I just went through this with a different brand, Hyatt, where I was charged a cash cancellation fee for a points booking.Cancellation policy on points booking read "2 days BFR ARRV OR PAY 1 NIGHT FEE" So 1 night fee wasn't disclosed as a cash fee, and they charged my card on file an arbitrary amount they decided (about 2x what I would value the points worth).

So cash penalties for points books do happen. No, they are not clearly disclosed.

Yes, you could dispute with your credit card company. However, I've wrongly assumed in the past that a vendor and your credit card issuer engage in an agreement that they'll abide by Amex's or Visa's decision regarding disputes. This is not the case. The vendor can still decide you owe and can close your account, file a lawsuit, perhaps send you to collections. If the property is owned and operated by the loyalty brand, such as a Hilton, I assume your Hilton Honors account could also be suspended.

We are all here for the enjoyment of travel, hopefully not the stresses of it. So I would just go into any points booking with a cash penalty with your eyes wide open, rather than the mentality of "let's see them try to collect."