Credit Cards 2016: Consumer Protection in Focus

Manley-Williams captionValerie-Hletko caption 2The past year has seen heightened CFPB interest in the following areas: (i) deferred interest and rewards, (ii) limited English proficiency consumers, and (iii) the recent revisions to the Military Lending Act (MLA). Pursuing simplicity in the design of product features and closely following limited English proficiency issues will help credit issuers mitigate their regulatory risk. Also on the horizon in 2016 is the effective date of the MLA revisions, which were announced in July 2015.

Deferred Interest and Rewards

The Bureau has been focused on the marketing and design of deferred interest products and issued a strong admonition in September 2014 relating to the potential for consumer surprise.  However, there has been relatively little enforcement activity in this regard.  Instead, enforcement generally has focused on technical violations of law.  For example, an August 2015 consent order arose out of point-of-sale disclosures as opposed to the product features themselves. Some deferred interest issues, such as “old fashioned mistakes,” (e.g., “if paid in full” is dropped from the marketing copy) may represent low-hanging fruit for the CFPB and should be addressed to mitigate enforcement risk.  The Bureau has also expressed concern about technical issues that may complicate deferred interest for consumers, such as expiration of the promotional period prior to the payment due date.

The Bureau has suggested that consumers base their choice of credit card more on the nature and richness of the rewards than on the interest rate.  Accordingly, the Bureau has expressed concern about various aspects of rewards programs, including the expiration of points and complexity surrounding how they are earned and redeemed.  While simplicity may reduce regulatory risk, it undoubtedly makes rewards programs more expensive for issuers, and makes it more difficult for consumers to distinguish among them. Read more…


CFPB Reports on Effect of the CARD Act

On December 3, the CFPB published a report summarizing the impact of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) on consumers and the credit market. According to the report, access to credit has increased by 10% since early 2012, with more than 60% of adults owning at least one credit card account. The report states that as a result of the CARD Act placing limitations on the use of over-limit fees, and its requirement that such fees and other penalty fees be “reasonable and proportional” to the underlying violation of account terms, consumers saved billions of dollars from 2011 through 2014. The CFPB’s outstanding areas of concern relating to the credit market include: (i) deferred-interest promotions; (ii) debt collection practices; and (iii) rewards program offers that provide only partial information.


Second Circuit Upholds District Court Decision to Dismiss Arbitration Case

On November 19, the Court of Appeals for the Second Circuit affirmed the Southern District of New York’s decision to dismiss a case alleging that two leading credit card issuing banks schemed to require that disputes be settled in arbitration, as opposed to class action lawsuits. The plaintiffs challenged the District Court’s decision on the grounds that language in United States v. General Motors Corp. should be used “to adopt a rule that the existence of conspiracy is a legal conclusion subject to review de novo.” Ross v. Citigroup, Inc., No. 14-1610 (2nd Cir. Nov. 19, 2015). Plaintiffs further argued that the District Court’s conclusion that the defendants’ actions did not constitute as conspiracy in violation of the Sherman Act should not be shielded by the “clearly erroneous” test. The District Court analyzed various “plus factors,” including motive, the quantity and nature of inter-firm communications, and whether the arbitration clauses were “artificially standardized” because of an illegal agreement, to determine whether or not conspiracy existed among the credit card issuing banks. The District Court concluded that the credit card issuing banks’ final decision to implement class-action-barring clauses was reached “individually and internally.” Stating that General Motors has never been applied as generously as the plaintiffs argued for it to be, the Second Circuit’s review of the record found the District Court’s conclusion plausible and not “clearly erroneous.”


CFPB, 47 State AGs, and District of Columbia Announce $216 Million Settlement to Resolve Credit Card Debt-Buying Investigation

On July 8, the CFPB along with 47 state attorneys general and DC announced an agreement with a major bank to resolve allegations that it sold faulty credit card “zombie debts” to third-party debt buyers, which included accounts with unlawfully obtained judgments, inaccurate or paid-off balances,  and debts owed by deceased borrowers. The federal and state investigators also claimed that the bank filed deceptive debt-collection lawsuits against borrowers using robo-signed or illegally sworn affidavits to obtain false or inaccurate judgments for unverified debts. Under terms of the consent order, the bank agreed to, among other things, pay (i) $106 million to 47 state attorneys general, (ii) a $30 million civil money penalty to the CFPB, and (iii) provide at least $50 million in restitution to affected borrowers. The bank also agreed to cease collections on more than 528,000 accounts, and require that third-party debt buyers be prohibited from reselling debts purchased from the bank, unless they are sold back to the bank.

In a related announcement, the OCC imposed a $30 million civil money penalty over allegedly illegal non-home debt collection litigation practices and Servicemembers Civil Relief Act (SCRA) compliance practices. The OCC’s action stems from the bank’s practices related to the preparation and notarization of sworn documents used in debt litigation proceedings, and inadequate policies and procedures to ensure compliance with the SCRA.


