Consumer watchdog agency backs off on high-cost credit cards

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The Obama administration’s consumer financial watchdog wants to undo a limit on some upfront fees on credit cards, prompting criticism that it could hurt borrowers with poor credit.

The Consumer Financial Protection Bureau is backing away from restrictions on what the industry calls fee-harvester cards. Issuers of these cards make such customers pay a large fee before they can receive cards with very low credit lines.

The agency indicated that its decision stemmed from a court ruling saying the fee cap appeared to be barred by “plain and unambiguous” language in the applicable law. Lobbyists and the public have until June 11 to file comments or objections before a final decision is made.

A credit card law passed by Congress in the aftermath of the financial crisis included a provision saying non-penalty fees could amount to no more than 25% of the credit limit during the first year after an account is opened. This included annual fees and application fees.

First Premier Bank and Premier Bancard, sister firms in Sioux Falls, S.D., then began charging large fees in advance as a condition of obtaining the controversial cards.

Issuers of the fee-harvester cards pitch them as a way for people with damaged credit to improve their credit scores. Consumer groups say the cards are debt traps, designed to generate overdraft charges as well as enormous fees.

When the Federal Reserve ruled last year that these upfront fees should also be included in the first-year fee cap, the companies sued in federal court. They charged that the Fed had exceeded its authority and would cause them irreparable harm.

In proposing to exclude the upfront fees from the 25% calculation, the Consumer Financial Protection Bureau acknowledged that the policy change would increase costs for cardholders and increase revenue for card issuers.

But it said the proposal, if adopted, would resolve First Premier’s lawsuit. It noted that U.S. District Judge Karen E. Schreier already had blocked implementation of the rule including the upfront fees, saying First Premier was likely to prevail.

Four national consumer advocate groups issued a statement saying they would object to the proposed change. They noted that First Premier charged a processing fee of up to $95 for its credit cards before opening an account with a $300 credit limit, then added a $75 annual fee that was charged to the card.

The net effect was to provide $225 in credit at a cost of $170 — “exactly the sort of abuse that the fee-harvester rule should prohibit,” attorney Chi Chi Wu of the National Consumer Law Center said in a statement. “The CFPB should not back down in protecting consumers from this sort of chicanery.”

“This is truly unfortunate,” said Lauren Bowne, a staff attorney at Consumers Union. “These cards are sold as a way for people with no credit or bad credit to build or repair their credit history. But what they do is to get people in more trouble because of their huge fees and penalties.”