Credit Card Rewards and Deferred Interest Programs Are on CFPB Radar Screen
Since its inception in 2011 as part of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) has been quite active in the credit card space, taking actions for certain practices deemed to be unfair. Most recently, J.P. Morgan Chase was ordered to pay $309 million in refunds to credit card customers for practices related to “add-on products,” an area of focus for the CFPB. Fines have also been administered against Capital One, Discover, and American Express for similar reasons.
On October 2nd, the CFPB released its biannual report on the credit card market as part of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. The report assesses the impact of the CARD Act on the credit card industry, which is characterized as having significantly enhanced transparency for consumers through the elimination of re-pricing actions, the reduction of fees, and the modification of issuers’ disclosure methodology. However, there has also been a decrease in credit availability since the beginning of 2008, a trend for which the CARD Act is at least partially responsible in conjunction with the Great Recession.
The forward-looking portion of the report specifies six areas of concern within the credit card market that require additional scrutiny to determine whether further actions must be taken:
- “Add-On Products”: Continue to review the manner in which “add-on products” are marketed and sold
- Fee Harvester Cards: Monitor the use of application fees prior to account opening, which are currently exempt from CARD Act regulation
- Deferred Interest Products: Study these products to determine if they are fair and transparent to consumers, specifically the subprime segment
- Online Disclosures: Study the effectiveness of the manner in which issuers deliver mandated disclosures in paperless channels
- Rewards Products: Consider the transparency of rewards program disclosures with an emphasis on activation incentives, earn/redemption rates, and expiration/forfeiture policies
- Grace Periods: Consider the transparency of grace period policies
In particular, the scrutiny of rewards products and deferred interest programs could have far-reaching implications for issuers and their partners. To state the obvious, rewards programs are ubiquitous, span all cardholder segments, and are tied more to cardholder spending than lending. To date, most of the CFPB’s attention has been focused on practices directly related to credit card pricing, cardholder disclosures, and the marketing of add-on products. One could cover a lot of ground in the rewards space given how dynamic such programs must be to remain competitive. Policy making while there is a transformation underway with mobile/digital advancements will be challenging. However, the initial examination of rewards programs will seemingly focus on the simplicity and clarity of disclosures, as the CFPB director, Richard Cordray, describes many rewards offers as “highly complex, as consumers may face detailed and confusing rules about how they can actually use their rewards.”
With respect to deferred interest products, nine of the top ten largest private label credit card programs offer some form of promotional financing plan. This is especially relevant to big-ticket retailers, who rely on deferred financing plans to drive a significant portion of sales and appeal to value-seeking customers. The CFPB’s primary concern with these plans is the potential retroactive finance charges that are incurred if the balance is not paid in full by the specified date and the belief that a disproportionate number of subprime borrowers are subject to these retroactive charges. Scrutiny of deferred financing programs dates back to the CARD Act when “no payment” plans were prohibited.
It is unclear how this increased scrutiny will affect the areas specified in the CFPB’s report. However, changes are likely to focus on disclosures, as the report emphasizes the need for increased transparency to consumers. Given the Director’s comments on the complexity of rewards program rules, the notion of standardized disclosure protocols similar to the current format of cardholder pricing, is one possibility. The CFPB’s track record with respect to focusing on transparency is now well-established. We expect credit card issuers to be very proactive in their responses to the stated agenda of the CFPB.
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