank—all of which it claimed prevented commenters from assessing the validity and accuracy of the proposal or the conclusions it supports.

One of the industry trade association commenters also expressed concerns that the CFPB did not provide information about the distribution of the ratio of late fee income to future collection costs for the Y-14 issuers; and about whether the CFPB used all of the issuers in the Y-14 data in analyzing the ratio of late fee income to future collection costs.

The academic commenter focused on a narrower set of data related to a Y-14 seven-month analysis. These data were used to support analysis in the proposal that lower late fees in month seven do not affect the late payment rate. This commenter asserted that these claims would require further review and validation by industry and urged the CFPB to release the underlying Y-14 data used in this seven-month analysis.

Several of the industry trade association commenters and the academic commenter also requested that the CFPB release further anonymized or aggregated Y-14 data to the public and postpone the rulemaking until it could release these additional data.

The CFPB disagrees with the commenters that the 2023 Proposal failed to provide sufficient data or description of methodology for commenters to offer meaningful comment. The CFPB also does not agree that it is improper to cite supervisory or other confidential data gathered for statutory functions or shared by the Board pursuant to those statutory functions in the rulemaking process; this is information the CFPB obtains as part of its lawful and authorized activities, and it provides insight into the issues addressed here. CFPB's published reports were collected through its supervision function, and the CFPB's regulations protect confidential supervisory information from disclosure. As noted above, the Board's instructions to the Y-14 issuers indicates that the Y-14 data are collected as part of the supervisory process and are subject to confidential treatment under certain exemptions of the Freedom of Information Act.
92

The CFPB was authorized to use this robust dataset if it complied with the Board's confidentiality conditions, and it would have been unreasonable to burden the industry with duplicative data requests. Also, as noted above, the CFPB collects certain information pursuant to information orders under section 1022(c)(4) of the CFPA and those orders provide that the CFPB will treat the information received in response to the order in accordance with its confidentiality regulations at 12 CFR 1070.40 through 1070.48. Courts have held that an agency can rely on confidential information in its rulemaking so long as the agency discloses information to allow interested parties to comment on the methodology and general data.
93

The CFPB disclosed how it obtained the data, the methodologies used to analyze the data, the number of accounts reviewed, characteristics about the accounts reviewed, and the results of the various studies.

92

See supra
note 80.

93

See NRDC
v.
Thomas,
805 F.2d 410, 418 n.13 (D.C. Cir. 1986);
see also Riverkeeper Inc.
v.
EPA,
475 F.3d 83, 112 (2d Cir. 2007);
rev'd on other grounds,
556 U.S. 208 (2009).

As noted above, the 2023 Proposal provides a detailed description of each of the four sources of data used in the rulemaking: (1) Y-14; (2) Y-14+; (3) credit card debt collection data received from an information order made pursuant to section 1022(c)(4) of the CFPA; and (4) the CFPB's Credit Card Agreement Database. Although the CFPB did not release the raw Y-14 data used in developing the 2023 Proposal, it took several steps to release aggregate data, as well as providing detailed descriptions of methodology and analysis, so that commenters could evaluate and provide meaningful

comment on the CFPB's data and analysis.

As noted above, contrary to what some commenters stated, the 2023 Proposal explained the source of the Y-14 data (from the Board), as well as the specific question about estimating collection costs for late fees that was used to generate the data. In the 2023 Proposal, the CFPB also described the four types of Y-14 data that it used for the analysis in the proposal, namely, late fee income, collection costs, late fee amount, and total required payments.
94

The 2023 Proposal further detailed the relevant years of data examined, as well as the reasons why the CFPB preliminarily determined it was appropriate to rely on data from the Y-14 issuers, noting that those issuers constituted approximately 70 percent of the market. The CFPB also adequately described in the 2023 Proposal how it used the Y-14 data in the analysis, including the methodology it used to calculate the ratio of collection costs to late fee income.
95

As described in the 2023 Proposal, that methodology involved the CFPB comparing each month's late fee income for a particular portfolio to the portfolio's average estimated pre-charge-off collection costs for that month, where that estimate was based on estimated pre-charge-off collection costs that occurred two through six months later.
96

The CFPB developed monthly estimates of this late fee income-to-cost ratio for each year from 2013 up to early 2022. The CFPB also described the methodology for conducting the Y-14 seventh-month analysis in relation to the impact of higher subsequent late fees on late payment incidence, which included conducting statistical analysis on a random subsample from account-level data available in 2019 from the Y-14 data to investigate whether the lower late fee amount in month seven leads to a discontinuous jump in late payments in the seventh month after the last late payment.
97

94
88 FR 18906 at 18910-11.

95

Id.
at 18916-18.

96
For example, if an issuer were to report late fee income of $15 million in January for a portfolio and total collection costs for that portfolio of $20 million in March through July, the CFPB estimated $15 million in pre-charge-off collection costs in March through July and calculated an average monthly collection cost of $3 million for purposes of this analysis—resulting in a ratio of late fee income of $15 million to collection cost of $3 million for this portfolio for the month of January. In the 2023 Proposal, the CFPB noted that its preliminary findings based on the weighted average of this ratio across issuers and market segments were robust to shifting, expanding, or shortening the time period of delay in collection costs as they relate to late fee income.

97

Id.
at 18920. The CFPB observed in the Y-14 data that, consistent with the safe harbor provisions of the current rule, consumers who paid late again within the six months after a late payment paid higher late fees during those six months than they paid after the initial late fee.

