CFPB Publishes 2023 Biennial CARD Act Report

On October 25, for the sixth time since its inception, the Consumer Financial Protection Bureau ("CFPB" or "Bureau") released its biennial report ("Report") evaluating the state of the consumer credit card market. The Credit Card Accountability Responsibility and Disclosure Act ("CARD Act") mandates that the CFPB provide these reports to Congress on a biennial basis, highlighting credit card market data, developments, and innovations. Though these biennial reports do not suggest any new rules or give any express guidance, the content of these reports can be useful for identifying areas of concern and enforcement priorities for the Bureau.

This year's Report, in addition to updating general data sets from the 2021 report—which was highly influenced by the economic conditions precipitated by the COVID-19 pandemic—includes a new Bureau analysis of credit card issuer profitability, along with a related discussion of issuer revenue, issuer costs, and cardholder costs. The Report also provides CFPB reviews of common practices found within the market, including with respect to traditional practices—e.g., balance transfers, cash advances, debt collection, and rewards programs—and with respect to innovative practices like the use of AI, the integration of third party marketers into prescreen experiences, new credit scoring processes, credit builder cards, and digital wallets.

We've identified key takeaways from the 2023 Report that include the CFPB's novel focus on card issuer profitability, continued attention on credit card rewards programs, review of installment plans on credit card accounts and other unique repayment terms, review of credit card-as-a-service platforms, and discussion of third party comparison sites and associated digital prescreening activities. Below we discuss each of these subjects in further detail.

1. A focus on issuer profitability, including that associated with increasing interest rates

While the CFPB's biennial reports have always included data associated with the use and cost of credit, as well as remarks and citations regarding the profitability of credit card operations,[1] this year's Report contains further detail about issuers' returns on assets and the efficiency with which "the industry manages expenses and converts balances into revenue."[2] The Bureau makes clear that it "has not assessed issuer profitability in this manner in previous iterations of this report."[3] Nevertheless, the Bureau has conducted profitability analyses in other contexts, including in an August 2022 blog post that examined increasing interest rates.

The Report, previous iterations of the biennial report, and the August 2022 blog post each claim that the credit card market drives "outsized profits"[4] and "returns [that] consistently exceed earnings for other bank activities."[5] According to the Bureau's data, interest revenue is the primary driver of issuer profitability, and interest rates have been increasing over the past several years. In reciting this data, the CFPB displays some skepticism that increasing interest rates are attributable to market factors alone. For example, the Report notes that while "CARD Act restrictions may be responsible for some of the initial increases" in variable APR margins, "the growth in margins over the past ten years suggests another factor may be involved, such as a lack of competition on APRs."[6] The Report also highlights the CFPB's belief that consumers may not shop for credit cards based on APRs and may also have a hard time "finding the actual purchase APR prior to account opening," and so therefore issuers are "incentivize[d] to avoid price competition" and "reluctan[t] to provide transparent pricing."[7]

The Report also attributes rising issuer profitability to record levels of fees, primarily including increasing annual fees and late fees. The Bureau notes that quarterly late fee charges reached a record high in Q4 2022, and claims that late fees continue to disproportionally impact accounts with lower credit scores.[8]

The focus on late fee revenue and its impact on card issuer profitability is aligned with the Bureau's recent late fee rulemaking. As DWT has previously discussed, the Bureau's March 2023 proposed rule to reduce late fee safe harbors (among other changes) was largely based on the Bureau's view that the supposed profitability of late fees is misaligned with the statutory requirement found in the Truth in Lending Act that late fees be "reasonable and proportional" to the cost to issuers of a late payment.[9]

It is more difficult, however, to forecast rulemaking or guidance associated with the Report's focus on rising interest rates and their impact on issuer profitability. Unlike with respect to penalty fees such as late fees, interest charges are not statutorily required to be proportional to the cost to issuers of extending credit. Moreover, the CFPB's recent late fee rulemaking acknowledged (and seemed to acquiesce to) the likelihood of issuers increasing interest rates as a result of the proposed reduction in the late fee safe harbor amount.[10] And although the Report notes that average APRs reached record highs in 2022, the average APR on private label cards was found to be 27.7% and the average APR on general purpose cards was found to be 22.7%[11]—each lower than even the all-in interest rate cap of 36% found in a federal consumer protection statute like the Military Lending Act.

