Last week, Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) announced that the CFPB would propose a rule that could reverse a ban on credit cards with low credit limits, high interest rates of up to 36% and steep fees. These types of cards are referred to as “fee-harvester cards,” which are targeted at consumers with poor credit histories. In 2009, The Credit Card Accountability, Responsibility and Disclosure (Credit CARD Act) was enacted to protect consumers from unfair credit card billing practices, including potentially abusive fee-harvester cards. The Credit CARD Act bars credit-card issuers from charging fees exceeding 25% of a card’s credit limit during the account’s first year. For instance, lenders generally aren’t able to charge more than $100 in fees for a $400 credit limit during the first year. Because of this new law, firms like South Dakota lenders – First Premier Bank and Premier Bancard, then began charging large fees in advance as a condition of obtaining the controversial cards. Last year, the Federal Reserve, which previously had regulatory authority under the Truth in Lending Act (which the Credit CARD Act is a part of), interpreted the law as also banning upfront “processing” fees charged prior to account activation.
As a result of the Fed’s ruling, First Premier Bank, which claims 20% of the market for high-fee, low-limit cards, sued in federal court. The bank claimed that the Fed had exceeded its authority and would ultimately cause them irreparable harm. Last September, a federal judge in South Dakota ruled in its favor issuing a preliminary injunction preventing the restrictions on application and activation fees from going into effect.
In its notice last Thursday, the CFPB proposed to limit the credit-card fee restrictions to fees lenders charge during the first year after a consumer opens account but not the fees lenders charge before the account is opened. Ultimately, this rule could be another win for predatory lenders this year allowing them to continue victimizing consumers with hundreds of dollars in “processing” fees in exchange for only a small amount of credit. In January, the U.S. Supreme Court issued a decision that makes it easier for predatory lenders to continue hiding their fraudulent and abusive practices. In CompuCredit Corp. v. Greenwood, the Supreme Court held that consumers who were sold predatory fee-harvester cards by CompuCredit must give up their rights to the public civil justice system, and instead submit all of their legal claims to forced arbitration.
The CFPB will take comments on the proposal through June 11th and has said publicly it wants "to resolve the uncertainty caused by the litigation." Now that the CFPB stands in the shoes of the Fed, we urge them to defend the Fed’s rule and fight for this case at the Court of Appeals level. NACA will be submitting comments to the CFPB on this proposal. We encourage all NACA members to submit comments or if you’d like to provide input for NACA’s comment letter please email LegislativeUnit@naca.net.