By Richard Roth, J.D., Editor, the CCH Federal Banking Law Reporter, CCH Bank Compliance Guide, Bank Digest; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.
A federal district court has granted a preliminary injunction against the enforcement of an amendment to Reg. Z—Truth in Lending (12 CFR 226) that would have reduced the ability of credit card companies to impose fees on the types of cards usually offered to subprime borrowers. The injunction, which prevents the Consumer Financial Protection Bureau from enforcing the rule until a final decision is given in the case, was based in part on a determination that the Federal Reserve Board exceeded its authority when it adopted the amendment.
The amendment address limits on the fees that can be charged to a consumer as part of opening a credit card account. These limits were required by the Credit CARD Act. According to the law, if an account requires the consumer to pay fees during the first year that exceed 25 percent of the credit limit, the fees cannot be charged to the account. The credit card company that filed the suit structured a new credit plan to comply with this restriction by requiring the payment of up-front fees that could not be charged against the account.
However, in April the Fed amended the relevant Reg. Z section in a way that would affect the new credit card plan. While the earlier version of Reg. Z applied to fees that could be charged during the first year after the account was opened, the amended language applied to fees that could be charged prior to the opening of the account or during the first year, and this would have covered the lender’s program. The amendment was scheduled to take effect October 1.
As a result, the credit card lender sued the CFPB—which now has the authority to enforce Reg. Z under the terms of the Dodd-Frank Act—seeking to block the amendment. According to the lender, extending the rule to fees charged before the account was opened was beyond the reach of the Credit CARD Act and thus beyond the Fed’s authority. In granting the preliminary injunction, the court determined that the bank was likely to win its argument.
According to the court, the language of the Act clearly and unambiguously applied only to fees that were charged after the account was opened. The law was intended to prevent fees that would reduce the account credit limit, and nothing in the law prevented a lender from charging up-front fees as long as those fees were not charged to the account. The Fed’s own rulemaking proposal noted this, the court said, when the Fed observed that the Act was intended to protect consumers from cards that were represented as having a specified credit limit but actually had a much lower effective limit due to the imposition of fees.
The court rejected the CFPB’s assertion that the Fed had acted properly to "fill a gap or statutory silence," saying instead that the rule amendment was an attempt to address conduct that was outside the scope of the Credit CARD Act. "With the proposed amendment, the Board would change the purpose of the statute from preventing fees that reduce the available credit under the account to reaching any fee the Board does not like," the opinion said. This was said to be "arbitrary, capricious, and contrary to the Board’s statutory authority."
The CFPB’s related assertions that up-front fees could be limited in order to prevent circumvention of the first-year fee limits or because the two types of fees were functionally equivalent also were rejected. There was no circumvention of the first-year fee limit because consumers would not be surprised by up-front fees that were not charged to the account, the court said. For the same reason, up-front fees and first-year fees were not functionally equivalent.
The opinion was filed in First Premier Bank v. U.S. Consumer Financial Protection Bureau (DC S.D.), Civ. 11-4103-KES.