As noted above, the CFPB also issued along with the 2023 Proposal the Revenue-Costs Report at the time of the proposal to aid in the ability of commenters to examine data from issuers and provide additional analysis and methodology, enhancing the ability of commenters to offer meaningful comment. The Revenue-Costs Report included additional monthly values for the aggregate late fee revenue and collection costs for general purpose and private label credit cards in the Y-14 data since 2016.
98

The report also provided (1) the number of portfolios that are included in the aggregate for the applicable month; (2) the total number of accounts in these portfolios, (3) aggregate interest revenue for these accounts, and (4) the CFPB's estimate of pre-charge-off collection costs, total account balances, and the weighted ratio of late fee income to estimated pre-charge-off collection costs. Many credit unions and individuals on behalf of credit unions and one industry credit union trade association used the information in the Revenue-Costs Report to compare the average pre-charge-off collection cost and the average late fee income per account for the Y-14 issuers to the average pre-charge-off collection cost and the average late fee income per account for the credit card industry. Specifically, using the information in the Revenue-Costs Report, these commenters calculated the annual average pre-charge-off collection cost and the annual average late fee income per account for the Y-14 issuers ($0.22 and $13.80 respectively) using monthly averages for the 12-month period ending September 2022 contained in the Revenue-Costs Report and compared these data to the annual average pre-charge-off cost per account and the annual average late fee income for the credit union industry that the commenters collected ($0.33 and $7 respectively).

98

See supra
note 89.

Throughout the process, the CFPB sought to provide as much information as possible to ensure that commenters could themselves analyze the CFPB methodology, critique data, and provide feedback. Indeed, as described below, the CFPB received approximately 10 comments that specifically analyzed the CFPB's use of the Y-14 data, as well as the CFPB's methodology and analysis. For example, the CFPB received comments that criticized the CFPB's bottom line late fee estimate and offered contrary amounts based on issuers' own analysis using the CFPB's methodology. Other commenters also provided meaningful feedback on the source of the data and data fields. The CFPB has determined this feedback further supports the fact that throughout this rulemaking (including an ANPR that sought data from issuers), the CFPB has sought to share as much information as possible. For comparison, the CFPB's rulemaking, unlike the original 2010 rule, analyzed and presented 10 years of data specifically from card issuers' own reports of collection costs. While these raw data could not be disclosed, the CFPB published data in an aggregate form, and in both the 2023 Proposal and the related Revenue-Costs Report, the CFPB described its methodology and analysis to further the ability of commenters to meaningfully examine, understand, and comment on the data.

Y-14 Data as Representative of Issuers' Collection Costs and Late Fee Income

As noted in the 2023 Proposal, the Y-14 data provided 10 years of information related to total collection costs, which as required by the Board is defined to include “costs incurred to collect problem credits that include the total collection cost of delinquent, recovery, and bankrupt accounts.”

Several industry trade associations and one law firm representing several card issuers asserted that the CFPB improperly relied on this Y-14 data field in developing the proposal because that “total collection cost” line item may be underinclusive of some issuers' collection costs. The law firm representing several card issuers asserted that there are expenses caused by late payments that are not included in the “total collection cost” line item relied on by the CFPB in the Y-14 data. For example, this commenter asserted that technology-related expenses associated with delinquent customer servicing and processing platforms, forms of customer communications for consumers in delinquent status, payment-processing expenses associated with programs for late payers, and costs associated with supporting collection activities such as human resources, risk management, and legal may not be reported.

Several industry trade associations asserted that the CFPB's analysis of this line item from the Y-14 data incorrectly excludes attributable expenses and overhead, including systems expenses and risk department expenses related to consumer credit card accounts. These

trade association commenters also stated that the amount excluded the costs of funding delinquent accounts (
i.e.,
costs to fund the balances for longer than expected because of late payments), and these commenters asserted that indirect costs represent real and reasonable expenses associated with late and delinquent accounts. While these commenters did not provide data for the costs associated with all late payments, these commenters did provide data for accounts that were late for 60 days or more and estimated that these 60-day plus delinquent accounts cost issuers $46.30, including $33.00 in direct expenses, $9.00 in attributable expenses, and $4.30 in funding costs.

Another industry trade association asserted that the Y-14 total collection cost line item on which the CFPB relied is not a sufficiently uniform or defined data set for purposes of assessing card issuer collection costs associated with late payments, due to variations in the way that the largest banks report their data. Specifically, this commenter asserted that Y-14 data are reported for stress-testing purposes, and as a result, institutions may not report it in a uniform way because for stress-testing purposes, it is less important whether an institution reports a particular cost in this line item or in another line item for costs, so long as the institution reports that particular cost in some way in the reporting forms overall. According to this commenter, some banks include certain overhead and fixed costs such as real estate and information technology (IT) in the total collection cost line item, while others do not. This commenter further asserted that the share of total collection costs across an institution's divisions may result in variation of how they report the Y-14 collection cost line item. In addition, this commenter asserted that not all reporting banks include commissions paid to third party collections agencies after a loan is charged off, which could mean that the reported amount is underinclusive.

This same industry trade association commenter also asserted that the Y-14 data on late fee income may be overstated. This commenter asserted that the Y-14 item for late fee income is the sum of fees assessed during the month minus fee reversals and refunds applied during the month (which included reversals due to charge off). According to this commenter, however, in accordance with banks' loss mitigation practices, each month some delinquent accounts may be modified through re-aging or converted into fixed payment plans, while others may be closed in a debt settlement, without explicit reversal of late fees but with concessions to the borrower. This commenter asserted that these implicit reversals of fee income are not captured in the Y-14 item for net fees assessed for some issuers, which therefore may overstate those issuers' realized late fee income.

