Consumer Agency Softens Fee Limit on Credit Cards

The Obama administration's consumer financial watchdog agency is backing off a plan to limit big upfront fees on credit cards.

The Consumer Financial Protection Bureau acknowledged Thursday that its proposal would increase costs for cardholders and allow banks to charge more in fees.

Banks aren't allowed to charge fees totaling more than 25 percent of a person's credit limit in the first year that the account exists. But there's no limit to the fees they can charge before the card is activated.

Under a rule proposed last year, those upfront fees would have counted toward the 25 percent cap. But the CFPB is retreating from that idea after a court prevented it from taking effect.

The consumer agency's new rule would let banks charge whatever fees they want up front. The 25 percent cap would only apply to fees charged after the card is issued.  The CFPB was set up after the financial crisis to protect

consumers from loans and cards with hidden fees or other traps. Republicans and business lobbyists opposed the agency's creation and tried to prevent it from gaining power. They argued that it would limit consumer choice, in part because fee limits would discourage banks from offering some services.

By tipping the rule in favor of banks, the agency is showing that it takes both businesses and consumers into account when setting policy, said Mark Williams, a former examiner for the Federal Reserve who teaches finance at Boston University.

"Just a year ago, the view was that this agency was going to be devastating for business," inventing costly and unnecessary consumer protections, Williams said. He said Thursday's action shows that the agency "could be very effective for consumers and also bridge the needs of business to make profits."

The CFPB decided to weaken the rule after a federal court in South Dakota issued an injunction preventing it from taking effect.

A bank had filed a lawsuit claiming the Fed overstepped with its original proposal.

The CFPB's revised proposal was published quietly in the Federal Register, the daily digest in which federal agencies make routine announcements. The CFPB is accepting public comment about until June.

If the proposal is approved, banks could charge steep fees to apply for or activate a card -- a practice most common when the customer has weak credit. After the card is issued, the banks could continue tacking on fees in the first year until they reach 25 percent of the credit limit.

"Obviously, the people most likely to be hurt are the more vulnerable, subprime borrowers," said Kathleen Day, spokeswoman for the Center for Responsible Lending, a consumer advocacy group.

"Still, we think they're doing the best they can to protect consumers."

(Copyright 2012 by The Associated Press. All Rights Reserved.)