Subprime credit card issuer First Premier Bank is suing the Federal Reserve Board and the Consumer Financial Protection Bureau over a new rule that would limit fees the issuer charges high-risk customers when opening card accounts.
The Sioux Falls, S.D.-based issuer filed a motion on Aug. 5 with the U.S. District Court of South Dakota requesting a preliminary injunction on the rule, which is set to go into effect Oct. 1 as part of the Credit Card Accountability, Responsibility and Disclosure Act.
U.S. District Chief Judge Karen Schreier has scheduled a hearing for Sept. 1 to consider a motion.
First Premier is suing both agencies because the bureau on July 21 assumed the role of supervising credit card issuers as part of the CARD Act. First Premier filed its initial complaint with the court on July 20.
A provision of the law 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 notes. Exceptions include late fees, over-limit fees and returned-payment fees.
The Fed in March announced a revision to the rule, expanding the scope of the 25% limit to include fees paid before an account is opened.
First Premier states in its complaint that it typically charges customers who do not qualify for a traditional credit card a processing fee before opening a new account. The fee ranges between $25 and $95.
New credit card customers typically receive an initial credit limit of $300, according to information on First Premier’s website. At the higher end of its fee range, First Premier’s account-opening fee could exceed the Fed’s limit, the suit notes.
If the new rule goes into effect as written, it will force the issuer to terminate its credit card program, constituting irreparable harm, First Premier alleges.
Citing the judicial-review process under the Administrative Procedure Act, the issuer alleges that the Fed’s March rule-revision is invalid because it conflicts with the CARD Act’s plain language.
The issuer believes the Fed’s interpretation of the law regarding card fees during an account’s first year was incorrect, Alan S. Kaplinsky, a partner with the Philadelphia-based law firm Ballard Spahr LLP, tells PaymentsSource.
“First Premier wants to prove that the Fed didn’t have the authority to lump in upfront account-opening fees with the other fees they might charge during the first year of the account,” Kaplinsky says.
Whether First Premier will prevail “is anyone’s guess,” Kaplinsky says, adding that the outcome likely will be “very significant” to other subprime credit card issuers.
“A case can be made that it’s fair for an issuer to charge an upfront fee to certain customers that don’t qualify for traditional credit cards because they are taking a steep risk,” Kaplinsky says. “This is a fairly narrow issue that’s unlikely to spark a lot of other lawsuits,” he adds.
What do you think about this? Send us your feedback.
