CARD Act Report: The CFPB Departs from Precedent

Editors’ Note: The following is one part of DWT’s ongoing coverage of the 2017 CARD Act Report.  Other parts include our prior PLA post The Consumer Credit Market: The CFPB’s 2017 CARD Act Report and a recent FSR webinar. This article also appears in The Review of Banking & Financial Services.

On December 27, 2017, as required by law, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its third biennial report evaluating the state of the consumer credit card market (the “Report”).[1] The Report provides important data about the credit card market, including the use, costs, and availability of credit cards across the credit score spectrum. The Bureau compiled the data from responses to its March 2017 public request for information. The Report updates data from the 2015 report and seeks to broadly assess the credit card market, including various issuer practices and consumer experiences.

The Bureau’s post-Richard Cordray outlook on the credit card market overall was optimistic. Unlike the CFPB’s prior credit card market reports in 2013[2] and 2015,[3] the Report did not specifically list any “areas of concern” that in the past have hinted at areas of increased regulatory scrutiny and served as a roadmap for the agency’s focus in its supervisory and enforcement activities. That said, the Report, like past reports, identifies areas where the Bureau staff appear to believe there are regressive subsidies (i.e., subsidies flowing from less creditworthy to more creditworthy consumers) and holes in the current regulatory scheme.

Several of these areas are identified below, along with other notable areas of focus in the Report.  Specifically, this article highlights several key findings in the Report related to balance transfers, deferred-interest products, loyalty and rewards programs, forbearance and collection practices, and the increasing prevalence of third-party comparison websites.

Balance Transfers and Associated Credit Costs

The Bureau continued to devote attention to the costs associated with credit card balance transfer offers – the Report discusses market data and practices related to the costs to consumers who use a balance transfer feature on their credit card.

In the 2015 report, the Bureau identified lost grace periods for new purchases as an area of concern in connection with balance transfers. [4] Although the 2017 Report does not characterize this issue as a concern, it does offer an updated discussion of the issue. The Report notes that the loss of a grace period is a significant source of balance transfer costs for consumers, which is often paired with an upfront fee for the balance transfer.[5]

The Report states that, after the CFPB’s guidance on this topic,[6] some card issuers changed their practices to provide a grace period on new purchases even when there is a revolving balance and a transfer balance.[7] Many issuers, however, still prevent consumers taking advantage of a balance transfer promotion from being eligible for a grace period.[8]

The discussion of costs and disclosures associated with balance transfers demonstrates the Report’s objective tone as compared with past years. Unlike the 2015 report,[9] this Report does not suggest that the disclosures associated with the loss of a grace period amount to deceptive or abusive practices by card issuers. The Bureau’s position on current issuer practices regarding grace periods for card accounts with a balance transfer feature is unclear. However, the CFPB did reference its 2014 guidance calling for prominent disclosure of the costs associated with balance transfers, and also noted that other promotions “such as deferred interest promotions, generally do not have this type of effect on the account’s grace period.”[10]

Additionally, the Report discusses payment allocation practices for balances that have different interest rates. The CFPB noted that while the CARD Act and its implementing regulations govern payment allocation practices for payments in excess of the minimum due among balances with different interest rates, they do not restrict payment allocation between balances with identical interest rates except in limited circumstances. The Report strongly implies that the staff believes that, especially in the context of balance transfers, this represents a hole in the existing regulatory scheme: “All other factors being equal, a consumer with multiple overlapping transferred balances subject to the same promotional rate, but with different promotional rate expiration dates, would prefer to have payments allocated to the balance that has its promotional rate period expiring first.”[11]

Deferred Interest Products

The Bureau has long been critical of deferred interest products (“DIPs”), suggesting that the possible costs of DIPs may be insufficiently disclosed and understood by consumers. The CFPB discussed costs and related disclosures of DIPs in prior reports, as well as the disparity in pay off rates between consumers with different credit scores (with superprime consumers paying the balance during the promotional period at a higher rate).[12] In June 2017, the CFPB sent warning letters to several card issuers that deploy DIPs suggesting that the issuers use more robust disclosures.[13]

The Report again questions the adequate disclosure of costs related to DIPs and analyzes payoff rates within the promotional period depending on a consumer’s credit score. The Report also states that superprime consumers are more likely to pay DIP balances before interest charges are accrued. The Bureau’s focus on this issue suggests concern that DIPs, being less advantageous to near-prime and subprime consumers, constitute a regressive subsidy.[14]

Additionally, the Report found that general purpose credit card balances for superprime consumers are paid at double the rate than for private label credit card balances, probably due to the prevalence of DIPs.[15] It is an open question whether these consistent findings of lower payoff rates during the promotional period for lower credit tier consumers will lead the CFPB to take action to limit the availability of DIPs to below superprime consumers.

