Subprime lender CompuCredit says it no longer markets its ‘fee-harvesting’ cards, which drew criticism from consumers, fines from regulators and soon will be outlawed.
A controversial marketer of subprime credit cards appears to have abandoned the business days before strict new rules are set to go into effect.
Atlanta-based CompuCredit, which has been hit with litigation and federal fines for its allegedly deceptive practices, is “not marketing credit cards at this time,” company spokesman Randal Wilson told CreditCards.com via e-mail on Tuesday. Wilson did not respond to subsequent e-mails and phone messages requesting additional information.
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a fee harvesting credit card:
The financial services company has faced mounting criticism and losses in recent months. In November, a lawsuit was filed in Chicago alleging that the company continued to charge customers fees on its Tribute card, even after shutting down the card and freezing all of its customers’ accounts. That suit followed a $114 million settlement with the Federal Trade Commission in December 2008. The agency charged the company with deceptively marketing its subprime credit card to customers.
Andrew Davidson, senior vice president of Chicago-based Comperemedia, which monitors credit card offers, said that he was aware that CompuCredit was getting out of the subprime credit card business. Their exit from the business leaves consumers with poor credit with limited options, he said, because very few card issuers target those customers.
“We’ve seen issuers pulling back significantly from subprime,” Davidson said. “The entire mailbox has shifted. … But then, it’s always been a niche product.”
Fee harvesting or subprime credit cards are marketed to people with bad credit who are trying to improve their credit scores by showing good repayment habits. The credit limits are typically low, ranging from perhaps $300 to $500. These subprime cards often have numerous upfront fees that significantly reduce the amount of available credit — and thus limits the consumer’s purchasing power on the card.
Earlier this month, CompuCredit announced layoffs of more than 700 employees in several states, citing a decline in business. The company lost approximately half a billion dollars through the first nine months of 2009, compared with an $87 million loss for the same period in 2008, according to its quarterly filings with the U.S. Securities and Exchange Commission.The company’s products — and its practice of charging high fees for small amounts of credit — were discussed at length in 2007 in a National Consumer Law Center report, “Fee-Harvesters: Low-Credit, High-Cost Cards Bleed Consumers.”
Credit card law’s subprime impact
The Credit CARD Act of 2009, whose major provisions go into effect Feb. 22, outlaws many of the high-fee products that CompuCredit and other subprime credit card lenders have marketed. The law prohibits upfront fees that exceed 25 percent of the available credit limit.
Since the law’s passage, other subprime credit card lenders have cast about for a new business model that work. First Premier, for instance, has experimented with replacing extremely high fees with extremely high rates — charging APRs as high as 79.9 percent.
CompuCredit’s withdrawal from marketing subprime credit cards does not end its operations. It still has a large payday lending firm, Purpose Financial Holdings. CompuCredit filed regulatory paperwork in January announcing it would spin it off into a separate operation.
Chi Chi Wu, staff attorney for the National Consumer Law Center and co-author of the NCLC report, said on Wednesday that an exit from the business by CompuCredit would not create any additional difficulties for consumers with poor credit to get a credit card because she never considered CompuCredit’s products to be legitimate.
“We always had doubt that these were real credit card products,” Wu said. “A lot of people who used them didn’t have much usable credit.”
See related: CompuCredit settles FTC charges for $114 million