Soon after the Federal Reserve Board issued a Regulation Z final rule amending provisions limiting credit card fees paid prior to account opening, as well as fees paid during the first year after account opening, a bank filed suit in district court against the agency.
As required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the court substituted the Consumer Financial Protection Bureau in place of the Fed as the defendant in the case.
Before examining the case, let’s review the background concerning Reg Z provisions on fee limitations. Changes to Reg Z that became effective in August 2010 limited the total amount of fees a consumer could pay on a credit card account during the first year following account opening to 25% percent of the account’s credit limit at account opening.
During the first year after an account is opened, no payment of any fees other than late-payment, over-limit, or returned-payment fees were permitted to be made from the available credit.
In April 2011, the Fed issued a Reg Z final rule amending and clarifying some of the prior Reg Z changes regarding the CARD Act. This final rule amended the August 2010 rule on fee limitations and applied the 25% limitation to fees the consumer is required to pay both before an account is opened and during the first year after an account is opened.
As was the case before, the limitations didn’t apply to late-payment, over-limit, or returned-payment fees. The Fed justified this change by stating that even though the practice of charging application or processing fees prior to account opening isn’t prohibited by Reg Z’s current language, the board believed it was inconsistent with the intent of the Truth in Lending Act because it alters the relationship between the costs and benefits of opening a credit card account.
After the initial fee limitation rule became effective in August 2010, First Premier Bank began offering credit cards to consumers with poor credit ratings. These cards required an up-front fee ranging from $25 to $95 consumers had to pay in full before opening the account.
Within three months after the Fed amended the Reg Z final rule in April 2011, First Premier filed suit against the agency. It argued the Fed exceeded its authority by applying the fee limitation to fees paid prior to account opening that aren’t charged to the credit card account balance.
First Premier said Congress intended to regulate only fees that are actually charged to the account balance, therefore reducing the available credit.
The bank argued that if the amendment became effective, it couldn’t charge the up-front fee and, as a result, would have to close its credit card program.
First Premier asked the court to invalidate that portion of the Reg Z amendment which limited fees paid prior to account opening and asked for a preliminary injunction to enjoin implementation of the Reg Z amendment.
The court agreed the Fed exceeded its authority when it amended Reg Z to limit fees paid prior to account opening that aren’t charged to the account balance: “Nothing in the plain language of [Truth in Lending] implies that it is meant to prohibit creditors from charging pre-account fees or any other fees as long as they are not charged to the account.”
Therefore, Congress only expressly intended to limit fees charged to the account itself. Because Truth in Lending is unambiguous, the board only has authority to promulgate regulations that operate within the boundaries of Congress’ clearly expressed intent.
For these reasons, on Sept. 23, 2011, the court granted First Premier’s motion for a preliminary injunction. As of mid-November, the preliminary injunction was still in place.
Until the preliminary injunction is either dismissed or overruled, the effective date of the amendment regarding the limitation of up-front credit card fees is postponed, and the Consumer Financial Protection Bureau is enjoined from enforcing it.
However, the original rule regarding the limitation of fees during the first year after an account is opened remains in place and credit unions should continue to comply with it.
MICHAEL McLAIN is CUNA’s assistant general counsel and senior compliance counsel. Contact him at 608-231-4185.