Although several commenters stated that there were potential variations in the Y-14 data, the CFPB has determined that such data are relevant and an important source of information on total collection costs and late fee income. As discussed below, the CFPB notes that the Y-14 data contains 10 years of data that is collected directly from certain Larger Card Issuers by the Board, using its supervisory powers, and these issuers accounted for just under 70 percent of outstanding balances on U.S. consumer credit cards as of year-end 2022. The Y-14 dataset contains data fields that are clearly worded to collect data relevant to this rulemaking, such as late fee income and collection expenses. The CFPB notes that many of the studies cited by industry commenters, and discussed in the section-by-section analysis of § 1026.52(b)(1)(ii) in part VII, used smaller subsets of the Y-14 data or notably similar precursors for their analysis related to late fees and late payments. The CFPB recognizes that there may be some potential variation in the Y-14 data collected based on the variation of inputs from card issuers, but as discussed below, the CFPB has determined that some variations in the costs that issuers' consider to be collection costs are consistent with the cost analysis provisions in § 1026.52(b)(1)(i) and are not likely to impact the analysis related to the $8 late fee safe harbor threshold for Larger Card Issuers set forth in the section-by-section analysis of § 1026.52(b)(2)(ii).

With respect to the argument that some issuers may exclude post-charge off amounts from the total collection costs line item, the plain definition provided by the Board for such data contains no such exclusion. The total collection costs line item instructs issuers to report “costs incurred to collect problem credits that include the
total
collection cost of delinquent, recovery, and bankrupt accounts” (emphasis added). Given that the definition is inclusive of total collection costs, the CFPB has determined it appropriately relied upon this line item.

In addition, as explained in the 2023 Proposal and above, this total collection costs line-item requests cost data that are generally consistent with the collection costs that may appropriately be considered under the cost analysis provisions in § 1026.52(b)(1)(i), except with respect to post-charge-off collection costs.

Current comment 52(b)(1)(i)-6.i provides that for purposes of § 1026.52(b)(1)(i), the costs incurred by a card issuer as a result of late payments include the costs associated with the collection of late payments, such as the costs associated with notifying consumers of delinquencies and resolving delinquencies (including the establishment of workout and temporary hardship arrangements). The Y-14 total collection costs line item, therefore, provides a source of data that enables the CFPB to examine more than a decade of late fee collection cost information that is relevant to the rule.

The one difference in the data, as discussed in the CFPB's 2023 Proposal, is that the Board's Y-14 late fee cost information includes post-charge off collection costs. As a result, and as described in detail in the proposal, the CFPB used a ratio based on debt collection agreements to appropriately limit the total collection costs to pre-charge off collection costs. With respect to the one comment that some issuers may not include commissions paid to third party collections agencies after a loan is charged off when reporting total collection costs in the Y-14 data, the CFPB recognizes that some issuers may not report post-charge-off costs but would expect that these issuers are outliers since the plain language of the instruction for the Y-14 data asks for total collection costs, which would cover both pre-charge-off and post-charge-off collection costs. In addition, the comments do not suggest that most card issuers exclude post-collection costs from the Y-14 data. As such, the CFPB has determined that it is appropriate to exclude the estimated ratio of post-charge-off collection costs from the Y-14 data for total collection costs when setting the safe harbor amount to be consistent with the collection costs that may be considered for purposes of the cost analysis provisions in § 1026.52(b)(1)(i).

The CFPB also recognizes that there may be some variation in the particular costs that issuers report in the Y-14 total collection costs line item with respect to late payments. For example, several trade association commenters indicated that some banks include certain overhead and fixed costs such as real estate and IT in the total collection cost line item, while others do not. Nonetheless, the CFPB has determined that these variations do not undermine the reliance on this data field to help the CFPB determine total collection costs related to late payments, particularly given that the total collection costs line

item is nearly the same as the definition for collection costs in the rule, and that this data field allows the CFPB to examine 10 years of data that were not available at the time of the original rule.

The CFPB notes that the cost analysis provisions in § 1026.52(b)(1)(i) also would involve a certain amount of variability from issuer to issuer in terms of which costs the issuer determines are related to collecting late payments for purposes of determining late fees amounts. As a general matter, if a card issuer is using the cost analysis provisions § 1026.52(b)(1)(i), the card issuer has the responsibility to determine whether certain costs it incurs relate to the collection of late payments based on all relevant facts and circumstances, within the framework set forth in § 1026.52(b)(1)(i) and related commentary. For example, while not all overhead costs would be costs of collecting late payment, some overhead costs may be incurred as a result of collecting late payments, depending on all the relevant facts and circumstances. A card issuer, however, must be able to demonstrate to the regulator responsible for enforcing compliance with TILA and Regulation Z that its determination is consistent with § 1026.52(b)(1)(i) and related commentary.
99

Thus, the CFPB has determined that that some variations in the costs that issuers' consider to be collection costs are consistent with the cost analysis provisions in § 1026.52(b)(1)(i) and are not likely to impact the analysis related to the $8 late fee safe harbor threshold for Larger Card Issuers set forth in the section-by-section analysis of § 1026.52(b)(2)(ii). The CFPB also notes that many of the studies cited by industry commenters, and discussed in the section-by-section analysis of § 1026.52(b)(1)(ii) in part VII, used smaller subsets of the Y-14 data or notably similar precursors for their analysis related to late fees and late payments. As such, the Y-14 data is more than sufficient to make appropriate estimates of (1) the collection costs that the Y-14 issuers incur in collecting late payments for purposes of guiding the CFPB in determining an appropriate safe harbor threshold amount for late fees charged by Larger Card Issuers; and (2) how collection costs for Larger Card Issuers change over time in relation to changes in the CPI.