Tennessee Enacts Legislation Requiring Payment Service Providers to Provide Adequate Disclosures to Merchants

On April 17, the Tennessee Governor Bill Haslem signed H.B. 547, which requires the disclosure of fees and other details in contracts entered into by payment service providers with merchants located within the state. The legislation requires the payment service providers to provide merchants with information detailing where the merchant can obtain access to operating rules, regulations, and bylaws under the agreement. In addition, the law requires payment service providers to disclose (i) the effective date of the agreement; (ii) terms of the agreement; (iii) any provisions relating to early termination or cancellation of the agreement; and (iv) a full schedule of all payment services fees with respect to the credit card, debit card, or other payment services under the agreement. The law also requires payment service providers to supply merchants with a monthly statement of fees, total value of transactions, and in some cases the aggregate fee percentage.


CFPB Grants Credit Card Issuers One-Year Suspension From Filing Card Agreements

On April 15, the CFPB issued a final rule temporarily suspending credit card issuers’ obligation to submit their card agreements to the CFPB, as required by the Credit Card Accontability, Responsibility, and Disclosure Act (CARD Act). The CARD Act, as implemented by TILA and Reg. Z (12 C.F.R. 1026.58), requires credit card issuers to submit credit card agreements to the Bureau on a quarterly basis. The first submission was set to be the first business day on or after April 30, 2015, but under the one-year reprieve, credit card issuers will not be required to begin submitting credit card agreements to the Bureau until April 30, 2016. According to the CFPB, during the temporary suspension, the regulator will “work to develop a more streamlined and automated electronic submission system.” The CFPB contends that the new system will allow for easier submission of credit card agreements than the manual submission system currently in place. Other requirements in Section 1026.58, including the requirement that credit card issuers post their credit card agreements on their own public website, remain unaffected by the temporary suspension.


Target and MasterCard Reach $19 Million Agreement Over Data Breach

On April 15, retail company Target agreed to set aside up to $19 million to settle claims brought by MasterCard and its credit card issuers to cover operational costs and fraud-related losses resulting from a data breach incident in 2013. According to a press release issued by Target, the agreement is dependent upon, among other things, 90 percent of eligible Mastercard accounts accepting their alternative recovery offers, either directly or through their sponsoring issuers by May 20, 2015. Eligible issuers, mostly comprising of banks and credit unions, who accept the offer will be required to release any current or future claims towards Target with respect to the data breach. All eligible issuers will receive full details of the Settlement Agreement at a later time.


CFPB Seeks to Improve Process for Industry Submission of Consumer Credit Card Agreements

On February 24, the CFPB announced a proposed rule that would reduce the burden of credit card issuers by suspending – for one year – their obligation to submit credit card agreements to the CFPB on a quarterly basis. The proposed rule would be in effect while the CFPB works to establish a “more streamlined and automated electronic submission system” that would make it easier for issuers to submit the agreements. The proposal amends the 2009 CARD Act, which established the requirement that issuers submit consumer credit card agreements to the CFPB. During the proposed one-year suspension, other requirements of the CARD Act would remain in place, such as the issuers’ “obligations to post currently-offered agreements on their own websites.” Comments on the proposed rule are due by March 13. Credit card issuers would resume submitting credit card agreements on a quarterly basis to the CFPB starting on April 30, 2016.


CFPB Orders Credit Card Company to Refund $2.7 Million for Charging Excessive Credit Card Fees

On February 4, the CFPB announced a consent order with a Delaware-based credit card company, ordering the company to refund an estimated $2.7 million to approximately 98,000 consumers and pay a civil penalty of $250,000 for allegedly charging consumers illegal credit card fees. According to the consent order, the CFPB alleged the company charged customers fees during the first year after customers opened the account that exceeded the 25% credit limit imposed by the CARD Act. The CFPB further alleged that the company, offering the credit cards through a state-chartered credit union, misled customers about paper statement fees associated with their credit cards and falsely claimed that certain security deposits were “FDIC insured” when they were not. In addition to the refund to customers and civil penalty, the consent order requires the company (i) to refrain from charging fees that exceed 25% of a customer’s credit limit in the first year of the account and (ii) subjects itself to CFPB supervisory authority for the first time.


CFPB Seeks to Ban Texas-Based Credit Issuer

On February 3, the CFPB asked a federal district court to enter a consent order against a Texas-based company for allegedly misleading thousands of consumers into signing up for a “sham” credit card. Under the terms of the consent order, the company would be prohibited from offering any future credit products and services and a $70,000 civil money penalty. For more, please refer to our InfoBytes as this development was previously covered on December 19.


CFPB Files Suit Against Texas Company for Alleged Deceptive Practices Targeting Union Workers

On December 17, the CFPB announced it filed suit against a Texas-based company for allegedly deceiving consumers into paying fees to sign up for a “sham” credit card. According to the complaint filed in the Northern District of Texas, the CFPB alleges that the company falsely advertised a general-use credit card that, in actuality, could only be used to buy products from the company. The CFPB further alleges that the company deceptively implied an affiliation with unions by, among other things, using pictures of nurses, firefighters, and other public servants in its advertising. The complaint seeks compensation for consumers, a civil penalty, and an injunction against the company.


