First Premier Bank v. United States Consumer Fin. Prot. Bureau

819 F.Supp.2d 906

FIRST PREMIER BANK and Premier Bankcard, LLC, Plaintiffs,

v.The UNITED STATES CONSUMER FINANCIAL PROTECTION BUREAU; and Timothy F. Geithner, in his official capacity as Secretary of the United States Department of the Treasury and acting Director of the Consumer Financial Protection Bureau, Defendants.

United States District Court, D. South Dakota, Southern Division.

Civ. 11–4103–KES.

Sept. 23, 2011.

Bryan R. Freeman, James P. McCarthy, Kelly G. Laudon, Lindquist & Vennum, P.L.L.P., Minneapolis, MN, Shane E. Eden, Vincent M. Roche, Davenport, Evans, Hurwitz & Smith, LLP, Sioux Falls, SD, for Plaintiffs.

John Robert Coleman, Bureau of Consumer Financial Protection, Washington, DC, for Defendants.

ORDER GRANTING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION

KAREN E. SCHREIER, Chief Judge.

Plaintiffs, First PREMIER Bank and PREMIER Bankcard, LLC (First Premier), move the court for a preliminary injunction to postpone and enjoin the October 1, 2011, effective date of the 2011 amendment to § 226.52 of Regulation Z. Defendants, The United States Consumer Financial Protection Bureau (the Bureau), and Timothy F. Geithner, oppose that motion.

BACKGROUND

Congress enacted the Credit Card Accountability and Responsibility and Disclosure Act of 2009 (the Credit CARD Act) to regulate the timing and manner of collecting credit card fees. The Credit CARD Act amended the Truth in Lending Act (TILA). TILA's primary purpose was to ensure “meaningful disclosure of credit terms” so consumers could compare available credit terms, “avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.” 15 U.S.C. § 1601(a).

Within the Credit CARD Act, Congress limited the manner by which creditors could charge fees for the type of cards associated with an “open end consumer credit plan” or what is known as a “harvester” card. Docket 28 at 2–3. At issue in this case is the language in the act referring to fees charged to the account balance or credit line during the first year after the credit card account is opened. Congress expressed:

(1) In general

If the terms of a credit card account under an open end consumer credit plan require the payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) by the consumer in the first year during which the account is opened in an aggregate amount in excess of 25 percent of the total amount of credit authorized under the account when the account is opened, no payment of any fees (other than any late fee, over-the-limit fee, or fee for a payment returned for insufficient funds) may be made from the credit made available under the terms of the account.

(2) Rule of Construction

No provision of this subsection may be construed as authorizing any imposition or payment of advance fees otherwise prohibited by any provision of law.

15 U.S.C. § 1637(n).

The Board of Governors of the Federal Reserve System (the Board) ¹ originally had authority to administer and implement TILA and the Credit CARD Act when it became law. Docket 28 at 4 n. 2; 15 U.S.C. § 1604. After July 21, 2011, the Bureau assumed that authority. Docket 28 at 4 n. 2; 12 U.S.C. § 5512(a). Under section 2 of the Credit CARD Act, the Board had the authority to “issue such rules and publish such model forms as it considers necessary to carry out this Act and the amendments made by this Act.” Credit CARD Act of 2009, Pub. L. No. 111–24, § 2, 123 Stat. 1734. The Board also had authority to issue rules under section 105(a) of TILA, which was designed to prevent circumvention or evasion of TILA. 15 U.S.C. § 1604(a).

In 2010 the Board issued regulation § 226.52 within Regulation Z, which mirrored the language of § 1637(n). The 2010 regulation provides:

(a) Limitations during first year after account opening.

(1) General Rule. Except as provided in paragraph (a)(2) of this section, if a card issuer charges any fees to a credit card account under an open-end (not home-secured) consumer credit plan during the first year after the account is opened, the total amount of fees the consumer is required to pay with respect to the account during that year must not exceed 25 percent of the credit limit in effect when the account is opened.

(2) Fees not subject to limitations. Paragraph (a) of this section does not apply to:

(i) Late payment fees, over-the-limit fees, and returned-payment fees; or

(ii) Fees that the consumer is not required to pay with respect to the account.

