CFPB Decision to Scale Back Fee Proposal Shows Savvy Approach

WASHINGTON — When the Consumer Financial Protection Bureau recently announced it planned to scale back proposed limits on credit card fees, it was immediately criticized by consumer groups and some in the media.

But the agency's decision was a savvy strategic move, observers said, risking consumer advocate ire but preventing a court appeal that it was unlikely to win.

The move also allowed CFPB to demonstrate again that decisions will be measured and deliberate, rather than ideological, as some industry groups had feared.

"This is how the CFPB wants to portray itself," said Isaac Boltansky, a policy analyst with Compass Point Research & Trading. "It wants to show that it isn't simply an agency that is driven by the wishes of consumer groups, that it will do ground-up research and investigate on its own and come to a conclusion. So I think that it was important in the first year of its existence to have a break with consumer groups."

At issue was a rule the CFPB inherited from the Federal Reserve Board that proposed limits on credit card fees prior to the opening of an account. But a federal judge said the provision wasn't authorized by the law.

Rather than continuing a court battle, the agency decided to strip the provision in its own proposal on the issue.

Boltansky and others said the move was a sign that the agency was carefully picking and choosing its battles.

The CARD Act of 2009 addressed "the lion's share" of consumer groups' concerns related to disclosures and fees, said Jo Ann Barefoot, a co-chairman of Treliant Risk Advisors.

Although credit card issues are still a priority for the bureau — especially debt cancellation and payment protection products for cards — they are not as important as products and services that have had less oversight, such as payday lending or mortgage servicing, she said.

"They have excruciating pressure on them from both sides," Barefoot said. "I think they're trying not to gratuitously inflame their critics on the industry side, and rather focus on areas where they really think they can have a big impact."

In addition, the agency's immediate regulatory agenda is likely to generate plenty of controversy on its own. It is set to release a slew of mortgage rules over the next several months, including the qualified mortgage rule, which requires lenders to verify a borrower's ability to repay a loan unless it meets the requirements of a so-called qualified mortgage.

"Probably knowing that the QM issue is coming, how many fires do you want to fight at the same time?" said Arthur Wilmarth, a professor at the George Washington University School of Law.

Boltansky agreed.

"I really do believe that this is a burgeoning regulator that had no interest in fighting battles on multiple fronts, and instead wanted to focus on what already is going to be a pretty busy summer," he said.

The battle stems from a CARD Act provision that prohibited banks from charging credit card fees that totaled more than 25% of a customer's credit line in the first year of the account opening. The Fed implemented the rule, but amended it in April 2011 to include fees issued prior to an account opening.

The $1.1 billion-asset First Premier Bank in Sioux Falls, S.D., sued the Fed and later the CFPB, which inherited the rules related to the CARD Act when it became an independent agency. Chief Judge Karen Schreier granted the bank's motion for a preliminary injunction last fall and blocked the amendment, which she called "arbitrary, capricious, and contrary to the [Fed's] statutory authority."

On April 12, CFPB published an advanced notice of proposed rulemaking to amend the rule so that it would no longer apply to fees paid before an account opens. In its notice in the Federal Register, the bureau said it proposed the rule "to resolve the uncertainty caused by the litigation."

The bureau's announcement sparked a backlash from consumer groups, some of which accused the bureau of blinking in the face of industry opposition. Other said the judge's ruling was surprisingly harsh, and left little doubt that CFPB did not have the authority to enforce the rule.

While a flap with consumer groups would likely only be temporary, however, losing a major court case on credit card fees could hurt the bureau's credibility, Wilmarth said. Case in point: the Securities and Exchange Commission's proxy access rule, which an appeals court overturned last year.

"Everyone thinks that the SEC losing that proxy access case has been a tremendous blow to the agency's prestige and its clout with regard to at least the major players," Wilmarth said. The CFPB "may not want to test their clout this soon."

Still, consumer groups said the bureau should have fought harder to maintain the cap.

Lauren Saunders, a managing attorney with the National Consumer Law Center, said the agency has "other tools at its disposal" beyond simply revising the rule. Those include tightening rules on fees in order to preserve the clear disclosure of prices, changing the rules related to how APR is calculated so that fees are taken into account, and using its authority to crack down on unfair, deceptive or abusive practices to address policies that distort a card's true cost, Saunders said.

"The decision that this particular legal battle wasn't worth fighting or has too many risks to fight, I can understand that from a perspective of a lawyer," Saunders said. "But if they were going to make that decision, they needed to take the next step and say, 'Let's make sure that the consumers are protected.'"

In the meantime, Saunders said, "We don't question the desire of the people at the CFPB to protect consumers, and from our perspective that relationship is the same as it's always been."

Some observers said they expect the agency to continue to scrutinize these practices.

Brian Gardner, a political analyst with Keefe, Bruyette & Woods Inc., rejected the implication that the bureau was backing down from tougher rules on credit card companies. Rather, he said the decision not to appeal the ruling appeared to be based much more on the legal merits of the case than a broader policy shift at the agency.

"I think they will be aggressive to the extent that the various statutes let them be aggressive," Gardner said. In this case, "they were constrained by the way that the CARD Act was drafted."

Legal considerations aside, Richard Fischer, a partner with the law firm Morrison & Foerster, said the decision is still consistent with statements from bureau officials that they want to preserve customer choice.

"If I'm reading it right, what the bureau is saying is, 'We meant what we said, we're not out here to eliminate programs, we're out here to make sure that programs are operated in a manner that is fair, not deceptive and not abusive,'" Fischer said.