How First Premier Bank Exploited a Loophole in the CARD Act

The CARD Act of 2009 was supposed to be a bill that reigned in on unacceptable credit card practices and help protect consumers against unreasonable practices. One of the provisions of the law was that sub prime issuers cannot collect an upfront fee of more than 25% of the credit line given. Sub prime issuers (for some unknown reason) tend to give a starting credit line of $300. Prior to the CARD Act, it was not uncommon for issuers to charge fees in excess of over a hundred dollars. Now, issuers can only charge up to $75 in fees if they give a $300 credit limit. But First Premier has skirted around the CARD Act (with the aid of a court ruling) and their cards are now able to require consumers to pay more than 25% of the initial credit.

A Look Back In Past Practices – But before we examine the First Premier case, let’s look back at precisely how a typical sub prime card was marketed in the past. If you’ve had bad credit or ever knew anyone with bad credit, you may be familiar with the schemes and practices of the past that were once offered to people hoping to build or repair their credit histories. If you are not familiar, it once looked a bit like this:

Creditor guarantees a credit card, by a bank- not a merchandise card, to a person with bad or no credit. Everyone needs some form of credit card for rentals and such, and if you are in the position of repairing your credit, this is another reason you would have been happy to receive a pre-approved/guaranteed credit card offer like this.

Even better, there are fees for the card but luckily with this particular offer, you don’t have to pay anything because the fees are billed directly to your new credit card. The offer may also include a credit limit of up to $5,000 and the fees which include annual fees, monthly fees, membership fees, administration fees, etc etc, total around $200. Your optimism makes the offer seem maybe not so bad, and even quite good for someone with bad credit because:

• You have bad or no credit and weren’t expecting to be approved for any type of credit card.
• You are building or repairing your credit and this card will help.
• $200 is a small price to pay for a credit card. If you are approved for even a portion of what is possible, say $1000.00 that’s still not so bad, right?

And then you would get the card, and realize, because of your credit you were only approved for a $300 credit limit. The fees you remembered calculating (along with some you may not, because there is also a processing fee now) leave you with a limit of $50.00. If you were like a number of other people that received this offer, you also didn’t realize you only had $50.00 to charge with. Upon first using your new credit card, you likely went over the limit with your first purchase and incurred late fees and over the limit fees and are now paying for a card you will potentially never catch up on enough to use.

The CARD Act Will Set You Free

Fast forward to 2009 and the Credit Card Accountability Responsibility and Disclosure Act of 2009 or Credit CARD Act of 2009 is enacted. For creditors and providers of cards like the aforementioned, this meant a few things regarding the extravagant fees. One of the provisions of the CARD act specifically prohibits over-limit fees and “if fees in the first year exceed 25% of credit limit, fees cannot be paid from available credit”

(n) Standards applicable to initial issuance of subprime or “fee harvester” cards

(1) In general
If the terms of a credit card account under an open-end consumer credit plan require the payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) by the consumer in the first year during which the account is opened in an aggregate amount in excess of 25 percent of the total amount of credit authorized under the account when the account is opened, no payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) may be made from the credit made available under the terms of the account.

This means, if your credit limit is only $300, your fees cannot exceed 25% or in this case $75.00.

First Premier Bank vs CFPB

The key language in the provision “during which the account is opened in an aggregate amount…’’ became the verbiage that allowed certain credit card providers to find a way around the provision. In order to make up for the loss in fees, they simply created new fees such as a processing fee that is paid before the account is opened. Sneaky, but not really. As Miles Beacom, president of First Premier Bank said, “the $95 processing fee doesn’t violate the Card Act because it is assessed before the account is opened” and that the fee offsets the risk involved in giving credit to consumers considered high risk.

As an answer to such creditors new practices of charging fees before the account is actually opened, the Consumer Financial Protection Bureau (CFPB) then issued rules prohibiting credit card providers from charging fees that were more than 25% of the total limit in fees before an account was opened and in the first year of the account being issued.

Because of the new rules, July 20, 2011 First Premier Bank, incidentally one of the largest providers of the sub-prime credit card, sued the Consumer Financial Protection Bureau. The claim was that the new rules changed and expanded the CARD Act, and luckily for First Premier Bank, the Judge in the lawsuit pretty much agreed. In short, First Premier Bank (and others) are permitted to charge fees of more than 25% of the card limit, before the account is even opened.

What This Means to Consumers

Well, basically this means that First Premier Bank can charge any amount of fees to cardholders before they actually even open the account. There is no provision in the CARD Act regulating fees pre-opening of the account. And believe it or not, consumers in that specific situation are more than happy to pay them in order to get a credit card.

According to First Premier Bank, the CARD Act had already cost them $1.2 million a month in lost revenue, which also resulted in laying off 1/6 of employees (or 1800 people). Besides the effect that it had on the bank personally, or as a business, we have to admit that these types of credit cards are necessary and serve a purpose. It goes without saying that banks that issue credit to consumers with bad or no credit are taking a significant risk which many times results in a loss.

Also, as the court in First Premier Bank v. CFPB noted “First Premier does serve a unique market – customers with poor credit who rely on First Premier to acquire and improve credit” and “Credit cards like First Premier’s are also important for consumers who are trying to rebuild credit and want to obtain savings on insurance, housing, and employment.” We may not agree on the exorbitant fees that First Premier Bank (or similar) charge people all for the sake of building, acquiring or repairing a credit history, but the fact remains that there is a need for these types of cards.

As far as practices, it is up to us as consumers to read the fine print and become educated enough to know when something is potentially a bad deal for us. Many sub prime issuers stopped offering credit cards because they felt the interpretations of the CARD Act made it unprofitable to serve this market. With this court ruling, we cannot rule out the return of more sub prime issuers. Having said all that, consumers can always start off with much cheaper secured credit cards to rebuild their credit.