First Premier Bank on July 20, 2011 filed suit against both the Federal Reserve Board of Governors and the newly created Consumer Financial Protection Bureau in U.S. District Court in South Dakota, claiming that regulations the Fed enacted in response to the Credit Card Accountability Responsibility and Disclosure Act of 2009 overstepped the agency’s authority and will result in undue economic hardships for the bank.
In its original form, the so-called CARD Act tasked the Federal Reserve with limiting the fees charged by a credit card issuer during the first year an account is open to 25% of the account’s credit line. In fulfilling this obligation, the Fed amended Regulation Z, the administrative implementation of the Truth in Lending Act, in part, to state that “the total amount of fees the consumer is required to pay with respect to the account during that year must not exceed 25 percent of the credit limit in effect when the account is opened.”
This rule was later amended to include fees charged prior to credit card accounts being opened.
The change was ostensibly made to close loopholes in the CARD Act’s original language that allowed banks like First Premier to escape the 25% fee maximum by collecting fees before a customer’s account was opened. Such a practice, according to the Fed, ran counter to the CARD Act’s original intent, to limit the initial financial burden that excessive fees placed on consumers trying to rebuild their credit.
First Premier—which, according to its lawsuit, based its credit card program on the terms of the law’s original language—sees things differently.
“Congress's primary concern was protecting consumers from unwittingly agreeing to fees that would be charged to the credit account at the time of account opening, thereby reducing the amount of available credit consumers thought they were obtaining,” First Premier’s lawsuit states. “Congress was not concerned with fees knowingly paid for the credit prior to account opening, which do not reduce the amount of credit available to the consumer.”
First Premier claims that its pre-account-opening fees therefore meet the standards originally laid out by Congress, as they are transparent and consumers must pay them before being extended credit.
As such, First Premier seeks to postpone the effective date of the Fed’s amendment—currently October 1, 2011. If this does not occur, First Premier says that it will suffer irreparable harm and will either have to shut down its credit card program or defy federal regulation.
Standing in the way of these efforts is Executive Order #12866, which states, “Federal agencies should promulgate only such regulations as are required by law, are necessary to interpret the law, or are made necessary by compelling public need, such as material failures of private markets to protect or improve the health and safety of the public, the environment, or the well-being of the American people.”
If the Fed can demonstrate that its regulations either are a valid interpretation of the CARD Act or represent the most cost-effective way to serve the public good, then they will likely hold up.
Central to this cost-benefit analysis is whether unsecured credit cards for people with bad credit are beneficial for the American people.
According to the lawsuit, “First Premier estimates that approximately 70 million individuals do not qualify for traditional credit cards. Many of these consumers of the credit cards offered under the Program purchase the credit to recover from a history of undisciplined borrowing and emerge from the Program with rebuilt and improved credit scores. … The public interest will be harmed without the credit offering provided by the Program. The credit offered by the Program serves the underserved credit market in an important way.”
On the Government’s side is the fact that secured credit cards and partially secured credit cards, which are issued by a number of different banks (including First Premier), not only represent an equally powerful means for credit building, but are available to a much higher portion of the 70 million individuals who face this task. A secured card’s security deposit allows for a far higher approval rate (close to 100%) and a lower fee structure than unsecured cards targeted to people with damaged credit.
It will be interesting to see how this lawsuit plays out.