(3) Rule of construction. This paragraph (a) does not authorize the imposition or payment of fees or charges otherwise prohibited by law. 12 C.F.R. § 226.52(a). This regulation currently is in effect.

Following the promulgation of § 226.52, First Premier began a new program (the program) that offered credit cards and required an up-front fee that the consumer had to pay before opening an account. Docket 28 at 6. With the Credit CARD Act and Regulation Z in mind, First Premier structured and operated the program in accordance with that law and regulation. The credit cards issued under the plan typically are utilized by consumers who cannot qualify for traditional credit cards because they have bad credit. Docket 28 at 7. Because a number of these consumers default on their payments, First Premier charges up-front fees prior to account opening that range from $25 to $95 per account. Id. First Premier requires customers to pay this fee in full before credit is extended under the account, and the consumer cannot pay the up-front fee with the credit available under the account. Docket 30 ¶ 14. This method is advantageous because the consumer better understands the purpose of the fee, and it does not reduce the available credit on the account. Id.

On November 2, 2010, the Board published proposed amendments to § 226.52 of Regulation Z. The Board engaged in the requisite notice and comment period, and First Premier sent a comment letter stating that the Board's proposed amendment to change the fee language from “during the first year” to include “prior to account opening” was in excess of the Board's authority and not in accordance with law. Docket 28 at 10. The Board took final action on March 18, 2011, and promulgated its revisions to § 226.52.

The amendment to the regulation (2011 regulation) changes the relevant language to:

(a) Limitations prior to account opening and during first year after account opening.

(1) General rule. Except as provided in paragraph (a)(2) of this section, the total amount of fees a consumer is required to pay with respect to a credit card account under an open-end (not home-secured) consumer credit plan prior to account opening and during the first year after account opening must not exceed 25 percent of the credit limit in effect when the account is opened. For purposes of this paragraph, an account is considered open no earlier than the date on which the account may first be used by the consumer to engage in transactions.

Proposed Rules Federal Reserve System, 75 Fed.Reg. 67,458, 67,490–91 (Nov. 2, 2010) (to be codified at 12 C.F.R. pt. 226). The Board states that the amendment was necessary to preserve “the statutory relationship between the costs and benefits of opening a credit card account.” Id. at 67,475. When promulgating the 2011 regulation, the Board relied on its authority under section 2 of the Credit CARD Act and section 105(a) of TILA to prevent evasion and circumvention of the purposes of TILA. Id. The “Effective Date” and “Mandatory Compliance Date” is October 1, 2011. Docket 28 at 11.

First Premier brought its claim for declaratory judgment and injunctive relief on July 20, 2011, asking the court to invalidate the challenged portion of the amendment under the Administrative Procedure Act and enjoin its implementation. Docket 1. A hearing on First Premier's motion for preliminary injunction was held on September 1, 2011. First Premier asks for preliminary injunctive relief to postpone the effective date of the amendment to preserve the position of the parties until the judicial-review process is complete. Docket 1 at 19.

STANDARD OF REVIEW

Plaintiffs bring this challenge under the Administrative Procedure Act, which establishes the court's scope of review. The APA allows judicial review of agency actions. Sierra Club v. Kimbell, 623 F.3d 549, 558–59 (8th Cir.2010) (citation omitted). The reviewing court will not set aside the agency action unless it is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Id. at 559 (quoting 5 U.S.C. § 706(2)(A)). An agency decision is arbitrary and capricious when:

the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Cent. S.D. Coop. Grazing Dist. v. Sec'y of U.S. Dep't of Agric., 266 F.3d 889, 894 (8th Cir.2001) (citation omitted). The reviewing court should not cure any agency deficiencies by supplying reasoning for the agency's decision that it did not include. Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983).

Under the APA, courts have the power to postpone the effective date of proposed agency action:

On such conditions as may be required and to the extent necessary to prevent irreparable injury, the reviewing court, including the court to which a case may be taken on appeal from or on application for certiorari or other writ to a reviewing court, may issue all necessary and appropriate process to postpone the effective date of an agency action or to preserve status or rights pending conclusion of the review proceedings.

5 U.S.C. § 705. Agency action may be...