99
The CFPB's determinations are consistent with how the Board viewed the costs analysis provisions when it adopted its version of these provisions in § 226.52(b)(1)(i). 75 FR 37526 at 37536. See also
id.
at 37540 where the Board discussed whether all overhead costs should be excluded from the cost analysis provisions and noted that it believes that the determination of whether certain costs are incurred as a result of violations of the account terms or other requirements should be made based on all the relevant facts and circumstances.

With respect to the late fee income reported in the Y-14 data, some industry commenters suggest that the reported late fee income may be overinclusive because it includes late fees where there has not been an explicit reversal of late fees, yet there have been concessions to the borrower as a result of delinquent accounts being modified through re-aging or converted into fixed payment plans or closed in a debt settlement. Although there may be instances where the late fees are waived, subject to a concession, or otherwise removed or reduced, the CFPB has determined that some overinclusion based on fee waivers would not significantly impact the ratio of pre-charge-off collection costs to late fee income discussed in the section-by-section analysis of § 1026.52(b)(1)(ii).

Further, in response to the commenter, the CFPB also notes the fact that certain fees may be waived is generally consistent with the fact that the cost analysis provisions only permit certain uncollected fees to be considered under § 1026.52(b)(1)(i). Specifically, comment 52(b)(1)(i)-5 provides that for purposes of § 1026.52(b)(1)(i), a card issuer may consider fees that it is unable to collect when determining the appropriate fee amount under the cost analysis provisions. Fees that the card issuer is unable to collect include fees imposed on accounts that have been charged off by the card issuer, fees that have been discharged in bankruptcy, and fees that the card issuer is required to waive in order to comply with a legal requirement (such as a requirement imposed by 12 CFR part 1026 or 50 U.S.C. app. 527). However, fees that the card issuer chooses not to impose or chooses not to collect (such as fees the card issuer chooses to waive at the request of the consumer or under a workout or temporary hardship arrangement) are not relevant for purposes of determining the late fee amount under the cost analysis provisions.

The CFPB also notes that it has repeatedly provided opportunities for issuers to provide specific data about their late fees, including in an ANPR, and it has carefully considered all such data that were provided, in addition to seeking out and considering additional data on its own. The Y-14 data provide the best means for the CFPB to examine relevant collections costs and late fee income data in order to determine what costs are incurred and to guide its determination of an appropriate safe harbor threshold for late fees, except with respect to Smaller Card Issuers, as discussed in part VI below. The CFPB is not using the Y-14 collection costs and late fee income data to cap the late fee amounts that issuers can charge. If the $8 safe harbor amount adopted as part of this final rule for those issuers that are subject to this safe harbor amount is not sufficient to cover a particular card issuer's pre-charge-off costs in collecting late payments, the card issuer can charge a higher amount consistent with the cost analysis provisions in § 1026.52(b)(1)(i) and the requirements in § 1026.52(b)(2). In other words, to the extent that an issuer has higher costs and determines the safe harbor amount is too low based on its own cost analysis calculation, that issuer may charge a higher late fee. The Y-14 data, therefore, are not used to create a limit on fees, but rather to ensure that the CFPB's discretionary safe harbor is appropriate and consistent with the statutory requirement that is intended to limit fees to those that are “reasonable and proportional” to the late payment.

Thus, for the reasons discussed above, the CFPB has determined that it is appropriate to use the Y-14 data for total collection costs and late fee income in this final rule to estimate (1) the collection costs that the Y-14 issuers incur in collecting late payments and the late fee income they collect for purposes of guiding the CFPB in determining an appropriate safe harbor threshold amount for late fees charged by Larger Card Issuers; and (2) how collection costs for Larger Card Issuers change over time in relation to changes in the CPI.

Y-14 Data Do Not Include Cost Information for Smaller Issuers

As discussed in part VI below, many smaller issuers and industry trade associations, several individual consumers on behalf of credit unions, one Member of Congress, and the Office of Advocacy, an independent office within the SBA, expressed concern that the CFPB's analysis of pre-charge-off costs from the Y-14 issuers does not accurately represent the collection costs for late payments of smaller issuers. These comments are discussed in more detail in part VI.

D. The Final Rule

Consistent with the 2023 Proposal, the CFPB considered four primary data sources in developing this final rule: (1) Y-14; (2) Y-14+; (3) credit card debt collection data received from an information order made pursuant to section 1022(c)(4) of the CFPA; and (4)

the CFPB's Credit Card Agreement Database.

Y-14 Data

For the reasons discussed above, the CFPB has determined that it is appropriate to consider the Y-14 data as one basis for adopting the changes to Regulation Z contained in this final rule. Prior to issuing the 2023 Proposal, the Y-14 data received by the CFPB covered the period from the middle of 2012 through September 2022 and are provided by certain Larger Card Issuers that are covered by the $8 amount. These issuers accounted for just under 70 percent of outstanding balances on U.S. consumer credit cards as of year-end 2022. Consistent with the 2023 Proposal, with respect to credit card data, in this final rule, the CFPB generally uses the complete portfolio data (including late fee income and collection costs) for all the card issuers included in the data collection. The CFPB also generally uses only a random 40 percent subsample of account information (including late fee amounts and total required payments) reported by card issuers included in the data collection. Consistent with the 2023 Proposal, the CFPB for this final rule only considered account- and portfolio-level data for issuers in a given month for consumer general purpose and private label credit cards for which there existed non-zero data on late fee income, collection costs, late fee amounts, and total required payments in the Y-14 data.

