‘Pre-Account Opening’ Fees is Where Credit Card Reform Failed


'Pre-Account Opening' Fees is Where Credit Card Reform FailedMany good and overdue consumer protections came from credit card reform enacted four years ago, but one credit card issuer took U.S. rule makers to court over one provision — and won.

The victory by First Premier Bank — an issuer known for charging subprime consumers triple-digit fees for cards with low credit limits — now allows all card providers to charge pretty much what they want to open an account.

First Premier essentially took the Federal Reserve and U.S. lawmakers to task — and took the prize. It can continue charging $95 processing fees, or higher, before opening a new customer’s card account, no matter how much actual credit is provided on the card.

The final victory lap on behalf of First Premier was taken begrudgingly by the Consumer Financial Protection Bureau, ironically created by other reform laws to protect credit card holders and all U.S. consumers who take out loans.

But the CFPB had not choice but to clarify U.S. law after First Premier’s court victory in 2011 . The agency was created after the credit card reform was enacted.

The CFPB finalized a revision to a 2011 rule that the Federal Reserve had issued on credit card fees.

The bureau on Friday made this revision official. It explained it this way:

At issue in the lawsuit was the total amount of fees that a credit card issuer may require a consumer to pay with respect to a credit card account prior to the opening of the account.

The 2009 Credit CARD Act (CARD Act) limited certain fees charged during the first year after the account is opened to 25 percent of the account’s initial credit limit. For example, if the credit limit is $400, fees charged during the first year after the account is opened generally cannot exceed $100.

In April 2011, the Federal Reserve Board amended its rules implementing the CARD Act to extend this limitation to fees that the consumer must pay prior to opening an account — such as, for example, an application fee.

The Board’s amendment was challenged on July 20, 2011 in the U.S. District Court for the District of South Dakota (by First Premier). On September 23, 2011, the Court granted a motion for a preliminary injunction preventing the amendment from taking effect.

That injunction forced the CFPB’s hand in issuing the revision, allowing “pre-account opening fees.”

Since the CFPB proposed its revision, consumer advocates — not surprisingly — opposed the amendment.

“Many members of the public opposed the … rule, arguing that amending … would reduce protections for vulnerable consumers. Some of these commenters suggested that the Bureau pursue other means of limiting pre-account opening fees, such as writing additional rules, coordinating examination activities, or bringing enforcement actions,” the CFPB said in its final rule.

The bureau had this response:

“The Bureau takes seriously the concerns raised by commenters, particularly with respect to the effect that rule may have on vulnerable consumers. The Bureau believes, however, that the final rule is necessary to resolve the uncertainty created by the South Dakota litigation…”

Also not surprising was the industry’s response:

“Industry representatives, however, supported the proposed rule as a more accurate implementation of the Credit Card Act and an effective way to resolve the current litigation,” the CPFB said.

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