Nevertheless, the Bureau's ongoing focus on rising interest rates and their relation to issuer profitability may bear watching. The Bureau's continued emphasis on rising interest rates in the Report and in other publications, the Report's note that consumers may choose to open credit cards at credit unions where APRs are capped at 18%,[12] and recently proposed legislation in Congress to cap the interest rate for all credit cards at 18%,[13] all hint at the potential for a change in regulatory, legislative, and public opinion environment with respect to rising credit card interest rates.

2. Rewards practices

The CFPB has made a habit of discussing credit card rewards practices in its biennial reports, and this year's Report is no exception. (Note that the CFPB's repeated discussion of rewards program practices and statistics in the biennial reports, and subsequent lack of material action in the form of new regulations or comprehensive guidance, is indicative of the limitations inherent in using these biennial reports to forecast CFPB activities.)

In addition to the usual recitation of rewards program statistics, this Report includes several rewards topics of interest and concern to the Bureau. First, the Report highlights that rewards sign-up bonuses constitute "the single largest driver of complaints to the CFPB regarding rewards credit cards."[14] As the Report notes, sign-up bonus issues can lead to consumer harm and CFPB action; in July 2023, the CFPB ordered a large financial institution to pay several million dollars in penalties and restitution in part as a result of failing to honor promised credit card sign-up bonuses.[15]

Second, the Bureau expresses concern that credit card companies are becoming "the gatekeeper[s] of scarce resources like concert tickets, lounge access, and exclusive restaurant reservations." The CFPB's particular concern with this practice may be represented by the Report's note that "consumer demand for these experiences often exceeds supply" and so "issuers are restricting benefits" to consumers that "meet the underwriting standards for a premium card" and that can afford "ever-more-expensive credit cards."[16] While it is difficult to envision specific and reasonable Bureau action to address such concerns, the Report's positioning of this issue as an "exclusivity," "underwriting," and affordability concern may be worth monitoring.

Finally, the Report evinces Bureau unease with current credit card rewards forfeiture practices. The Report remarks that "[m]any consumers lose all rewards balances upon account closure (either by the issuer or cardholder), and some issuers place expiration dates on rewards."[17] The Report also includes a comment that credit card-as-a-service models that involve the management of a credit card rewards program by a third party may be more likely to result in consumers losing accumulated rewards after account closure, which could "trigger confusion and frustration" and possibly "lead to worse repayment outcomes and confusion regarding customers' account servicing rights."[18]

As the Report mentions, New York state enacted a law relating to the forfeiture of rewards points in 2021, which will go into effect in December of this year.[19] The New York law seems to be aligned with the Bureau's concerns about rewards points forfeiture as outlined in the Report, and so it may be worth keeping an eye on additional state and federal law and guidance in this area.

3. Repayment terms, including installment plans

The Report highlights a handful of novel new credit card repayment terms, while also discussing the increasing prevalence of installment plans on credit card accounts. As DWT has previously discussed, installment plans on credit card accounts come in various shapes, but typically contemplate plans designed to assist consumers in paying off large purchases, using their existing credit line, in substantially equal payments amortized over a specific duration. With respect to such installment plans, the Report notes that five of the ten largest issuers now maintain such plans in some form, and that balances associated with installment plans doubled to reach $9 billion in 2022.[20]

The Bureau acknowledges that the average cost of an installment plan is "significantly lower than the cost a consumer would face by revolving the same amount at their non-promotional purchase APR."[21] The Bureau also compares these installment plans somewhat favorably to another product it deems similar, Buy Now Pay Later ("BNPL").[22]

Nevertheless, the Report does include some words of caution with respect to installment plans. For example, although the Bureau indicates that installment plans "may not present the same risk of "loan stacking" that may be associated with standalone pay-in-four type products," it does indicate that installment plans may also "contribute to the same overextension risks inherent in credit card usage."[23] Additionally, the CFPB suggests that the issuers it surveyed rarely consider a consumer's ability to pay minimum payments, as required by Section 51 of Regulation Z, in association with installment plans before determining a consumer's eligibility for such a plan.[24]

