CFPB says bank engaged in 'forum-shopping' to fight $8 late fee rule

Bloomberg News

With $10 billion in late fee revenue on the line, credit card issuers and the Consumer Financial Protection Bureau are duking it out in a Texas court over the fate of the bureau's $8 credit card late fee rule, which will be decided by the same judge that overturned the Affordable Care Act in the Obama administration. 

On Tuesday, the CFPB claimed the credit card industry engaged in "forum shopping," in which litigants go to considerable lengths to bring their suits before sympathetic judges. The CFPB asked U.S. District Judge Reed O'Connor to deny a request for a preliminary injunction by six trade groups that sued the bureau last week to block the late fee rule from going into effect.

The bureau's response comes just days after the Judicial Conference of the United States, a policymaking body for the federal courts, announced a new policy to assign civil cases randomly to address concerns about "judge shopping." 

The CFPB said in its brief that the Fort Worth Chamber of Commerce lacked standing in Texas and claimed that Synchrony Bank — a $106 billion-asset bank based in Stamford, Connecticut, and chartered in Utah — had only recently joined the group in order to get the lawsuit filed in Texas, a district considered favorable to the banking industry. The CFPB urged the judge to dismiss the case for improper venue or, alternatively, to move the case to Washington D.C. 

"Far-flung entities cannot just pay membership fees to an association in their venue of choice to gain access to that venue," the CFPB said in its motion. "Only one Plaintiff resides in this District, the Fort Worth Chamber of Commerce. But the Fort Worth Chamber — suing on behalf of its members, only one of whom is named, Synchrony Bank of Draper, Utah (apparently, a recent addition to its roster) — lacks standing and, therefore, cannot provide the foundation for venue in this Court. The other Plaintiffs are associations headquartered in Washington, D.C., or other parts of Texas. And those other Texas groups identify zero members with standing." 

The Fort Worth Chamber of Commerce did not respond to repeated inquiries. A spokeswoman for Synchrony declined to comment.

The CFPB's $8 late fee rule issued earlier this month applies only to the largest 30 to 35 credit card issuers. The CFPB said that because the trade groups that oppose the rule are based in the District of Columbia, the case should be moved out of Texas. 

"Put simply, this case — about a consumer protection rule issued in Washington and applicable to a small number of large card issuers, not one of which appears to be based in this District — does not have an adequate connection to this District for venue to be proper," the CFPB motion said.

In addition to the Fort Worth chamber, the five other trade groups that sued the CFPB are the U.S. Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, the Longview Chamber of Commerce and the Texas Association of Business. The U.S. Chamber of Commerce is expected to file a reply brief later Thursday. The judge could rule within a week, according to some experts.

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If the judge grants the trade groups an injunction, then the late fee rule will be stayed and every bank and credit card issuer that are members of the ABA, CBA and the other trade groups can continue charging credit card late fees of $32 for the first missed payment and $41 for subsequent late payments.  

Judge O'Connor could invalidate the CFPB's $8 credit card late fee rule by claiming that the U.S. Court of Appeals for the 5th Circuit found the CFPB to be unconstitutional in 2022 due to its funding structure. Three appeals court judges ruled that the CFPB's funding through the Federal Reserve Board violates the Constitution's structural separation of powers. The three judges also invalidated part of the CFPB's 2017 payday lending rule.

The judge also could stay the rule until the Supreme Court decides on the bureau's funding structure, a decision expected by June at the latest. 

A ruling against the CFPB would cut into the Biden administration's narrative that the reduction in late fees to $8 from $32 is one of the ways the president is helping families ahead of the 2024 election, a message the president noted in his State of the Union address last week. The bureau can appeal a ruling directly to the 5th Circuit.  

A ruling in favor of the CFPB would mean the $8 late fee rule may go into effect within about two months. The rule has not yet been published in the Federal Register but would go into effect 60 days after its publication.  

The CFPB has very broad statutory authority over credit card issuers. In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act, which banned credit card companies from charging excessive penalty fees. The authority for administering the CARD Act was transferred from the Federal Reserve Board to the CFPB.