By William McSwain and Richard Haggerty
The Consumer Financial Protection Bureau (CFPB) recently put credit card companies that offer special promotional rates “on notice” that they can expect increased scrutiny from the three-year-old federal agency.
In a bulletin issued on September 3, the CFPB warned that it will be on the lookout for “deceptive and/or abusive acts and practices in connection with solicitations that offer a promotional annual percentage rate (APR) on a particular transaction over a defined period of time.” The types of transactions specifically mentioned in the bulletin include “convenience checks, deferred interest/promotional interest rate purchases, and balance transfers.”
“Today, we are putting credit card companies on notice that we expect them to clearly disclose how these promotional offers apply to consumers so that they can make informed choices about their credit card use,” CFPB Director Richard Cordray said in prepared remarks released at the same time as the bulletin.
Many credit card companies offer grace periods to consumers on new purchases. Typically, under such an arrangement, a consumer who has paid his or her previous balance in full will be allowed a certain amount of time after the close of the billing cycle to pay the full balance without being charged interest on purchases made during that billing cycle. If the consumer does not pay off the full balance, the consumer will lose the grace period for the current and future billing cycles until the full balance is paid. This practice is permitted under Regulation Z, which is the name for the regulations implementing the Truth in Lending Act. See 12 C.F.R. § 1026.6(b)(2)(v).
Credit card companies also frequently offer balance transfers, convenience checks, or other promotions that carry a low or zero percent APR for a certain period of time. According to the bureau’s recent bulletin, “CFPB supervisory experience has observed that some card issuers do not adequately convey in their marketing materials that a consumer who accepts such a promotional offer will lose his grace period on new purchases if he does not pay the entire statement balance, including the total amount subject to the promotional APR, by the payment due date.”
The CFPB contends that it found that “one or more” card issuers have left consumers with the misimpression that the only cost associated with promotional offers is a small transaction fee and that the promotional rate will be the only rate at which the consumer will incur interest. The bureau noted that some credit card companies leave the necessary disclosures out of their marketing materials entirely. Others allegedly do not place the information in a prominent place within the marketing materials or use technical language that does not clearly explain the costs and risks of accepting the promotional offer.
The CFPB has now signaled that not making consumers aware of the potential loss of the grace period through “clear language placed in a prominent location” could result in being charged with engaging in abusive and/or deceptive practices.
Congress created the CFPB as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Title X of Dodd-Frank, which is entitled the Consumer Financial Protection Act of 2010, specified that the CFPB, which exists as part of the Federal Reserve System, would be charged with the broad task of regulating “the offering and provision of consumer financial products under the Federal consumer financial laws.” 12 U.S.C. § 5491. Part of the CFPB’s statutory mandate includes ensuring “consumers are protected from unfair, deceptive, or abusive acts.” 12 U.S.C. § 5511(a).
Under Dodd-Frank, an act or practice is “abusive” if it is one that:
(1) materially interferes with the ability of the consumer to understand a term or condition of a consumer financial product or service; or
(2) takes unreasonable advantage of—
(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;
(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or
(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.
12 U.S.C. § 5531(d).
Although the term “deceptive” is left undefined in Dodd-Frank, the CFPB Supervision and Examination Manual notes that the bureau should be guided by the Federal Trade Commission’s definition of deception, which states that an act or practice is deceptive if “there is a misrepresentation, omission, or other practice that misleads the consumer acting reasonably in the circumstances, to the consumer’s detriment,” and the representation or omission is material.
In order to avoid liability for engaging in an abusive or deceptive practice, there are several guidelines that credit card companies should follow.
Specifically, the CFPB noted that it expects credit card issuers to implement internal controls to lower the risk of statutory violations and to ensure that “[a]ll solicitations, applications, account-opening materials, and convenience checks comply with the requirements in Regulation Z; [a]ll marketing materials clearly, prominently, and accurately describe the material costs, conditions, and limitations associated with the offers; and [a]ll marketing materials clearly, prominently, and accurately describe the effect of promotional APR offers on the grace period for new purchases.”
If you have questions about the CFPB bulletin and how it might affect you, please contact one of the authors listed above or any other member of Drinker Biddle’s White Collar Criminal Defense and Corporate Investigations Group.