Federal Court Blocks Reg. Z 25% Limit on Pre-Account Opening Fees

Federal Court Blocks Reg. Z 25% Limit on Pre-Account Opening Fees

by the Consumer Financial Services Group

The U.S. District Court for the District of South Dakota has issued a preliminary injunction postponing the October 1, 2011, effective date of the Federal Reserve Board's 2011 Regulation Z (Truth in Lending) revision that includes, in the limit on total fees that may be charged during the first year a credit card account is open, application and similar fees that must be paid before opening (the 2011 Revision).

First Premier Bank sought the injunction after filing a lawsuit against the Fed and the Consumer Financial Protection Bureau (CFPB) challenging the 2011 Revision. (Click here to read our legal alert describing the complaint and preliminary injunction motion.) The injunction, issued on September 23, 2011, blocks enforcement of the 2011 Revision pending completion of judicial review.

The 2011 Revision purported to implement a provision of the Credit CARD Act of 2009 that limited the fees (other than late fees, over-the-limit fees, and returned payment fees) that can be charged to a consumer's account "in the first year during which the account is opened" to 25 percent of the account's initial credit limit. The Fed's initial Reg. Z revision to implement the Credit CARD Act limitation, which became effective in February 2010, did not include fees paid before account opening in the 25 percent limit. However, in November 2010, the Fed published proposed revisions to Reg. Z and, in March 2011, the Fed issued a final rule adopting those revisions. The revisions included the 2011 Revision, which expanded the scope of the 25 percent limit to reach fees paid before account opening. (The Fed's final rule was summarized in a prior Ballard Spahr legal alert.)

In granting the preliminary injunction, the court found that First Premier was likely to prevail on its claim that the 2011 Revision is invalid. Rejecting the agencies' argument that the U.S. Supreme Court's opinions in Milhollin and Mourning removed the 2011 Revision from scrutiny under the complete Chevron test, the court determined that the 2011 Revision was not entitled to deference under that test because it conflicts with the Credit CARD Act's plain language. Describing the statutory language as "clear and unambiguous," the court found that such language "explicitly refers to the fees charged to the account as those that reduce the credit limit, and the statute also is clear as to the time period to which fees may be charged." According to the court, its plain language reading was supported by the statute's legislative history and Congressional intent, which indicated that the statute was meant only "to prevent the harm of fees being charged to the account that would reduce the available credit to an unknowing consumer."

Having found the statutory language to be unambiguous, the court labeled the 2011 Revision "arbitrary, capricious, and contrary to the Board's statutory authority" and refused to give it any deference. Analyzing the other factors required for a preliminary injunction, the court found that First Premier had shown:

  • It would suffer irreparable harm without the injunction because it would be forced to terminate its credit card program and incur unrecoverable economic loss of a magnitude that threatened its existence
  • That the potential harm to First Premier from a denial of the injunction outweighed any potential harm the injunction would cause to the Fed or CFPB
  • That the injunction would serve the public interest by avoiding employment losses and maintaining credit card access for consumers

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). For more information, please contact group Chair Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Vice Chair Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Mercedes K. Tunstall, 202.661.2221 or tunstallm@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com

Copyright © 2011 by Ballard Spahr LLP  (No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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