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Bank challenging Credit CARD Act offers doozy of a credit card

Consumer Reports News: April 13, 2012 06:18 PM

The bank that triggered a flurry of consternation this week over its apparently successful challenge to the 2009 Credit CARD Act offers a credit card for subprime borrowers that prompted a warning last year from Consumer Reports.

First Premier Bank's Gold Card, a credit card promoted to consumers with "less than perfect credit," charges a $95 processing fee, a 36 percent APR for purchases and cash advances, and a $75 annual fee for the first year. While the card's annual fee drops to $45 the second year of ownership, it then charges a monthly service fee of $6.25, or $75 annually. Total fees in year one are $170 and in year two, $120. Yet it has just a $300 initial credit limit, which drops initially to $225 because of the $75 annual fee.

These terms are somewhat different from what we reported in December 2011. "Watch out," we said, pointing out the card's 49.9 percent APR and monthly service fee of $6.50. While the card's APR is now lower, the new $95 processing fee places First Premier's card among the highest-fee cards we've seen.

Upfront fees upheld
First Premier's legal challenge to a consumer-friendly credit-card rule led to events that provoked outrage among some consumer groups this week.

The 2009 Credit CARD Act restricted credit-card fees to 25 percent of the card's initial credit limit in the first year of card-ownership, but the Federal Reserve extended that restriction to cover fees charged before a credit-card account is opened. First Premier responded with a lawsuit against the Fed's new rule, and last September, a federal judge in South Dakota granted a motion for preliminary injunction against enforcement of the Fed's change.

In response, the Consumer Financial Protection Bureau, which took over regulatory authority of credit-card issuers from the Federal Reserve, issued a proposed rule this week that goes along with the court ruling, and could make it easier for other credit-card issuers to charge high up-front fees to prospective customers. Under the proposal, credit-card issuers could charge more than 25 percent before the accounts were actually opened. Once open, new fees would be limited to 25 percent of the credit limit for the first year.

The CFPB's proposal has some consumer groups up in arms, and others determined to figure out a work-around. One observer suggested that the fledgling agency had deemed that it did not have as much power to pursue the issue as did its predecessor agency, the Federal Reserve, and had decided to pick its battles and stick to a more rigid interpretation of the law.

Consumers Union, the policy and advocacy arm of Consumer Reports, expects to issue a comment on the new rule by mid-June.

"We hope that there is a path to extend this kind of protection for credit card users," said Pamela Banks, senior policy counsel for Consumers Union.  "A lot of people have been hit with big sign-up penalties before they even open their account."

New credit-card deals: Bonus rewards and low teaser rates are enticing, but watch out

Tobie Stanger

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