"Fee harvester" credit card offers could return to American mailboxes after a court ruling postponing changes to the Federal Reserve Board's Regulation Z. Board governors rewrote the "Truth in Lending" regulation in response to 2009's Credit CARD Act, restricting card issuers' signup and setup fees to no more than 25 percent of a new account's overall credit limit.
In the years leading up to the Credit CARD Act, some lenders attracted attention from investigators for advertising Visa and MasterCard credit cards for bad credit. "Pre-selected" offers promised unsecured credit cards to applicants with low FICO scores in exchange for lofty processing fees. To sweeten the deal, lenders assured new cardholders that they required no cash up front, billing the application and account setup fees to the new credit cards.
Credit cards maxed out on arrival
By the time some new credit cards arrived in the mail, their $300 credit limits would already have been mostly used up. Cardholders with the cash to pay down their balances told reporters and consumer agencies that they preferred the opportunity to pay for a second chance at maintaining an unsecured account. Cardholders who managed to pay their accounts down to below 30 percent of their credit limits enjoyed the most positive long term effects on their credit scores, according to credit reporting agency scoring models.
However, critics of subprime credit cards accused bank officials of squeezing low income consumers for high finance charges and unprecedented service fees. Customers who fell behind on payments quickly racked up severe penalties and interest, pushing them even further into debt. The Credit CARD Act's restrictions forced subprime lenders to require application and setup fees as cash payments in advance of issuing a new account. The Federal Reserve Board took Congress' direction even further, stating that all fees collected would count toward the 25 percent cap.
Lawsuit claims Fed's rule could bankrupt the bank
First Premier Bank filed suit against the Consumer Financial Protection Bureau and against Treasury Secretary Timothy Geithner, claiming that the Fed's broad interpretation of the Act invalidated its business model and could render the bank insolvent. A South Dakota judge agreed, blocking enforcement of the new rule pending further review.