Upfront credit card fees are stirring up emotions in South Dakota.
Last week, First Premier Bank and Premier Bankcard of the Mount Rushmore State filed a lawsuit against the Federal Reserve Board and the newly opened Consumer Financial Protection Bureau. The suit says the central bank overstepped its authority when it ruled that upfront fees were included in price caps established by the Credit Card Accountability, Responsibility and Disclosure Act of 2009. (The CFPB is charged with enforcing the Credit CARD Act, hence why it was included in the lawsuit.)
The CARD Act, most of which went into effect last year, limits credit card fees in the first year to 25 percent of the initial credit limit. That means a bank can't charge more than $125 in the first year on a credit card with a $500 limit. It doesn't apply to penalty fees.
In March, the Fed clarified that any application or similar fees before an account is opened are covered by the price control rule.
The problem with that, according to First Premier, is the bank can't price in the risk of serving consumers who have a history of inconsistently paying their bills.
"There are 70 million people out there that have had problem credit or are trying to build their credit, and if we can't build the product for the risk then we can't offer it," says Miles Beacom, president and CEO for Premier Bankcard.
But consumer advocate Linda Sherry says the suit is bunk.
"The clarification is exactly what Congress intended to root out the high upfront fees on these 'subprime' credit cards," says Sherry, director of national priorities at watchdog group Consumer Action. "Trying to argue that a processing fee, or application fee or a 'yadda yadda' fee is not part of the cost required to get one of its cards is disingenuous."
She recommends consumers with blemished credit seek out secured credit cards to help repair or build good credit.
The Fed clarification goes into effect Oct. 1, according to First Premier, but the bank already has started to make changes to comply. It's not pretty.
The number of accounts it opens each month has dropped by 80 percent to 40,000 from 200,000, Beacom says. And the bank closed its Spearfish, S.D., office as a result, laying off 330 people.
First Premier offers three credit cards with upfront fees ($25, $45 and $95) for riskier borrowers and one without a fee. Beacom also notes that a consumer can get a full refund within the first 30 days.
"We just want people to make their own decision," Beacom says. "They can sign up for it or not."
Chime in: Should the Federal Reserve help curb upfront fees on credit cards for consumers with tarnished credit?
Follow me on Twitter: @JannaHerron