Federal Judge Refuses To Lift Injunction Blocking CFPB Credit Card Late Fee Rule

A Texas federal judge has refused to lift the preliminary injunction blocking the CFPB’s enforcement of its final rule that would require larger credit card issuers to lower their late fees to $8 and that would also permit smaller credit card issuers to charge late fees up to $32 for a first violation and up to $43 for a subsequent violation during the next six billing cycles.

“To begin, the CARD Act explicitly allows card issuers to impose ‘penalty fee[s],’” Judge Mark T. Pittman of the U.S. District Court for the Northern District of Texas wrote in refusing to lift a preliminary injunction blocking the rule.

He continued, “The point is that, under the CARD Act, card issuers have the opportunity to charge penalty fees reasonable and proportional to violations, and narrowing the safe harbor to cost-based fees eliminates that opportunity,”

On March 5, 2024, the CFPB released the final credit card late fee rule.  It reduced the late fee safe harbor amount for larger issuers to the proposed $8 amount and eliminated automatic annual inflation adjustments for issuers subject to the reduced safe harbor amount.

The reduced safe harbor late fee amount only applies to credit card issuers that have 1 million or more open accounts (“larger issuers”), who, according to the CFPB, constitute the issuers with 95% of total outstanding credit card balances.  The final rule also adjusts the higher, pre-existing safe harbor late fee amounts that issuers below the 1 million account threshold (“smaller issuers”) can charge for a first violation from $30 to $32 and for subsequent violations during the next six billing cycles from $41 to $43.

Two days after the rule was issued, the Chamber of Commerce of the United States of America, Fort Worth Chamber of Commerce, Longview Chamber of Commerce, American Bankers Association, Consumer Bankers Association, and Texas Association of Business filed suit challenging the rule.  They argued that in issuing the rule, the CFPB had ignored the fact that card issuers could charge a penalty fee.

In issuing his decision, Pittman said that the CARD Act specifically allows late fees that may act as a deterrence.

“In fact, subsection (c) expressly refers to the deterrent effect of the penalty fees as one of the four factors that the CFPB  ‘shall consider’ in establishing standards to ensure the penalty fees are reasonable and proportional,” Pittman wrote.

Pittman wrote that given the fact that the final rule violates the CARD Act, the plaintiffs have a strong likelihood of success on the merits, which weighs heavily against dissolution of the preliminary injunction. He also wrote that the balance of equities and public interest do not favor the CFPB because there is generally no public interest in the perpetuation of an unlawful agency action.

The CFPB also had again sought to have the case transferred to the federal district court in Washington, D.C.

In his decision, Pittman rejected the transfer request, saying “this Court must also consider that it has previously been mandamused twice and found by the Fifth Circuit as having failed to act diligently and ‘clearly abusing its discretion’ by transferring this case to the District of Columbia.”

Judge Pittman has since entered an order requiring the parties to prepare a joint report that details the remaining legal issues and that proposes a summary judgment briefing schedule for those issues.  That report must be submitted on or before December 23.

He has also granted a motion in which the CFPB asked to be excused from filing an answer, which would otherwise have been due on December 20, on the grounds that the remaining issues can be decided on cross motions for summary judgment.  That motion seems to indicate that the CFPB will not be appealing the injunction.

In light of Judge Pittman’s continuance of the preliminary injunction based on alternate grounds (i.e., the failure of the CFPB to reflect deterrence in calculating a safe harbor), it seems very likely that the Judge will award summary judgment to the plaintiffs. It should also be noted that the new acting director of the CFPB appointed by Trump may stipulate to the court awarding summary judgment to the plaintiffs and decide not to appeal any final court order. There is an additional question as to whether the acting director will decide to engage in a new rulemaking under the CARD Act or just be content to let the “old” regulations remain in place.

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