Federal authorities are formally backing away from rules that
prevented banks from charging application and other fees before
credit card accounts are opened.
Under proposed new rules published Thursday by the Consumer
Financial Protection Bureau (CFPB), there will be no limit on the
amount of fees charged before an account is opened. After approval,
issuers will still be subject to a cap on fees during the first
year of all new accounts.
The agency acknwleges its new proposal "may impose potential
costs on consumers" who would be hit with fees they wouldn't have
faced before.
The move is a victory for a Sioux Falls, S.D., bank -- First
Premier -- that caters to people with bad credit. The bank made
headlines in 2010 by charging a whopping 79.9 percent interest rate
on its credit cards. In a battle against regulators, the bank got
what it wanted in a federal lawsuit that claimed rules limiting
fees before accounts were opened created a hardship and would cause
irreparable harm to its business.
"The CFPB should not back down in protecting consumers from this
sort of chicanery," says Chi Chi Wu, a staff attorney for the
National Consumer Law Center in Boston.
Fee-harvesting cards
At issue is a provision in the Credit CARD Act of 2009 that sought
to prevent "fee harvesting" credit cards from gouging consumers
with upfront fees. These cards are typically issued to people with
bad credit and carry credit limits of only $500 to $700.
Banks charged higher than average interest rates and
application, administrative and account maintenance fees to offset
the greater-than-average risk that some of cardholders would not
repay their loans. Consumers complained that these fees often ate
up all or most of the available credit limits on the accounts and
left them with little to make purchases. By comparison, a person
with good credit can expect to get a card without paying any fees
or security deposits, before or after the application.
The CARD Act capped fees at no more than 25 percent of the
available credit limit during the first year of an account. Banks
found a loophole in the law and began assessing fees before
accounts were opened. Federal Reserve board regulators then rewrote
the rules and added a provision that included those advance fees in
the 25 percent cap as well. That provision was set to take effect
on Oct. 1, 2011, but First Premier went to federal court in July
2011 to block it. The company said at the time it was losing jobs
because of the regulation.
A U.S. District court judge in First Premier's home state of
South Dakota granted the bank's motion for a temporary injunction
on Sept. 23, 2011, blocking enforcement of the
rule.
"In order to resolve the litigation, the CFPB is seeking comment
on whether it should conform the rule to the court ruling so that
it no longer applies to fees charged prior to account opening," the
CFPB wrote in statement. "The overall 25 percent cap on certain
credit card fees charged during the first year, along with the
other specific provisions of the CARD Act, would remain in
place."
Heeding industry concerns
CFPB appeared to heed concerns voiced by banking industry
executives who have complained that they are being crushed by too
much regulation. The more lenient proposed rules were released a
day after CFPB Director Richard Cordray met in Sioux Falls with
representatives from small banks, who complained about the mounting
costs of dealing with new regulations.
Vince M. Roche, an attorney for First Premier, declined to
comment on the case. According to its lawsuit, First Premier
charged $25 to $95 before accounts were opened and gave applicants
85 days to make the payments. The bank refunded any money paid in
if applicants had second thoughts and withdrew.
"First Premier's disclosures clearly describe this fee and other
fees associated with the product," according to the suit. "The
upfront fee offsets the high risk associated with the underserved
market. The upfront fee cannot be paid using the credit offered to
the applicant."
The bureau is seeking public comment on its revamped rules. The
deadline to file is June 11, 2012.
See earlier stories:
Issuer of 79.9% interest rate credit card defends its product,
First Premier sues Fed, watchdog agency over new credit card
rules