Today, the CFPB announced that it would reinterpret a rule protecting credit cardholders against excessive first-year fees, a move that heavily favors bad-credit lenders over consumers. In the wake of credit cards that charged hundreds of dollars in application fees – let alone annual fees – the Credit CARD Act of 2009 directed the CFPB to regulate fees on subprime credit cards. And they did: the Federal Reserve ruled in 2011 that a credit card’s first-year fees, including fees paid before account opening, could not exceed 25% of the credit limit. That’s $75 in fees for a limit of $300 – and remember, this is for the first year alone.
But the CPFB will now relax that rule, known as Regulation Z, excluding pre-opening fees from the 25% limit. This means that a subprime card with a $300 limit can now charge a $75 annual fee and a $119 processing fee – sadly, not a hypothetical. Unfortunately, the CFPB has failed to help those consumers most in need of protection from predatory subprime lenders.
First Premier wins another round in subprime battle
The rule change stems from a lawsuit by First Premier Bank, a card issuer whose cards were just the cards this law was meant to prevent. Before the Credit CARD Act of 2009, an unsecred Visa card with a $250 credit limit came with:
- A $35 processing fee
- A $119 acceptance fee
- A $72 annual fee, assessed at $6 a month
That’s $276 in first-year fees – more than the card’s credit limit. After the Credit CARD Act capped first-year fees at 25% of the limit, First Premier offered a new card with a $300 limit and $75 first-year fee – exactly 25%. However, it also charged a $95 processing fee, arguing that fees charged before account opening shouldn’t count toward the limit.
The Federal Reserve clamped down on this practice in 2011, arguing that such practices flew in the face of Regulation Z. First Premier could no longer charge the processing fee. The bank responded by filing suit in South Dakota, arguing that the Fed exceeded its authority in regulating pre-opening fees. The courts issued an injunction, stopping the Fed’s interpretation of the rule.
“Card issuers should benefit”
The CFPB admitted that it dropped the pre-opening rule to avoid a legal battle:
The Bureau issued the [rule] to resolve the uncertainty created by the South Dakota litigation…Card issuers should benefit from clarification…which will resolve any uncertainty created by the South Dakota litigation. The final rule also permits card issuers to collect fees that were previously prohibited.
Yet what should also be considered are the voices of consumer advocates and members of the public, who comprised the majority of those who commented on the proposal. “Many members of the public opposed the April 2012 Proposed Rule, arguing that amending [the rule] would reduce protections for vulnerable consumers,” notes the CPFB, yet these concerns go unaddressed.
A new sheriff on Wall Street?
Despite rumblings of a new attitude to regulating banks, from a non-binding resolution on “too big to fail” to the election of Senator Elizabeth Warren, the move is a clear concession to subprime lenders and legal expediency. First Premier is one of the biggest names in subprime credit card lending, and we’ve detailed our dislike of their unsecured card offerings in full detail.
Unfortunately, those who get “unsecured” credit cards end up paying substantial upfront and ongoing fees, even more than they’d pay with a secured credit card. As an example, here is the First Premier card’s fee schedule for a card with a $300 limit:
- $95 processing fee
- $75 first-year annual fee, $120 thereafter (assessed as $45 annually and an extra $6.25 monthly)
- The $75 first-year fee is assessed against the credit limit, so the initial available credit is just $225
- 25% credit limit increase fee – if you increase the limit by $100, you must pay $25
Tellingly, cardholders can get a credit increase “as soon as your Credit Account has been open for 13 months,” thus avoiding a conflict between the Federal Reserve’s first-year fee limits and the credit limit increase fee.
If the CFPB won’t stand up to one of the most unsavory credit card issuers out there, who will they stand up for?