Loyalty and Rewards Programs

The CFPB noted a proliferation and innovation of rewards programs and that these programs are popular with consumers. The CFPB noted that not all consumers access rewards to the same degree, but that “superprime is the dominant credit tier for spending via all rewards types.”[16]  When reviewing card issuer practices for rewards, the CFPB noted both improvement and continuing issues. The Report discussed continuing concerns about “consistent consumer access to rewards terms and conditions throughout the account lifecycle, a number of steps to ensure consumer-friendly experiences with sign-up bonuses and similar promotions, and better communication around expiration and forfeiture.”[17] However, the CFPB remarked that “while a number of [] issues persist, progress has been made.”[18]

The CFPB’s balanced discussion of rewards programs suggests that continued diligence is needed to ensure that rewards terms, including redemption and forfeiture, are sufficiently disclosed.

Forbearance, Debt Collection and Late Fees

The Report summarized market developments regarding forbearance and collection, including that many issuers have discontinued short-term financial hardship programs for consumers, while other issuers “evaluated customers with short-term financial hardship and offered them long-term programs as an alternative.”[19]

Issuers have also changed their late fee practices, and “surveyed issuers generally waived late and over-limit fees, if any, and ceased all active collection efforts on accounts that were enrolled in any internal forbearance payment plan or [debt management plans], as long as the accounts met the renegotiated payment terms.”[20] While late fees have increased slightly since the prior report, the fee amounts “nevertheless remain substantially below pre-CARD Act levels.”[21] The Bureau also noted that a small number of accounts at each issuer tend to accrue a large share of late fees, and that the CFPB “intends to work with issuers and other providers and market participants to better understand what innovations could help consumers avoid paying late, benefiting both themselves and their creditors.”[22]

Third-Party Comparison Sites

The Report includes a thorough assessment of “third-party comparison sites” (“TPCS”), also known as product aggregators or affiliate websites, which allow consumers to compare multiple credit card products from multiple issuers in a streamlined fashion. This is a welcome area of focus for the Report, although it comes several years after the issue first came to prominence in the industry.

TPCS are an important account acquisitions channel for credit card issuers, accounting for almost 20% of all credit card applications and generating almost $1 billion in revenue in 2016, an increase in revenue of almost 50% from 2015. TPCS are updated frequently to include the latest products and features, often allow consumers to identify credit cards that are “best suited to fit their needs” based on user inputs, and link consumers directly to digital credit card applications.[23] They have evolved from initially providing basic comparison engines to providing original editorial content and personal financial management tools:

• Comparison engines usually allow consumers to identify products based on user inputs, such as rewards, APRs, and self-reported credit scores, where the resulting products appear in lists or tables.
• Editorial content can include reviews of specific products, “best of” lists, educational articles, and detailed surveys of the credit card market.
• Personal financial management tools, such as free credit scores, consumer financial account data aggregation, and budgeting features, are available.

The Report notes that all TPCS have some form of general advertiser disclosure. These advertiser disclosures may state that the site is compensated by credit card issuers, that the order in which products appear on the site may be influenced by that compensation, and that the “entire universe” of credit card offers has not been evaluated. In some instances, editorial disclosures state that editorial content, such as a review of a particular credit card, is not influenced by payment.

The Report acknowledges in a footnote that credit card issuers have established and enforced standards, such as the above advertiser disclosure, which has led to the consolidation of TPCS and practices, but –perhaps signaling possible future supervisory or regulatory activity – the footnote cautions that the CFPB has “not reviewed the sufficiency of any disclosure under applicable federal law.” The Report also notes that many sites include “aspirational” language regarding the site’s desired perception (for example, that sites can help “find the right card for you” or can help a user “master” financial concepts), but cautions that “[W]hether these branding efforts create consumer expectations that are not fully matched by some of the revenue practices of sites remains an open question” that the CFPB will continue to monitor.