For this final rule, the CFPB relied upon the data in the proposal for its analysis. After issuing the 2023 Proposal, the CFPB received 14 more months of data for the Y-14 issuers (account-level data through November 2023, portfolio data up to August 2023). These additional data did not change the CFPB's original findings or rationale as set forth in 2023 Proposal. Because the data are relevant, however, the CFPB has determined that it is appropriate to explain how those new data supplement and support its original data and analysis. The CFPB's use of the Y-14 data (including the supplemental data received after the 2023 Proposal was issued) is discussed in more detail in part VII.

Determination of Post-Charge-Off Collection Costs Using Credit Card Debt Collection Data Received From an Information Order Made Pursuant to Section 1022(c)(4) of the CFPA

In addition, for the reasons discussed above, and consistent with the 2023 Proposal, the CFPB has determined that it is appropriate to subtract an estimate of the post-charge-off collection costs from the total collection costs Y-14 data. Consistent with the 2023 Proposal, for this final rule, the CFPB used commissions paid to third-party debt collectors for charged-off accounts to estimate the percentage of collection costs that may occur after charge-off. The CFPB understands that such commission payments, made to third-party debt collection companies, would be made almost exclusively in connection with accounts that have been charged off, and represent a conservative estimate of post-charge-off collection costs, as there may be other costs associated with collections post-charge-off beyond such commission payments. Consistent with the 2023 Proposal, the CFPB's methodology for estimating post-charge-off commissions considered the amount of charged-off balances and then estimated the commission on the volume of recovered balances by using the recovery and commission rates.
100

100
For example, if an issuer had a total of $1 million in newly charged-off balances in a given year, a cumulative recovery rate for that year of five percent, and a post-charge-off commission rate of 20 percent, the CFPB would estimate the post-charge-off commission costs to be $10,000. To calculate the post-charge-off collection costs as a share of total cost of collections, the CFPB then divided the estimated post-charge-off commission costs by the total collection costs the bank reported in the Y-14 data. For issuers who sell debt, the cost of collections calculation uses charge-off balances net of asset sales. The commission rate for each issuer is an average weighted by the share of post-charge-off balances in each tier placement (
e.g.,
primary, secondary, and tertiary placements).

As discussed above, for the 2023 Proposal, the CFPB estimated from debt collection reports the commission expenses that six major card issuers paid in 2019 and 2020 and based on those data, the CFPB estimated that these post-charge-off costs are around 25 percent of total collection costs for these issuers. Based on those data, for the 2023 Proposal, the CFPB estimated that pre-charge-off collection costs were equal to 75 percent of the collection costs included in the Y-14 data for purposes of its analysis related to the proposed changes to the safe harbor thresholds for late fees in § 1026.52(b)(1)(ii).

For this final rule, the CFPB relied upon the data in the proposal for its analysis. In addition, after the Proposal's release—as part of the CFPB's 1022(b)(2) market gathering for purposes of its CARD Market Report—the CFPB also obtained updated data for 2021 and 2022 related to commission expenses that the CFPB collected for its most recent biennial review of the consumer credit card market released in October 2023. These additional data did not change the CFPB's original findings or rationale. Because the data are relevant, however, the CFPB has determined it is appropriate to explain how those new data supplement and support its original data and analysis. Based on commission expenses that six major card issuers paid in 2021 and 2022 to third-party debt collectors for charged-off accounts, the CFPB estimated that these post-charge-off costs are around 20 percent of total collection costs for these issuers; the average ratio was 20 percent in 2021 and 21 percent in 2022. In 2021, the median ratio of estimated post-charge-off commission costs to annual collection costs for the six major issuers surveyed was 19.0 percent; in 2022, it was 23.7 percent. Thus, for 2021 and 2022, the CFPB estimated that pre-charge-off collection costs were equal to 80 percent of the collection costs. These new data indicate pre-charge-off collection costs in 2021 and 2022 that were similar, though slightly higher than in the proposal and, therefore, supplemented and supported the CFPB's data and analysis. Both the estimates of pre-charge-off collection costs for Y-14 issuers used in the 2023 Proposal (based on the 75 percent estimate) and developed using the supplemental information (based on the 80 percent estimate) are discussed in more detail in the section-by-section analysis of § 1026.52(b)(1)(ii) for purposes of its analysis related to the final changes to the safe harbor thresholds for late fees for Larger Card Issuers.

Y-14+ Data

Consistent with the 2023 Proposal, the CFPB also considered Y-14+ data in developing this final rule. As noted above, the Y-14+ data include confidential information from the Board's Y-14 data and a diverse group of specialized issuers. In the 2023 Proposal, these additional data that included specialized issuers were used to calculate the average late fee charged by Y-14+ issuers in 2019 and 2020. As explained in the proposal, in 2019 and 2020, the average late fee charged by issuers in the Y-14+ data was $31. The updated data from the Y-14+ issuers further support this original analysis because, based on the CFPB calculations, they show that the average late fee charged by those issuers was $31 in 2021 and $32 in 2022.

