The government agency tasked with protecting consumers is backing down in its fight to limit credit card fees.
The Consumer Financial Protection Bureau, the federal watchdog for all things that affect consumers' wallets, has proposed doing away with an amendment to existing legislation that would limit the amount of fees a credit card company can charge a consumer when applying to open an account.
"It's a big deal for those consumers who end up getting one of these credit cards that charge extremely high fees up front," said Chi Chi Wu, a staff attorney at the nonprofit National Consumer Law Center, in an interview with The Huffington Post. "Basically, it reopens a loophole that the Federal Reserve had closed."
Currently, federal law states that in the first year of an account, credit card companies cannot charge fees that exceed 25 percent of a consumer's available credit limit. In other words, if a person opens a credit card with a $2,000 limit, the company cannot charge more than $500 in fees that first year. But the law doesn't cover charges that a company imposes prior to an account's opening, such as application fees. That's where the loophole lies.
In April 2011 the Federal Reserve Board adopted an amendment to make up-front fees subject to the same 25 percent cap as other first-year fees. The board acted after First Premier Bank, a credit company riddled with consumer complaints, issued a card with a $300 credit limit -- and a $95 processing fee and a $75 annual fee.
Last summer First Premier took the Federal Reserve and the Consumer Financial Protection Bureau to court, arguing that the government didn't have the authority to cap the fees associated with opening an account. The judge ruled in favor of First Premier, effectively freezing the amendment.
In response to the judge's decision, on Thursday the consumer agency threw in the towel and proposed striking the amendment completely so that up-front fees would not be subject to any cap. The agency is advocating the change to "resolve the uncertainty" in light of the judge's ruling, according to its filing with the Federal Register.
The Consumer Financial Protection Bureau, which was created as part of the 2010 Dodd-Frank financial reform legislation, inherited responsibility for regulating credit card fees upon opening its doors last summer. Prior to that, the Federal Reserve Board oversaw the issue. The agency's decision not to fight the judge's ruling has frustrated Wu, who said the agency should have fought harder to maintain the cap.
"The Federal Reserve always had a lot of authority" on credit card fees, Wu said. "The CFPB inherited this authority. It should have appealed the ruling."
The agency's change of heart is a win for credit card companies, said Mark Williams, a former Federal Reserve examiner, in an interview with the Associated Press.
"Just a year ago, the view was that this agency was going to be devastating for business," he said, adding that Thursday's action shows that the agency "could be very effective for consumers and also bridge the needs of business to make profits."