The Consumer Financial Protection Bureau has decided not to challenge credit card companies on introductory fees. Credit card companies had been more aggressive in charging fees to users before they use a credit card, ever since new regulations made it so they could no longer charge more than 25 percent of the total credit limit in standard fees.
The CFPB originally proposed regulations to eliminate the introductory fees, but on Thursday relented and decided not to pursue the matter.
Consumer advocate groups expressed discontent over the decision, and what it says about the possibility of the CFPB as a sufficient consumer watchdog of financial products.
“Even if it is a small rule, it affects the most vulnerable of consumers — consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards,” said Chi Chi Wu, a lawyer at the National Consumer Law Center, told the New York Times. “Exactly the sort of consumers that we think CFPB. should stand strongest for.”
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In one of the first tests of its willingness to show its muscle, the new agency created to protect consumers declined on Thursday to put up a fight.
The agency, the Consumer Financial Protection Bureau, introduced a proposal that would make it easier for credit card issuers to charge fees before borrowers’ accounts were officially open.
The bureau, which began overseeing many consumer financial products last year, said it was issuing the proposed rule in response to a federal court decision that challenged how the Credit Card Act was being applied. The act, which took effect in February 2010, put several rules in place aimed at curbing abusive lending practices.
Part of the new law said that credit card issuers could not charge fees equal to more than 25 percent of the borrower’s credit limit in the first year after the account was opened. But after certain credit card issuers started charging application or processing fees before consumers’ accounts were opened, the Federal Reserve expanded the rule so that the fee limit would also apply to those upfront charges. That’s the piece of the rule that the consumer protection agency, which has since assumed regulatory authority, is proposing to eliminate.
The bureau declined to say why it took this course. But some consumer advocates said they believed that the consumer agency, led by Richard Cordray, may be backing down because it has decided to “pick its battles,” while trying to show that it is not unfriendly to business.
But other advocates said they could not understand why the agency was not taking a more aggressive stand. “Even if it is a small rule, it affects the most vulnerable of consumers — consumers with impaired credit records, often of limited means, who end up with these expensive fee-harvester cards,” said Chi Chi Wu, a lawyer at the National Consumer Law Center, referring to cards marketed to people with tarnished credit histories. “Exactly the sort of consumers that we think C.F.P.B. should stand strongest for.”
The bureau’s proposal stems from a ruling in September by the Federal District Court for South Dakota that granted a preliminary injunction blocking the rule on the upfront fees from taking effect. To resolve the matter, the consumer agency said it was seeking comment on whether it should revise the rule so that it no longer applies to fees charged before an account is opened.
The initial lawsuit that led to the federal ruling was brought in July 2011 by First Premier Bank of South Dakota, which issues cards to borrowers with troubled credit records. The bank told the court that it would “suffer irreparable harm” if it were not allowed to collect the upfront fees. “The regulation will threaten First Premier’s very existence by causing the loss of millions of dollars in profits,” the bank said.
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Last summer First Premier took the Federal Reserve and the Consumer Financial Protection Bureau to court, arguing that the government didn't have the authority to cap the fees associated with opening an account. The judge ruled in favor of First Premier, effectively freezing the amendment.
In response to the judge's decision, on Thursday the consumer agency threw in the towel and proposed striking the amendment completely so that up-front fees would not be subject to any cap. The agency is advocating the change to "resolve the uncertainty" in light of the judge's ruling, according to its filing with the Federal Register.
The Consumer Financial Protection Bureau, which was created as part of the 2010 Dodd-Frank financial reform legislation, inherited responsibility for regulating credit card fees upon opening its doors last summer. Prior to that, the Federal Reserve Board oversaw the issue. The agency's decision not to fight the judge's ruling has frustrated Wu, who said the agency should have fought harder to maintain the cap.
"The Federal Reserve always had a lot of authority" on credit card fees, Wu said. "The CFPB inherited this authority. It should have appealed the ruling."
The agency's change of heart is a win for credit card companies, said Mark Williams, a former Federal Reserve examiner, in an interview with the Associated Press.
"Just a year ago, the view was that this agency was going to be devastating for business," he said, adding that Thursday's action shows that the agency "could be very effective for consumers and also bridge the needs of business to make profits."
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