In addition, after issuing the 2023 Proposal, the CFPB obtained confidential total collection costs and late fee income data from specialized issuers that are included in the Y-14+ data. In particular, the CFPB requested from these issuers' data for total

collections costs and late fee revenue using the same instructions for this data request that are used in the Y-14 data collection. These additional data did not change the CFPB's original findings or rationale. Because the data are relevant, however, the CFPB has determined it is appropriate to explain how those new data supplement and support its original data and analysis. These additional data are consistent with the CFPB's determination in this final rule based on the data used for the proposal related to Y-14 issuers that the average Larger Card Issuer would recover pre-charge-off collection costs even if late fees were reduced to one-fifth of their current level.

The average late fees charged by the Y-14+ issuers in 2020 and 2022 and the data on total collections costs and late fee income from the specialized issuers in the Y-14+ are discussed in more detail in the section-by-section analysis of § 1026.52(b)(1)(ii).

CFPB's Credit Card Agreement Database

As noted above, in the 2023 Proposal, the CFPB discussed a 2022 review conducted by the CFPB of credit card agreements submitted to the CFPB's Credit Card Agreement Database in the fourth quarter of 2020 to determine the maximum late fee amount charged across agreements by issuers submitting to that database. Since the 2023 Proposal was issued, the CFPB in 2023 conducted a subsequent review of agreements submitted to that database as of the second quarter of 2023 to determine the maximum late fee amount charged across agreements by issuers submitting to that database.

These additional data did not change the CFPB's original findings or rationale. Because the data are relevant, however, the CFPB has determined it is appropriate to explain how those new data supplement and support its original data and analysis. As discussed in part II.E, the results of the 2023 survey of agreements to determine the maximum late fee amount charged across agreements by issuers submitting to that database are consistent with the results of the 2022 survey of agreements with respect to the maximum late fee amount charged across agreements by issuers submitting to that database. The data from the 2022 review of agreements and the 2023 review of agreements are discussed in more detail in part II.E and the section-by-section analysis of § 1026.52(b)(1)(ii).

VI. Certain Provisions Not Applicable to Issuers That Together With Their Affiliates Have Less Than One Million Open Credit Card Accounts

A. The CFPB's Proposal

The 2023 Proposal would have applied the revisions in the proposal to all card issuers of credit card accounts under an open-end (not home-secured) consumer credit plan. Specifically, the 2023 Proposal would have applied the following proposed revisions to all issuers of such accounts: (1) the $8 late fee safe harbor threshold and the elimination of the higher late fee safe harbor amount for subsequent violations; (2) the elimination of the annual adjustments for the proposed $8 safe harbor threshold, (3) the restriction on late fee amounts to 25 percent of the required minimum payment; and (4) the clarification in comment 52(b)(1)(i)-2.i that the collection costs to calculate penalty fees under the cost analysis provisions does not include post-charge-off collection costs.

With respect to proposed revisions to the late fee safe harbor amounts, in the 2023 Proposal, the CFPB recognized its estimates of pre-charge-off collection costs incurred by card issuers were based on late fee income and collection cost data from larger issuers that report to the Y-14 collection, as well as data from some additional Y-14+ issuers. The CFPB did not have data equivalent to the Y-14 data for smaller issuers' pre-charge-off collection costs, but the CFPB stated that it had no reason to expect that smaller issuers would have substantially higher pre-charge-off collection costs than larger issuers. Based on a 2022 review of about 2,500 credit card agreements from over 500 card issuers (as discussed in part II.E), the CFPB also noted that smaller issuers appeared to charge lower late fee amounts, and therefore, any reduction in late fee amounts would have a proportionately smaller impact on their late fee income. Specifically, in the 2023 Proposal, the CFPB noted that (1) in 2020, the average late fee charged by larger issuers included in the Y-14+ data was $31;
101

(2) the CFPB collects card agreements from more smaller issuers than issuers for which the CFPB has financial data; and (3) based on the review of agreements, as described above in part II.E, the CFPB established that issuers outside the top 20 by outstanding credit card balances charged smaller late fees in 2020 than issuers within the top 20.
102

In the 2023 Proposal, the CFPB solicited comment on this analysis and the potential impact on smaller issuers of the proposed $8 safe harbor amount, including whether smaller issuers could provide data or evidence related to the cost of collecting late payments. The CFPB also solicited comment on whether the pre-charge-off collection costs for smaller issuers differ from such costs for larger issuers, and if so, how the costs differ.

101
2021 Report, at 55. The average late fee charged by issuers included in the Y-14+ data is based on the Y-14 data and data collected from other specialized card issuers in response to an information order pursuant to section 1022(c)(4) of the CFPA.

102
Late Fee Report, at 14.

For the reasons discussed below, including the CFPB's review of the comment letters about collection costs, as well as the CFPB's concerns about impact on consumers and competition, the CFPB is not adopting at this time certain proposed changes for Smaller Card Issuers as defined in new § 1026.52(b)(3). The term “Smaller Card Issuer” is defined to mean a card issuer that together with its affiliates had fewer than one million open credit card accounts as defined in § 1026.58(b)(6) for the entire preceding calendar year.
103

Specifically, the following proposed changes are not being adopted at this time for Smaller Card Issuers (1) the $8 late fee safe harbor threshold and the elimination of the higher late fee safe harbor amount for subsequent violations; and (2) the elimination of the annual adjustments for the safe harbor threshold dollar amounts.

103

See supra
note 5.

