Consumer Bureau Declines to Resist Upfront Credit Card Fees

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.

It also argued that it is “one of the few businesses in the country that offers such high-risk borrowers the chance to rebuild their credit history.”

A First Premier spokeswoman, Brenda Bethke, said Thursday that the bureau’s proposal is under review by its legal counsel and declined to comment.

Odysseas Papadimitriou, chief executive at, a credit card comparison Web site, said that to his knowledge, First Premier was the only bank that has been trying to make up for revenue that had been crimped by the new credit card regulations by charging more upfront fees. “However, you can count on other banks to start doing the same thing if consumers embrace these high-fee credit cards,” he added. “A smarter strategy for the C.F.P.B. might be to drop the amendment and the associated legal battle but require any issuers that charge fees before the account is opened to send a notice that clearly shows consumers how much their credit card will cost them.”

But some consumer advocates said they still believe that the fees are egregious enough to warrant more of a fight. They said First Premier began charging a $95 processing fee before the card account was opened, as well as a $75 annual fee. Yet the credit limit on the card was $300.

“The C.F.P.B. should not back down in protecting consumers from this sort of chicanery,” Ms. Wu said.

The consumer agency said all comments on its proposal must be received by June 11.

“We welcome and want public feedback on this proposal,” the agency said.


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