According to the Credit Card Act, which took effect in February 2010, credit-card issuers cannot charge fees equal to more than 25% of the borrower’s credit limit in the first year after the account is opened. A question confronting the Consumer Financial Protection Bureau was whether up-front fees charged before the account is open count toward the limit. The new agency decided against subjecting such fees to the limit. The question is why.
Bankers at First Premier bank, which issues credit cards to people with low credit-ratings, claimed that the bank’s “very existence” would be threatened on account of “the loss of millions of dollars in profits.”[1] That the threat was self-serving should at the very least make it questionable. However, if true, it could mean that the bank was depending on taking advantage of customers for its own survival—in which case it should not continue to exist. The bank was charging a $95 processing fee before an account is opened, plus a $75 annual fee. The annual fee itself is questionable, given the credit limit was $300. It is highly doubtful that the cost to the bank of processing a credit card application was $95. It can thus be argued that the bank was taking advantage of people who needed a credit card in order to rebuild their credit history. Depending on such a business model is not viable, at least ethically-speaking.
For an agency whose entire raison d’etre is to protect consumers to enable such charges by exempting them from the law’s limits for first year charges raises the question of whether “regulatory capture” had occurred. Hardly unknown among regulatory agencies, the phenomenon occurs when the industry being regulated “captures” its regulators. Whether through the power of information that the agency needs or outright political pressure, industries can coopt or subvert their respective regulatory agencies from their formal missions. That the banks objected to Elizabeth Warren and she was replaced as the proposed director by Richard Cordray may suggest that his loyalties were not entirely behind the consumer. That is to say, the banks may have had too much influence on the selection of the director tasked with protecting consumers.
1. Tara Bernard, “Consumer Bureau Declines to Resist Upfront Credit Card Fees,” The New York Times, April 13, 2012.
