When the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) went into effect in February 2010, one of the ideas behind it was that customers would be protected from unreasonably high or undisclosed fees imposed by credit card companies. The provision in the law that prevented “fee harvesting” capped yearly fees at no more than 25 percent of a customer`s available credit limit during the first year the account was open.
Banks, however, fearful of losing revenue, found a loophole in the law and began imposing fees on new card holders before actually processing their accounts, effectively allowing them to charge unlimited fees as long as the account was not yet officially open. The bank that got the most attention for doing this was South Dakota`s First PREMIER bank – a bank that specializes in making credit cards available to people with poor credit history and who may have trouble being approved for an account elsewhere.
When the Federal Reserve became aware of this they rewrote the rule, adding a stipulation that limited any advance-processing fees to the 25% threshold as well. First PREMIER balked, saying the regulation was causing their company financial hardship, and in July 2011 they went to federal court to try to overturn the regulation. In September they were victorious when their motion for a temporary injunction was granted, preventing enforcement of the rule.
Trying to Come to Terms
Last week, in the midst of trying to resolve the issue, the Consumer Financial Protection Bureau (CFPB) proposed new rules that would remove limits on fees charged prior to the opening of an account, while preserving the first-year cap of 25% of available credit. The CFPB says that they realize the proposal “may impose potential costs on consumers” and is actively seeking consumer input on the matter until the filing deadline of June 11, 2012.
Consumer advocacy groups are unhappy about the development, saying things like:
- “The CFPB should not back down in protecting consumers from this sort of chicanery.” – Chi Chi Wu, staff attorney for the National Consumer Law Center in Boston
- “I was a little bit disappointed in it, and that`s why we’re pushing back. The way to protect consumers is to push back when courts make mistakes.” – Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group (US PIRG)
High Risk, High Fees?
At issue is the question of whether small banks like First PREMIER have the right to charge high fees to the high-risk population that they serve. Does the federal government have the right to legislate consumer protection to the point of doing potential harm to the banking business?
First PREMIER approves sub-prime borrowers for credit card accounts, serving a population that is statistically highly likely to default on loans. The much-publicized 79.9 percent interest rate that they were widely criticized for in 2010 is only imposed if card holders carry a balance, meaning a customer who pays off their amount due in full each month would not pay any interest. Certainly, no one with good credit history would apply for a card with such a high interest rate, but for the customer with damaged credit who needs a chance to rebuild their credit rating, a bank like First PREMIER offers them an option to do so.
How High is Too High?
The fees charged by First PREMIER at issue in the lawsuit were between $25 and $95, and customers had 85 days to opt out of the fees and withdraw their applications – with the bank refunding any fees paid. First PREMIER attorney Vince M. Roche would not comment, but according to the lawsuit, “First PREMIER`s disclosures clearly describe this fee and other fees associated with the product. The upfront fee offsets the high risk associated with the underserved market.”
The CEO of First PREMIER, Miles Beacom, said of the in-progress regulation rewrite, “We`re hopeful that it is written so that we’ll be able to continue to market and price the product for the risk and that the customers make a decision whether they want the product or not.”
With Freedom Comes Responsibility
The federal government must walk a fine line between protecting consumers and letting banks do business unhindered by excessive regulation. Do customers really need to be “protected” from banks which give their customers full disclosure of their fee schedule and the chance to opt out of their card agreement if they deem the fees to be exorbitant or unfair?
Anyone looking for a new credit card can browse our site and read the terms and conditions of every card offered. With no shortage of options, from prepaid cards to premium ones, if the terms of one card don`t suit you, there is surely another one that will. Also remember that with responsible use of credit, things like high interest and penalty fees need not be an issue for any card holder. April is Financial Literacy Month; we encourage you to take a look at our Credit Card Education section and take responsibility for your finances, fees and all.