We’ve seen this rodeo before.
In legal terms, the Consumer Financial Protection Bureau (CFPB) appears to have bypassed a small business requirement that puts a proposed anti-consumer regulation in legal jeopardy.
The massive, impenetrable administrative state has struck again. A blunderbuss set of regulations that neglect the need to actually protect consumers will hammer banks, both large and small, in a way that will harm the very consumers regulators claim to protect.
Exhibit 1 is the proposed rule of the Consumer Financial Protection Bureau (CFPB) addressing Credit Card Penalty Fees issued on March 29, 2023 (Regulation Z). It would force consumers into a Procrustean bed fashioned for wealthy users of credit cards heedless of their distinct economic challenges and access to credit. But the rule would be DOA for violating the Small Business Jobs Act of 2010.
At present, a credit card issuer’s fees for a violation of the terms and conditions of the card, including late payment or exceeding a credit limit, are restricted by regulation. Issuers must determine that the fees represent a reasonable proportion of the total costs incurred by them occasioned by the violation. Alternatively, issuers may rely upon safe harbor provisions to establish compliance: $30 for penalty fees and $41for each subsequent violation of the same type occurring during the same billing cycle of in one of the next six billing cycles.
The proposed rule would dramatically shrink the safe harbor. Penalty fees for late fees would plunge from $30 to $8; higher fees for recidivism would be eliminated; annual inflation adjustments would be ended; and, in no circumstance could late fee penalties exceed 25 percent of the required payment.
Although this sounds great for consumers, the impact would be the opposite. Banks would be forced to respond with higher interest rates, higher fees, a reduction in rewards programs and reduced credit lines. The people who need credit cards the most might be shut out of having them because there will be more delinquency with more late payments and the market will respond by hiking lower income Americans’ credit scores leading to less access to credit cards.
Smaller banks, in particular, will be disproportionally hurt. The Regulatory Flexibility Act (RFA), as amended by the Small Business Regulatory Enforcement Act, entitles small entities to a voice in the rulemaking process. If a rule is expected to have a significant economic impact on a substantial number of small entities, the Act requires the relevant federal agency to evaluate the impact and to consider less onerous alternatives. Further, the Small Business Jobs Act requires agencies to consider comments provided by the Office of Advocacy of the U.S. Small Business Administration.
A depositary financial institution is deemed small if its assets are less than $850 million. Applying this criterion, the CFPB estimated the number of small banks at 3,380, of which 498 showed credit card debts on their balance sheets; and the number of small credit unions at 4,586, of which 2,785 reported credit card assets.
Under section 605 (b) of the RFA, an agency can circumvent a small business impact assessment and consideration of less burdensome alternatives by certifying that a rule will not have a significant economic impact on a substantial number of small entities. But the certification must command a factual foundation. Speculation is insufficient.
The CFPB certified its Penalty Fees rule under section 605 (b). It argued that only 13 small banks reported credit card assets at 1 percent of total assets or higher; that among the remaining small banks with asset share below 1 percent, 29 had a credit card revenue share above 1 percent of total revenue; that the CFPB reasonably speculates that credit card fees are substantially less than 20 percent of total credit card revenue. Ergo, “for the vast majority of small banks, even a large reduction in credit card late fee revenue would represent well below 1 percent of bank revenue, and, therefore, would not have a significant economic impact.”
On May 2, 2023, the Office of Advocacy of the U.S.SBA protested the CFPB’s certification as fourfold flawed.
The certification treated all small banks and credit unions alike in their costs and revenues by neglecting a more granular analysis which could demonstrate a significant economic impact on a subgroup. The certification further ignored the potential economic impact of small banks and credit unions issuing fewer credit cards with a corresponding diminishment of revenue. Moreover, the certification attempted to extrapolate effects on small entities from data regarding institutions with more than $10 billion in assets. Additionally, it fails to summon data showing that small entities as opposed to their behemoth brothers are largely culpable for excessive fees that need clipping, or that the proposed $8 fee would cover the costs of small depositary institutions needed to prevent them from ceasing to issue credit cards.
Finally, calculating a “reasonable” late payment penalty tied to costs is typically beyond the accounting expertise of small financial entities. They must rely on an easily administrable and financially viable safe harbor to remain in the credit card business.
The CFPB should go back to the drawing board and convene a small business review panel as stipulated by section 609 of the RFA instead of racing to jump off a legal cliff. Small business is the heart and soul of the American economy. It should not be handicapped by the CFPB’s regulatory myopia or indolence.
Bruce Fein was associate deputy attorney general and general counsel of the Federal Communications Commission under President Reagan. @brucefeinesq.
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