For these Smaller Card Issuers, the safe harbor thresholds in § 1026.52(b)(1)(ii)(A) through (C) will continue to apply to late fees that they charge (as revised in this final rule pursuant to the annual adjustment provisions in § 1026.52(b)(1)(ii)(D)). In addition, the annual adjustment provisions for the safe harbor dollar amount thresholds to reflect changes in the CPI in § 1026.52(b)(1)(ii)(D) will continue to apply to late fees imposed by Smaller Card Issuers. Also, as discussed in the section-by-section analysis of § 1026.52(b)(2)(i), the proposed provisions to restrict late fee amounts to 25 percent of the required minimum payment are not being finalized in this final rule with respect to any card issuers, including Smaller Card Issuers. In contrast, the clarification in comment 52(b)(1)(i)-2.i that the collection costs for calculating penalty fee amounts under the cost analysis provisions in § 1026.52(b)(1)(i) do not include post-charge-off collection costs is being adopted for all card issuers, including Smaller Card Issuers, because this provision is intended to

clarify the existing rule and commentary.

B. Comments Received

Impact on credit unions and small card issuers—$8 late fee safe harbor amount.
Many banks and credit unions, industry trade associations, and individual consumers on behalf of credit unions, one Member of Congress, and the Office of Advocacy, an independent office within the SBA, expressed concern that the CFPB's estimated pre-charge-off collection costs for Y-14 issuers that the CFPB used in its analysis to support the proposed $8 do not accurately represent the pre-charge-off collection costs for late payments of smaller issuers.

Many credit unions and individuals on behalf of credit unions and one industry credit union trade association commenter asserted that (1) credit union call report data indicate that credit card late fees incurred per member per year are only $2.65; (2) annual total pre-charge-off collection costs per credit card account offered by credit unions amounted to $0.33, which is 10 cents higher than the pre-charge-off collection costs per credit card account for large issuers that the CFPB notes in the proposal; (3) and the ratio of monthly late fees to total pre-charge-off costs for the credit union industry is 2.8, compared to 5.7 for large issuers in 2022. These commenters also asserted that credit unions (1) have much lower fee-to-cost ratios than big card issuers because credit unions are not-for-profit, community focused, relationship-oriented financial institutions; and (2) face higher pre-charge-off collection costs as compared to big banks that can achieve economies of scale based on their numbers of customers and employees.

Many credit unions and individuals on behalf of credit unions and three industry trade association commenters asserted that Federal credit unions did not have the same options as larger issuers to recover potential lost revenue from late fees, and this could impact their ability to offer credit cards to consumers. Specifically, these commenters explained that Federal Credit Union Act limits Federal credit unions' ability to increase APRs in order to recover revenue losses resulting from a lower late fee safe harbor amount. Two of these industry trade associations indicated that National Credit Union Administration (NCUA) Board's action in January 2023 regarding the Federal Credit Union Act currently imposes a cap of 18.0 percent on the APR.
104

The other industry trade association asserted that the Federal Credit Union Act makes the credit union business model fundamentally different than that of the largest credit card issuers and that these limitations should not be ignored by the CFPB.

104
The Federal Credit Union Act generally limits Federal credit unions to a 15 percent interest rate ceiling on loans. However, the NCUA Board may establish a temporary, higher rate for up to 18 months after considering certain statutory criteria. National Credit Union Administration Letter (23-FCU-02),
Permissible Loan Interest Rate Ceiling Extended
(Mar. 2023),
https://ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/permissible-loan-interest-rate-ceiling-extended-2
. A January 2023 NCUA Board action established a temporary 18 percent interest rate ceiling through September 10, 2024.
See id.

Many credit unions and individuals on behalf of credit unions and one industry credit union trade association commenter asserted that credit unions already offer some of the lowest late fees in the market, which benefits consumers. One of the credit union commenters asserted that its net earnings are returned to members in the form of higher annual percentage yields (APYs), lower APRs, and greater servicing.

More than fifty individual commenters on behalf of credit unions asserted that the proposal, if adopted, would have potentially massive unintended consequences, including that some credit unions would leave the market. They asserted that this, in turn, could limit credit availability and increase industry consolidation, and would restrict credit unions' ability to offer solutions to consumers experiencing real financial hardship. A bank and a community bank trade association commenter expressed similar comments and indicated that the 2023 Proposal, if adopted, ultimately would force many community banks to exit the credit card market, leaving consumers, and in particular, rural consumers, fewer options for financial services.

A credit union trade association commenter asserted that the 2023 Proposal, if adopted, would (1) make it more difficult for credit unions to balance safety and soundness considerations with the desire to provide credit access to all consumers, especially those building or rebuilding their credit; and (2) further consolidate credit card issuers, strengthening the largest providers that may compensate lower late payment fees with product add-ons and other practices that are not consumer friendly. This commenter also asserted that (1) use of the cost-analysis provisions are not feasible for credit unions; (2) while the risk of operating outside of the safe harbor provision is common for the largest credit card issuers with large legal departments, not-for-profit credit unions are in a different position; (3) even when the fee is reasonable, it would be a safety and soundness concern to charge more than $8 as the risk of class action lawsuits continues to grow; (4) defending a reasonable fee through litigation is cost prohibitive for a not-for-profit financial institution and could severely impact their operations; and (5) while the safe harbor late fee amount proposed would not be a legal cap it may become an effective cap for credit unions, once again only benefiting the largest credit card issuers.

