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From Banking and Finance Law Daily, September 4, 2014

Deceptive, abusive card promotions risky business for issuers, warns CFPB

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau is making its position known on credit card promotions that it says are deceptive or abusive. The bureau is referring to issuers that “lure” consumers with offers of reduced or zero-interest annual percentage rates for specific purchases or balance transfers, but then hit those consumers with “surprise” interest rate charges.

“Credit card offers that lure in consumers and then hit them with surprise charges are against the law,” said CFPB Director Richard Cordray. “Before they sign up, consumers need to understand the true cost of these promotions.” Cordray said that the bulletin issued by the bureau is meant to put “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.”

Covered transactions. Section 1036 of the Dodd-Frank Act prohibits covered persons or service providers from engaging in deceptive acts or practices. The bulletin outlines transactions that the bureau believe fall within deceptive and/or abusive practices in connection with credit card promotions. These transactions include, but are not limited to, convenience checks, deferred interest or promotional interest rate purchases, and balance transfers.

Risk of deception. The CFPB clarifies that solicitations for these types of offers risk being deceptive if the marketing materials do not “clearly and prominently convey” that a consumer who accepts the issuer’s offer and continues to use the credit card to make purchases will lose the grace period on the new purchases if the consumer does not pay the entire statement balance, including the amount subject to the promotional APR, by the payment due date.

Failure to cure. The bureau also said it has discovered that “one or more card issuers created and failed to cure” consumer misimpressions that purchases fall within the promotional APR. Some issuers do not include any information about the loss of the grace period for affected consumers in promotional rate marketing materials, according to the bureau, while other issuers may include information regarding the loss of the grace period, but the information is not prominently located in the marketing materials, or uses technical language that fails to clearly explain the full terms, risks, and potential costs of the offer.

In the absence of clear language placed in a prominent location, a reasonable consumer’s net impression of the solicitations could be that the only cost of obtaining the promotional APR is the disclosed transaction fee, and that the consumer would only incur interest charges at the promotional rate because the only unpaid balance on his or her credit card would be subject to the promotional APR, the bureau said.

Regulation Z disclosures. The bureau further notes in the bulletin that Reg. Z—Truth in Lending (12 CFR Part 1026) requires the disclosure of information about grace periods at four points in a consumer’s relationship with a credit card issuer:

  1. on or with solicitations or applications to open a credit card account;

  2. at account opening;

  3. on periodic statements; and

  4. with checks that can be used to access a credit card account.

These disclosures generally inform consumers of the length of any grace period and the time at which finance charges will begin to accrue. Regulation Z does not require marketing materials to include additional disclosures alerting consumers to the effect of accepting a promotional offer on the loss of the grace period on purchases. However, stressed the bureau, marketing materials accompanying some offers may risk being deceptive or abusive in violation of the Dodd-Frank Act, even if Regulation Z is not violated.

Bureau expectations. The CFPB states in the bulletin that it expects credit card issuers to incorporate into their compliance management systems adequate measures to prevent violation of federal consumer financial laws, including the Dodd-Frank Act’s prohibitions on unfair, deceptive, or abusive acts or practices. Accordingly, credit card issuers are expected to implement internal controls sufficient to ensure that they market promotional APR offers in a manner that limits the risk of statutory or regulatory violations and related consumer harm. At the least, issuers should ensure that:

  • solicitations, applications, account-opening materials, and convenience checks comply with the requirements in Regulation Z;

  • marketing materials clearly, prominently, and accurately describe material costs, conditions, and limitations in connection with the promotion; and

  • marketing materials clearly, prominently, and accurately describe the effect of promotional APR offers on the grace period for new purchases.

Blog post. In conjunction with the bulletin, the CFPB in a post to its blog advised consumers of the hidden dangers of promotional credit card offers. The post describes to consumers the “surprise” interest-rate charges that often go hand in hand with these offers, and advises them on ways to avoid the interest if they do choose to accept a promotional offer.

MainStory: TopStory CFPB CreditDebitGiftCards DoddFrankAct TruthInLending UDAAP

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