CFPB Warns Credit Card Issuers Regarding Offering Promotional APRs

On September 3, the CFPB published Bulletin 2014-02 warning credit card issuers of the risk of engaging in deceptive or abusive acts and practices in connection with solicitations offering a promotional annual percentage rate (APR). In particular, the bulletin discusses the risk associated with balance transfer solicitations that fail to clearly disclose all material costs of the promotional APR offer, including the failure to disclose that consumers will lose their interest-free grace periods on new purchases if the entire statement balance—including the transferred balance—is not paid in full. The bulletin warns that, depending on the facts and circumstances, card issuers’ solicitations may be considered deceptive and/or abusive if they do not disclose that transferring an outstanding balance may result in additional interest charges for new purchases until a consumer’s grace period is restored by paying in in full. Furthermore, the bulletin notes that while Regulation Z does not require marketing materials to include additional disclosures alerting consumers to the potential effect of accepting a promotional APR offer, some offers may risk being deceptive or abusive even if Regulation Z is not violated. In a press release regarding the bulletin, Director Cordray stated, “[W]e 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.” Finally, the bulletin states that the CFPB expects card issuers to incorporate adequate measures into their compliance management systems in order to prevent violation of Federal consumer financial laws, including the prohibition on deceptive, unfair, or abusive practices. These measures should include steps to ensure that all marketing materials clearly, prominently, and accurately describe the effect of promotional APR offers on the grace period for new purchases.


Nebraska Federal Court Refuses To Dismiss Suit Claiming Breach Of Contract, Violation of State Law for Unauthorized Credit Card Transactions Following Bank Data Breach

On August 20, the U.S. District Court for the District of Nebraska denied motions to dismiss filed by a Nebraska bank and two credit card processing companies in response to a purported class action filed by a merchant alleging that it suffered damages following a data breach at the defendants’ premises. Wines, Vines & Corks, LLC v. First Nat’l of Neb., Inc., No. 8:14CV82 (D. Neb. Aug. 20, 2014). According to the merchant’s complaint, the merchant maintained a credit card processing account with the defendants and, following the breach, had unauthorized credit card transactions processed and fees withdrawn from its account. The merchant alleged breach of contract, negligence, and violations of the Nebraska Consumer Protection Act and the Nebraska Uniform Deceptive Trade Practices Act based on the defendants’ failure to adequately secure and protect account information and refusal to refund the fees. In denying the motions to dismiss, the court determined that the merchant sufficiently pled the existence of a contract and resulting damages in support of its breach of contract claim, as well as a breach of the duty of due care in support of its negligence claim. Also, the court found that the merchant’s state law claims were adequately supported and determined that the defendants’ argument that the economic loss doctrine barred these claims was misplaced.


Federal Reserve Bank Paper Analyzes Credit Card Fair Lending Issues

The Federal Reserve Bank of Philadelphia recently published a discussion paper on credit card fair lending risks. The paper reviews qualitative fair lending risk assessment methods and potential quantitative analysis that may be performed to assess fair lending risk exposure in each of the following areas: (i) marketing; (ii) underwriting; (iii) credit line assignment; (iv) pricing; (v) servicing and collection; (vi) secured cards; and (vii) affinity partners. The authors note that the methods discussed are also applicable to other consumer credit products that utilize credit scoring models. The paper states that although statistical testing can be an important component of fair lending compliance management for credit card lending, “statistical analysis approaches in this area—and particularly disparate impact testing approaches—are not well established, and there are no formal regulatory guidelines for conducting such analysis.” With regard to quantitative risk assessments, the authors discuss the utility of proxy testing and explain the likelihood of false positives and false negatives as well as unassigned consumers. The authors state that “these limitations suggest that results derived from a proxy-based analysis should be treated with an appropriate degree of caution.”


New York Virtual Currency Proposal Could Capture Bank Products, Card Rewards Programs

On July 17, the New York Department of Financial Services (NYDFS) proposed a rule intended to govern the virtual currency marketplace. The proposed rule is extremely broad and as currently drafted would appear to capture products provided by traditional brick and mortar banks and other regulated financial institutions. For example, as proposed, the rule could regulate:

  • Reward programs, “thank you” offers, or digital coupons that offer cash back or statement credits;
  • Generated numbers that access cash;
  • Prepaid access and other cards that will allow customers to receive cash, including those customarily exempt such as government funded transfers;
  • P2P transfers; and
  • Wallet providers where the customer can access cash.

If left unaddressed, these apparent unintended consequences could create a confusing regulatory environment for certain bank and card products. It is also noteworthy that the rule does not provide any customary exclusions for chartered entities, raising substantial preemption questions. Read more…