Many credit unions and individuals on behalf of credit unions urged the CFPB to exempt credit unions from its rulemaking as credit unions do not profit from any fees assessed to their members and the data are clear that credit unions already offer some of the lowest fees available in the market. Some of these commenters indicated that if the CFPB is hesitant to exempt just a particular type of financial institution, in light of the considerable impact that the 2023 Proposal is likely to have on small entities, the CFPB should consider a broader exemption for small entities, currently defined by the SBA's size standard of $850 million in total assets. These commenters asserted this would allow smaller entities to continue to maintain their ability to cover the costs of offering credit card accounts and remain competitive in the marketplace. An industry credit union trade association commenter asserted that one possible way to negate the impact of the 2023 Proposal on credit unions is to scale the rule for larger and smaller issuers.

One Member of Congress noted from the Congressional Research Service that smaller issuers sometimes serve more subprime cardholders who are more likely to make late payments which therefore implies that certain smaller issuers would face higher than average collection costs from late payments. The commenter noted that although the CFPB's proposal asserts that credit cards represent only a small percentage of credit unions' assets and revenues, the loss of late fee revenue would represent a distinct impact on credit unions because as nonprofits, they are unable to raise funds from stockholders. This commenter advised that the CFPB either work to ensure that the cost analysis provisions—an alternative to the safe harbor—would not impose undue burdens on small issuers or that the CFPB consider a separate safe harbor for

smaller issuers that more accurately reflects their unique costs.

The Office of Advocacy, an independent office within the SBA, criticized the CFPB for insufficiently considering the extent to which the proposed $8 safe harbor amount would cover the collection costs of smaller issuers. This agency asserted that (1) determining a late fee amount under the cost analysis provisions may not be feasible for smaller institutions; (2) small institutions may not have ready access to professional staff or consultants to develop a late fee that qualifies under the cost analysis provisions, and also may lack the information systems to provide the necessary support to determine the late fee amount under those provisions; and (3) for that reason, smaller institutions may rely on safe harbors to be certain that they are complying with the law. As such, this agency noted that an adequate safe harbor amount that reflects the costs that small entities incur in processing late payments is necessary to prevent small institutions from incurring potential legal fees if they were to use the incorrect late fee amount under the cost analysis provisions. The commenter further asserted that consumers, including small businesses, may choose to obtain their credit cards from small depository institutions that offer credit cards for a variety of reasons, including the ability of consumers with low credit scores to obtain a credit card that may otherwise be unavailable. The commenter also expressed concern that if the safe harbor amount does not cover the costs of providing the service, small depository institutions may decide to stop issuing credit cards.

Impact on credit unions and small card issuers—elimination of annual adjustment.
Several banks and credit unions, and a few credit union trade associations urged the CFPB to consider the impact eliminating the annual adjustments for safe harbor threshold amounts to reflect changes in the CPI may have on credit unions and small card issuers. For example, one credit union and one credit union trade association asserted that credit unions typically have higher than average per account collection costs than larger banks. This credit union trade association further asserted that credit unions currently report that fee revenue does not cover the full cost of delinquency and collections. Another credit union trade association asserted that credit unions have less diversified revenue streams to make up for costs in other areas. A bank commenter indicated that small issuers have a smaller credit base by which economic effects may be mitigated. Yet another credit union trade association asserted that (1) elimination of the annual adjustments would increase credit card losses and that Federal credit unions are subject to interest rate caps; and (2) credit unions would have a limited ability to recoup credit card losses.

Impact on credit unions and small card issuers—25 percent limitation.
As discussed in more detail in the section-by-section analysis of § 1026.52(b)(2)(i), several banks, credit unions and industry trade associations and one individual commenter urged the CFPB to consider the disproportionate impact the 25 percent limitation may have on credit unions, small card issuers, and private label card issuers.

Lack of SBREFA panel.
Many banks and credit unions, industry trade associations, and individuals on behalf of credit unions, the Office of Advocacy, an independent office within the SBA, and one law firm representing several card issuers asserted that the 2023 Proposal, if adopted, would have a significant economic impact on a substantial number of small entities (SISNOSE) and thus the CFPB is required to hold a small business review panel (SBREFA panel) under the Regulatory Flexibility Act (RFA) prior to finalizing the rulemaking. These comments are discussed in more detail in part X.

C. The Final Rule

For the reasons discussed below, the CFPB is not adopting at this time the following proposed changes for Smaller Card Issuers that are defined in § 1026.52(b)(3) as a card issuer that together with its affiliates had fewer than one million “open credit card accounts” as defined in § 1026.58(b)(6) for the entire preceding calendar year:
105

(1) the $8 late fee safe harbor threshold and the elimination of the higher late fee safe harbor amount for subsequent violations; and (2) the elimination of the annual adjustments for the safe harbor threshold. For Smaller Card Issuers, at this time, the safe harbor thresholds set forth in § 1026.52(b)(1)(ii)(A) through (C) will continue to apply to late fees charged by Smaller Card Issuers (as revised in this final rule pursuant to the annual adjustment provisions in § 1026.52(b)(1)(ii)(D)). In addition, the annual adjustment provisions for the safe harbor thresholds to reflect changes in the CPI in § 1026.52(b)(1)(ii)(D) will continue to apply to late fees imposed by Smaller Card Issuers. Also, as discussed in the section-by-section analysis of § 1026.52(b)(2)(i), the proposed provisions to restrict late fee amounts to 25 percent of the required minimum payment are not being finalized in this final rule with respect to any card issuers, including Smaller Card Issuers. In contrast, the clarificat

[Text truncated at 120,000 characters. The full text is on the page linked above.]

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-05011. Public record. Not legal advice.