A federal court has blocked enforcement of a new rule affecting subprime credit card issuers that the Federal Reserve Board established as a result of the Credit Card Accountability, Responsibility and Disclosure Act.
The U.S. District Court for the District of South Dakota on Sept. 23 issued a preliminary injunction postponing the Oct. 1 effective date of the Fed’s implementation of a new rule restricting the total fees an issuer may charge a cardholder during the first year they hold an account.
Sioux Falls, S.D.-based First Premier Bank, which typically targets subprime borrowers, in August filed suit against the Fed and the Consumer Financial Protection Bureau (
First Premier included the bureau in its lawsuit because the Dodd-Frank Wall Street Reform and Consumer Protection Act shifted regulatory authority from several federal agencies to the new, 400-person consumer protection bureau that opened its doors July 21, 2011.
A provision of the Credit CARD Act that went into effect in February 2010 limits the fees issuers may charge to a consumer’s account during the first year to 25% of the account’s initial credit limit, the suit noted. Exceptions include late fees, over-limit fees and returned-payment fees.
The Fed in March announced a revision of the rule, expanding the scope of the 25% limit to include fees paid before an account is opened.
First Premier typically requires high-risk credit card prospects to pay a fee before an account is opened. The fee, which covers separate costs associated with opening accounts for borrowers with poor credit history, is not part of the credit line consumers may receive with the card.
In granting the injunction, the court found that the Fed’s March revision was “arbitrary, capricious, and contrary to the board’s statutory authority.”
The court wrote that the Credit CARD Act’s language was “clear and unambiguous,” contending that the statute was meant only “to prevent the harm of fees being charged to the account that would reduce the available credit to an unknowing consumer.”
Without the injunction, First Premier would suffer “irreparable harm” and would be forced to terminate its credit card program and be at risk for going out of business, Jeremy T. Rosenblum, a partner with the Philadephia-based law firm Ballard Spahr LLP, tells PaymentsSource.
The injunction blocking enforcement of the Fed’s March rule is “unusual,” Rosenblum says.
“The Fed and the consumer protection bureau have sweeping authority to enforce rules, and the court stepped in here to say that despite the fact that the Fed has the power to make exceptions and use its own judgment, it was wrong this time in the way it interpreted the statute,” he says.
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