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Crackdown urged on 'fee-harvester' credit cards

WASHINGTON — A national consumer advocacy group called on Congress Thursday to pass legislation halting the growth of a particularly abusive type of credit card that targets vulnerable consumers with poor credit histories.

Advertised on television and elsewhere, so-called "fee-harvester" cards are heavily marketed to subprime borrowers who can't obtain traditional credit cards.

The cards offer small credit limits — usually several hundred dollars — but when issued, cardholders immediately incur a number of high fees that can eat up nearly 80 percent of the available credit. While card companies reap hundreds of millions of dollars in fees, consumers receive only a trace of credit.

A new report Thursday from the National Consumer Law Center found that the cards often feature aggressive debt-collection operations, bait-and-switch offers on credit limits and card terms, and deceptive add-ons such as "credit protection" and unwanted memberships in travel and diners clubs.

One card, offered by South Dakota-based First Premier Bank, features a $250 credit limit, but new cardholders are automatically hit with a $95 program fee, a $29 account set-up fee, a $48 annual fee and a $6 monthly participation fee. That's $178 in immediate debt, which leaves only $72 in actual credit.

"No one in their right mind would agree to pay $178 so they can borrow $72," said Joe Ridout, a consumer services manager for Consumer Action, a nonprofit education organization.

Willard Ogburn, the NCLC director, said the practice is "technically legal, but morally indefensible."

Several calls seeking comment from First Premier weren't immediately returned.

One card issuer, CompuCredit of Atlanta, collected $400 million in fees from the cards last year and by mid-2007 was owed $973 million in similar fees. The company spent some $160 million marketing its cards on the Internet, through mailings and by other means, said Rick Jurgens, a NCLC consumer advocate.

The report blames the growth in "fee-harvester" cards on lax regulation of the financial industry and on federal statutes that pre-empt state usury laws designed to prevent abusive and predatory lending practices. Jurgens called on Congress to abolish pre-emptive statutes and to enact laws that limit credit card fees, interest rates and terms.

"Congress should act to close the legal and regulatory loopholes that allow fee-harvesters and other issuers of high-cost cards to profit from low-income and vulnerable consumers," Jurgens said.

Sen. Carl Levin, D-Mich., has introduced the "Stop Unfair Practices in Credit Cards Act," which addresses some credit card abuses. But Chi Chi Wu, an attorney with the NCLC, said that bill doesn't address concerns raised in the new report, "Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers."

Lynn Strang, a spokeswoman for the American Financial Services Association, the national trade group for the consumer credit industry, said the organization supports efforts to assure clear disclosure of credit card terms and opposes abusive card practices. But she added that the AFSA opposes mandatory caps on credit card interest rates and fees because lenders need flexibility to set rates based on risk.

Strang said the cards can help consumers rebuild their credit histories and added that "if there was no value in them, there would be no market demand" for them.

Smaller banks, such as First Premier, First Bank of Delaware and Applied Bank, formerly known as Cross Country Bank, typically specialize in fee-harvester cards. But large credit card issuers, including Capital One and HSBC, also have issued cards with similar business models, the report found.

In addition to the onerous usage fees, advocates said fee-harvest cardholders are likely to incur additional fees for exceeding their scant credit limits. Applied Bank charged a $100 fee just to increase the credit limit, Ridout said.

Jurgens told the story of Gabor Marsi of Akron, Ohio, who obtained a card from Capital One after filing for bankruptcy due to medical expenses. After paying a $50 application fee, Marsi received a card with a $200 credit limit. He declined a card offer for a "diner's club" membership, but after his wife used the card to buy a $130 baby crib, the couple found they had been billed $99 for the diner's club membership.

This caused them to exceed their credit limit. The couple wound up paying $700 to finance the crib. They're now in a lawsuit with Capital One, which claims the family owes $3,500, Jurgens said.

Tatiana Snead, a spokeswoman for Capital One, said the company couldn't comment on the Marsi case due to pending litigation. But she said the report doesn't reflect Capital One's business practices.

"Although we're just now seeing the report ourselves, it appears that it was not based on current information, does not include an accurate picture of Capital One's policies and mischaracterizes our business model," Snead said.


View the National Consumer Law Center report on "fee-harvester" credit cards.