Last week, the Consumer Financial Protection Bureau (CFPB) backed off a plan to reduce costly up-front fees on credit cards. It’s amazing how the early headlines last week gave the impression that the CFPB was weak for changing course. The CFPB was, in fact, left with little wiggle room due to a federal court decision.
Here’s the situation: The Credit CARD Act of 2009 had included a regulation that limited up-front fees to 25 percent of the credit limit during the first year the account is open. This rule was supposed to protect consumers from what’s known as “fee harvester” credit cards.
First Premier, a subprime credit card lender that charges a $95 processing fee and a $75 annual fee, sued the CFPB and the Fed because this affected their business model. Some of their cardholders only get a $300 limit, and so charging $180 during the first year breaks the 25 percent rule.
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First Premier believed the Fed had interpreted the rule unfairly. A federal court in South Dakota sided with First Premier. Given the court decision, the CFPB created a new proposal that applies the 25 percent cap to fees charged after the account is opened. So, in First Premier’s case, the $95 processing fee wouldn’t be included in the cap. There are many subprime lenders that charge these fees, so this ruling doesn’t just impact First Premier.
Some consumer advocates may be upset with the CFPB’s choice to “back down.” I consider myself a consumer advocate and I think the CFPB made the right decision. I don’t see it as backing down at all. This is a situation where they have to pick their battles. How much time and energy should the bureau spend on this when it’s been through a federal court and there are so many other pressing issues? If you’d like to give the CFPB your two cents, and I encourage you to do so, it’s accepting comments about this issue until June.
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I’d like to see the CFPB focus on educating consumers and letting them know there are other choices besides fee-harvester credit cards. If you’re using a credit card that charges a 36 percent APR or more, having to pay up-front fees is the least of your worries. Check out the Orchard Bank credit cards, which also target subprime consumers. The terms are entirely reasonable.
Aside from making a practical decision, I think this is also a savvy PR move. The folks at the CFPB are showing that they aren’t going to have a knee-jerk reaction if things don’t go their way. I think that keeps the market on an even keel, which is best for consumers. This can also win over individuals who are ambivalent about the bureau. All good things for consumers.
Ultimately, it’s important to remember that the CFPB is not operating in a vacuum. There are economic laws that have to be considered, too. Banks are going to push back when revenue is on the line. When you take away a revenue source, other fees pop up. The bureau has to walk a fine line to keep the markets a safe place for all involved. And, so far, I think it’s doing a good job.
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