By Dave Clarke
WASHINGTON (Reuters) - Public interest groups are chiding the new U.S. consumer watchdog for proposing to rollback part of a credit card rule that cracks down on the fees that can be charged to borrowers.
On Thursday, the Consumer Financial Protection Bureau (CFPB) released a proposal that would scrap a rule issued a year ago by the Federal Reserve that covered fees charged before a credit card is issued.
The rule is now being held up by a court challenge mounted by First Premier Bank.
The CFPB said the proposal was meant "to resolve the uncertainty caused by the litigation" by dropping the Fed's plan to expand the crackdown mandated by the 2009 Credit Card Act.
Consumer groups, who are usually staunch defenders of the agency, balked at CFPB's proposal, calling it a mistake.
"The CFPB should not back down in protecting consumers from this sort of chicanery," Chi Chi Wu, a National Consumer Law Center (NCLC) staff attorney, said in a statement issued by four consumer groups, including the U.S. Public Interest Research Group, the National Council of La Raza and Consumer Action.
The 2009 credit card law limits certain fees a lender can add on to a bill in the first year an account is opened to no more than 25 percent of a borrower's credit limit. This does not include late fees or charges for exceeding the credit limit, but targets items such as annual or monthly fees.
"The overall 25 percent cap on certain credit card fees charged during the first year, along with the other specific provisions of the CARD Act, would remain in place," the bureau said in a release.
Consumer groups have derided the card charges in question as "fee harvesting" and contend they are often aimed at low-income borrowers who are only given a credit limit of a few hundred dollars. A 2007 report by the NCLC argued that fees can eat up much of the available credit line.
In April 2011, the Fed issued a rule expanding the fee cap to include in the 25 percent limit any fees charged before a card becomes active, such as an initial processing fee, to answer charges that card companies were seeking ways around the restrictions.
First Premier challenged this decision, arguing these fees were not covered by the law. In September, a judge from the U.S. District Court for South Dakota issued an injunction blocking the Fed rule.
The CFPB proposal is not final and the agency is collecting comments through June 11 before deciding whether to go ahead.
The consumer bureau was created by the 2010 Dodd-Frank financial oversight law to police consumer lending markets. It opened its door in July 2011 and inherited oversight of consumer protection laws from other regulators, including the Fed.
(Editing by Andre Grenon)