In addition to installment plans, the Report reviews several novel repayment structures implemented across the industry. For example, one product discussed allows cardholders to obtain closed-end loans accessed through a card transaction. Another product provides for a four billing cycle grace period so long as the minimum payment is made during those four billing cycles.[25]

While the CFPB does emphasize the potential of installment plans and new repayment terms structures to provide "consumer-beneficial innovation and competition," the Report also notes that repayment "may implicate an array of regulatory provisions." Accordingly, the CFPB "will continue to monitor new mechanisms to ensure consumers are adequately informed about financial offerings," and "that consumers are protected from risky practices."[26]

4. Credit card-as-a-service platforms

The Report discusses credit card-as-a-service platform providers in its "Innovation" section, emphasizing the potential for these providers to provide greater competition in the credit card market, but also the potential for certain consumer harms. The Report notes, for example, the ability of these services to "generate new use cases for consumers and businesses," and the fact that these services "may derive a competitive advantage through newer technology and improved user experience without the technical challenges many major issuers face when updating legacy systems."[27]

On the other hand, the Report observes that some credit card-as-a-service providers have recently been "pulled from the market because of financial issues." Such failures, the Bureau indicates, may introduce new consumer risks in the credit card market, since the failure of "one link in the chain" of merchant, third-party vendor, and bank could result in a consumer being unable to make a payment or access an account.[28] The Bureau also expresses some concern over whether "the efficiencies claimed by these platforms are matched by effective execution" of important and regulated account servicing functions.[29]

5. Third party comparison sites and prescreens

The CFPB includes statistics and commentary associated with both the prevalence and challenges of the roles of third party comparison sites and prescreening in the credit card market. The Report points out that third-party comparison sites, sometimes referred to as aggregators, continue to be a significant driver of credit card applications in the market, responsible for approximately 20% of general purpose credit card applications between 2020 and 2022.[30]

In promoting the Bureau's own Terms of Credit Card Plans survey, the Report provides a not-so-veiled criticism of the third party comparison site industry: "Unlike some [third party comparison] sites, issuers cannot pay for better placement on the CFPB comparison site, and the CFPB does not earn a commission from any referrals to issuer websites. Rather, it is intended to serve as an additional, neutral source to drive further competition, fairness, and transparency in the marketplace."[31]

Such criticism is aligned with the Report's reminder that one such third party comparison site was subject to a consent order by the Federal Trade Commission ("FTC") earlier this year associated with that site's misrepresentation of offers to consumers as "preapproved."[32]

Preapproved and prescreened offers are themselves a point of discussion in the Report, and the CFPB discusses certain related innovations favorably. For example, the Bureau seems to approve of issuers providing consumers the opportunity to check whether they qualify for a particular credit card online without impact to their credit scores. The Report categorizes such a user experience as a part of the "growing trend of demystifying the credit card application process through accessible digital engagement rather than issuer-initiated direct mail."[33] The Report also notes that prescreened solicitations have a 75 percent approval rate, which is "over 10 percentage points higher than the channel with the next highest approval rate."[34]

Finally, the Report details the growing use of soft credit inquiries as a part of the application and underwriting process. The Bureau generally speaks favorably of such usage, explaining that "the use of soft inquiries may encourage … borrowers to check their eligibility for a card with better terms rather than applying only for cards for which they may be more likely to qualify."[35] The Bureau also approves of scenarios where soft pulls may alert consumers with absolute certainty as to whether they will be approved for a card, and for what terms they may be approved.[36]

On the other hand, the Report does express a broad concern that a move away from hard inquiries may impact existing credit scoring models. Additionally, the Bureau worries that if only select issuers are making approval decisions using soft credit pulls, "certain applicant segments—such as subprime borrowers—may disproportionately face the prospect of score degradation resulting from hard pulls."[37] These comments also need to be considered in the context of CFPB activity regarding the Fair Credit Reporting Act and open-banking.

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If you have any questions about the Report beyond the subjects discussed above, please reach out. DWT will continue to monitor further developments from the Bureau associated with its publication of the Report and any related actions taken or guidance provided, including with respect to the CFPB's late fee rulemaking.