Late Fee Cap Unconstitutional?

What prompted the late fee cap regulation?

Why was the late fee cap rule challenged?

The American Bankers Association (ABA) and the U.S. Chamber of Commerce challenged the late fee cap rule due to concerns over its potential consequences on the financial landscape. They argue that while designed to protect consumers from high fees, the CFPB's regulation could destabilize prudent financial management and credit market operations.

The ABA voiced apprehensions about the unintended consequences that might arise from stringent caps on late fees. They claim that lower penalties for late payments could diminish the incentive for timely repayment among credit card users, potentially leading to an increase in late payments and adversely affecting consumers' credit scores. This could result in consumers becoming ineligible for future credits or only securing loans at higher interest rates.

Additionally, the trade association articulates that with reduced potential revenue from fees, credit card issuers might seek to recoup losses by enforcing stricter borrowing conditions, such as higher annual percentage rates (APRs) on carried balances and a scaling back of credit availability, particularly to those on the lower rungs of the socioeconomic ladder.

The American Bankers Association and U.S. Chamber of Commerce also challenge the CFPB's statutory authority to enact such sweeping changes without evident proof that the banks' current fees exceed the operational costs associated with late payments. They argue that the imposition of an inflexible cap disregards the variations in costs and risk management strategies across different financial institutions.

An illustration depicting the potential consequences of the CFPB's late fee cap rule, such as higher interest rates, stricter borrowing conditions, and reduced credit availability for consumers.

What constitutional arguments are cited against the late fee cap?

The constitutional challenge against the CFPB's ability to enforce the late fee cap hinges on a 2022 decision by the U.S. Court of Appeals for the Fifth Circuit, which ruled the agency's funding mechanism as unconstitutional. The decision asserts that the CFPB's funding—sourced directly from the Federal Reserve rather than appropriated by Congress—violates principles of federal appropriation and oversight, central to maintaining checks and balances within the governmental framework.

Critics argue that such autonomy affronts the appropriations clause and grants the agency an unjust degree of fiscal and operational latitude, sidestepping institutional checks that would otherwise temper its regulatory impulses. The relevance of this constitutional critique extends beyond fiscal technicalities; it is tied to broader contentions about the scope and limit of administrative authority in a republic where governmental powers are delineated and balanced to prevent overreach.

When a federal agency like the CFPB enforces rules with profound impacts on the economy, the argument intensifies about ensuring such actions are firmly rooted in, and continuously checked by, constitutional principles. A federal court invoking constitutional bases to challenge the CFPB's enforcement measures sets a precedent that probes the robustness of any regulatory action initiated without explicit, legislatively sanctioned authority.

What might be the future legal trajectory for the late-fee cap?

Given the constitutional challenges brought against the CFPB's rule to cap late fees on credit cards, the ongoing litigation appears to set the stage for an extended legal entanglement, potentially culminating at the Supreme Court. As deliberations proceed in lower courts, several legal scenarios could unfold.

The immediate future likely involves a series of appeals concerning the injunction issued by the U.S. District Court for the Northern District of Texas. Both sides are expected to present arguments that emphasize either consumer protection or economic freedoms and statutory interpretation. A circuit split could emerge as different jurisdictions may offer divergent opinions on similar cases, enhancing the likelihood of Supreme Court intervention to resolve inconsistencies and provide definitive guidance on the limits of agency authority.

If the Supreme Court opts to hear this case, its ruling will affect the specific late fee cap and potentially redefine the scope of regulatory powers granted to federal agencies like the CFPB. The justices may consider:

  • Whether Congress intended to delegate such sweeping regulatory powers under the Dodd-Frank Act
  • If such delegation was constitutionally appropriate

The eventual judicial decisions stemming from these issues will have far-reaching implications for the future of consumer finance law and economic regulation. If the high court's decision narrows the scope of permissible agency actions, we may witness a contraction of administrative influence concerning economic oversight—or conversely, a reaffirmation of agency capabilities to enforce consumer protection within limitations that respect statutory boundaries and obligations enacted by Congress.

A digital painting of the United States Supreme Court building with a credit card and a question mark, representing the uncertain future of the CFPB's late fee cap rule as it potentially heads to the highest court for a decision on its constitutionality and the scope of the agency's regulatory powers.
  1. Consumer Financial Protection Bureau. Truth in Lending (Regulation Z) Annual Threshold Adjustments (Credit Cards, HOEPA, and Qualified Mortgages). Federal Register. 2022;87(243):79176-79180.
  2. American Bankers Association v Consumer Financial Protection Bureau, No. 4:23-cv-00209-O (N.D. Tex. 2023).
  3. Consumer Financial Protection Bureau v Community Financial Services Association of America, Ltd, No. 21-50826 (5th Cir. 2022).