The Consumer Financial Protection Bureau acknowledged Thursday that its proposal would increase costs for some cardholders and allow banks to charge more in fees.
The CFPB was set up after the financial crisis to protect consumers from loans and cards with hidden fees or other traps. Thursday’s decision shows the difficult line the agency must walk, allowing banks to make enough money so they can offer loans and cards while protecting consumers from fees that it considers abusive or deceptive.
Bill Bartmann, a financial lawyer and debt-collection executive who generally supports the agency, called it “strategic thinking” on the part of Richard Cordray, the agency’s director.
“He’s picking battles, and it’s unrealistic to think you can win them all,” said Bartmann, who publishes a widely read newsletter on financial regulation.
Fee limits are of particular concern to borrowers with weak credit, including so-called subprime borrowers, and the companies that seek to lend to them.
Subprime borrowers tend to face much higher fees because lending to them carries more risk. Banks fear the agency will block too many fees, effectively preventing millions of Americans from establishing stronger credit so that they can qualify for mortgages or auto loans.
Consumer groups decried the CFPB’s decision. But several independent experts called it a positive signal that the agency is choosing battles carefully as it adds staff and writes dozens of rules required under a 2010 overhaul of financial rules.
Banks aren’t allowed to charge fees totaling more than 25 percent of a person’s credit limit in the first year that the account exists. But there’s no limit to the fees they can charge before the card is activated.
Under a rule proposed last year, those upfront fees would have counted toward the 25 percent cap. The CFPB is retreating from that idea after a federal court in South Dakota prevented it from taking effect.
The consumer agency’s new rule would let banks charge whatever fees they want up front. Those fees can include processing or activation fees of nearly $100 – a large chunk of the credit limit for borrowers who are often granted lines of less than $1,000. Under the new plan, the 25 percent cap would apply only to fees charged after the card is issued.
First Premier Bank of Sioux Falls, S.D., had argued that the Fed overstepped when it proposed the tougher rule. The bank had started charging customers a $95 processing fee for credit cards before the account was opened, plus a $75 annual fee. Some cards had a credit limit of $300.
The upfront fee allowed First Premier and others to charge people fees totaling far more than 25 percent of their credit lines. The rule was an attempt to close that loophole.
High-fee, low-limit cards like First Premier’s are available mainly to people with weak credit histories, said Chi Chi Wu, an attorney with the National Consumer Law Center, which has urged CFPB to fight the court ruling.
“This is the population of credit card holders who are the most vulnerable, folks who don’t have a great credit history, who probably already have limited means,” Wu said. “If anything, the CFPB should stand stronger for the consumers who have the least power among us.”
Republicans and business lobbyists had opposed the CFPB’s creation and tried to prevent it from gaining power. They argued that it would reduce consumer choice, in part because fee limits would discourage banks from offering some services.
By tipping the rule in favor of banks, the agency is showing that it takes both businesses and consumers into account when setting policy, said Mark Williams, a former examiner for the Federal Reserve who teaches finance at Boston University.
“Just a year ago, the view was that this agency was going to be devastating for business,” inventing costly and unnecessary consumer protections, Williams said. He said Thursday’s action shows that the agency “could be very effective for consumers and also bridge the needs of business to make profits.”
The CFPB’s revised proposal was published quietly in the Federal Register, the daily digest in which federal agencies make routine announcements. The CFPB is accepting public comment on the matter until June.
The CFPB declined comment beyond a press release that summarized the proposal. It acknowledged the potential effects in its Federal Register notice.