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Why Is CFPB Backing Down?

Why Is CFPB Backing Down?

It appears the Consumer Financial Protection Bureau is stepping away from the fight to limit credit card fees. Could it be the federal agency overstepped its boundaries or maybe pressure from big banks and credit card companies is proving too much? We examine these developments in a goal of better understanding its reasoning.

The Current Situation

As it exits now, federal law is clear in what a credit card company can charge in the first year of a new account. That limit cannot exceed 25% of the new customer’s available credit line. If you open a credit card account and receive a credit line of $1000, your fees during those first twelve months cannot total more than $250. Straightforward, right? Not necessarily. The law doesn’t address any fees a credit card company can charge prior to the actual account opening. A lawsuit last year resulted in a credit card company, specifically, First Premier, winning.

The Lawsuit

First Premier Bank found a loophole in the law. Instead of charging its fees after opening the account, it instead offered consumers a credit card with a $300 credit limit; but it also included a $95 processing fee and a $75 annual fee. This totaled, of course, more than 25%. It argued those fees were imposed prior to opening the account. The credit card company took it to court – and won.

The Federal Reserve Board, which is where CFPB took over much of the responsibility, attempted to add an amendment that would include those up front fees in the 25% cap. It was unable to do so and the fact First Premier won the lawsuit “froze” the amendments forward movement.

CFPB Response

Here’s where the CFPB comes in. For whatever reasons, it’s opted to back off and in fact, is now proposing to eliminate the amendment in its entirety. It plants to not move forward with the addition. It also declined to provide any reasoning as to why. The general consensus among those in the industry is one of disbelief. “The Federal Reserve always had a lot of authority” on credit card fees, said one analyst. “The CFPB inherited this authority. It should have appealed the ruling.”

Good News for Card Companies

Naturally, credit card companies are pleased with CFPB’s ruling. Mark Williams, a former Federal Reserve employee told the Associated Press on Thursday that a year ago, credit card companies were dreading the introduction of the agency because they felt as though it was going to significantly limit the areas the banks and card companies could profit from. They are seeing the decision by CFPB as a win.

The Official Word

If you’re interested, we’re providing the “meat and potatoes” of the ruling (you can see it in its extensive totality at This is an important ruling that can affect every credit card consumer in the country. While CFPB has yet to reveal its motives for backing down, ideally, it will release a statement at some point since its goal, from the beginning, was to be the voice of the consumer. It should be noted, too, that this is currently open for public comment until June 11, 2012.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act) was signed into law on May 22, 2009. [1] The Credit Card Act primarily amended the Truth in Lending Act (TILA) and instituted new substantive and disclosure requirements to establish fair and transparent practices for open-end consumer credit plans.

The Credit Card Act added TILA Section 127(n)(1), which states that “[i]f the terms of a credit card account under an open end consumer credit plan require the payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) by the consumer in the first year during which the account is opened in an aggregate amount in excess of 25 percent of the total amount of credit authorized under the account when the account is opened,” then “no payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) may be made from the credit made available under the terms of the account.” [2]

On January 12, 2010, the Federal Reserve Board of Governors (Board) issued a final rule implementing new TILA Section 127(n) in 12 CFR 226.52(a). [3] Section 226.52(a) limits the total amount of fees that a credit card issuer may require a consumer to pay with respect to an account to 25 percent of the credit limit in effect when the account is opened. Under the January 2010 final rule, this limitation applied only during the first year after account opening. [4] This rule became effective on February 22, 2010.

On April 8, 2011, the Board issued a final rule expanding § 226.52(a) to apply to fees the consumer is required to pay with respect to an account prior to account opening. [5] The change was based on the Board’s understanding that certain credit card issuers were “requiring consumers to pay application or processing fees prior to account opening that, when combined with other fees charged to the account after account opening, exceed 25 percent of the account’s initial credit limit.” [6] The Board viewed this practice as “inconsistent with the intent of [TILA] Section 127(n)(1) insofar as it alters the statutory relationship between the costs and benefits of opening a credit card account.” [7] The Board’s change to § 226.52(a) was scheduled to become effective on October 1, 2011. [8]

On July 20, 2011, a credit card issuer filed a lawsuit in the United States District Court for the District of South Dakota, alleging that the Board exceeded its authority by expanding § 226.52(a) to apply to fees the consumer is required to pay prior to account opening. [9] On July 21, 2011, the Board’s rulemaking authority to implement the provisions of TILA transferred to the Bureau pursuant to Sections 1061 and 1100A of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). [10] On August 5, 2011, the card issuer filed a motion for a preliminary injunction, asking the court to postpone the October 1, 2011 effective date with respect to the application of § 226.52 to fees paid prior to account opening. The district court granted the motion for a preliminary injunction on September 23, 2011. As a result of the court’s order, the portion of the Board’s 2011 final rule applying § 226.52(a) to pre-account opening fees has not become effective.

On December 22, 2011, the Bureau issued an interim final rule to reflect its assumption of rulemaking authority over Regulation Z. [11] The interim final rule made only technical changes to Regulation Z, such as noting the Bureau’s authority and renumbering Regulation Z as 12 CFR part 1026. Accordingly, the provision addressed in this proposal and in the litigation discussed above is properly cited as 12 CFR 1026.52(a).

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