TPCS are often compensated by credit card issuers when a consumer is approved for and opens a credit card account, which means that TPCS make money when consumers apply for credit cards for which they are qualified. On the other hand, the Report states that the CFPB continues to evaluate the factors affecting product presentation and ordering, including per-approval revenue, quantified consumer benefits, approval likelihood, and popularity. Per-approval revenues may distort product placements and, where consumers “are at least in part nudged or persuaded to apply for” a small subset of products with outsized per-approval revenue and approvals, the Report identifies an apparent “mismatch with consumer expectations given that [TPCS] are branded, implicitly and explicitly, as helping consumers to identify products based on their needs, interests, and inputs,” but rather than directly referring to the “abusiveness” prong of the UDAAP standard, the Report states that “disclosures may help mitigate this problem.”[24]

Final Thoughts – Does the Report Suggest a New Reserved Approach?

The change in tone of the 2017 CARD Act Report compared to past CARD Act Reports suggests that the CFPB is pivoting away from using this report as a platform to identify problematic practices that require greater oversight by its supervision or enforcement offices. If so, then the change in tone is consistent with the stated change in enforcement posture by Acting Director Mulvaney. A more restrained approach to enforcement is also likely to follow if the Trump Administration successfully restructures the CFPB and changes its strategic approach as recently proposed.[25]

However, credit card issuers would be advised to exercise reasonable care and ensure compliance with all applicable rules and regulations. Enforcement against banks and other financial services companies for regulatory non-compliance remains a principal objective of the CFPB, notwithstanding the Bureau’s change in leadership and posture. The Bureau still has the authority to act on illegal practices in areas that could have a significant impact on consumers and the credit card market generally, including debt collection, rewards programs, deferred interest products, and third party comparison sites.

[1] “The Consumer Credit Card Market,” Dec. 2017, available at http://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf

[2] “CARD Act Report,” October 1, 2013, available at: http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf

[3] “The Consumer Credit Card Market,” Dec. 2015, available at http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf

[4] See, e.g. “The Consumer Credit Card Market,” Dec. 2015, Pp. 125-27.

[5] See Report, p. 191 (“For some cardholders, the loss of a grace period can be a potentially significant source of costs associated with balance transfers. To save money by transferring balances from one credit card account to another, the consumer needs to revolve at least some of the transferred balance.”)

[6]  “Marketing of Credit Card Promotional APR Offers,” CFPB Bulletin 2014-02, Sept. 3, 2014, available at http://files.consumerfinance.gov/f/201409_cfpb_bulletin_marketing-credit-card-promotionalapr-offers.pdf.

[7] See Report, p. 193 (“Issuer disclosures on balance transfers show that some issuers have revised their applicable grace period policies since the issuance of our guidance. These disclosures show that some issuers now allow consumers to retain their grace period while revolving a transferred balance so long as they pay the balance generated by new purchases in full each month. Although issuers lose some interest revenue from this type of change, they may also realize some benefits. The decreased cost of new purchases may cause increased use of the card for such purchases. In addition, the issuer may avoid any customer service costs associated with the prevailing grace period policy on balance transfers.”).

[8] Report, p. 191.

[9] “The Consumer Credit Card Market,” Dec. 2015, p. 126-27.

[10] See Report, p. 192 (citing the CFPB report “Marketing of Credit Card Promotional APR Offers,” CFPB Bulletin 2014-02, Sept. 3, 2014, available at http://files.consumerfinance.gov/f/201409_cfpb_bulletin_marketing-credit-card-promotionalapr-offers.pdf.

[11] Report, pp. 182-83.

[12] See, e.g. “The Consumer Credit Card Market,” Dec. 2015, pp. 147-207.

[13] CFPB Press Release, “Consumer Financial Protection Bureau Encourages Retail Credit Card Companies to Consider More Transparent Promotions,” June 8, 2017 available at https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-encourages-retail-credit-card-companies-consider-more-transparent-promotions/.

[14] Report, pp. 101-110.

[15] Report, pp. 57-58.

[16] Report, p. 62.

[17] Report, p. 64.

[18] Report, p. 64

[19] Report, p. 319.

[20] Report, p. 331.

[21] Report, p. 93.

[22] Report, p. 95.

[23] Report, p. 266.

[24] Report, p. 298-299.

[25] Bureau of Consumer Financial Protection Strategic Plan – FY 2018 – 2022 (Feb. 12, 2018); An American Budget – Major Savings and Reforms, Fiscal Year 2019.