The Consumer Financial Protection Bureau (CFPB) has issued its second biennial report on the credit card market. In addition to setting forth the CFPB’s general findings about market conditions, the report discusses “areas of concern for consumers,” including deferred interest products, subprime credit cards, and rewards programs.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires the CFPB to perform periodic market reviews. The CFPB’s first report was issued in October 2013.
The areas of concern noted in the latest report are likely to be the subject of heightened CFPB supervisory scrutiny and enforcement activity. The CFPB’s findings include:
- The CARD Act’s effective elimination of overlimit fees resulted in consumers paying $9 billion less in overlimit fees from 2011 through 2014 than they would have paid if issuers had continued to assess such fees at the 2008 rate.
- The CARD Act’s limits on late fees resulted in consumers paying $7 billion less in late fees from 2011 through 2014 than they would have paid if late fees had remained at pre-CARD Act levels.
- The decline in the total cost of credit (all interest and other fees paid by the consumer) from pre-CARD Act levels found in the 2013 report has continued, remaining approximately 2 percentage points lower.
- The approximately $3.5 trillion in credit available to consumers on credit cards in early 2015 was approximately $325 billion (or 10 percent) more than the credit available in early 2012. Of the $3.5 trillion, $2.8 trillion in credit was unused as of early 2015.
- The number of credit card accounts grew by approximately 3 percent in 2013 and 2014. This annual growth outpaces the growth in the nation’s adult population, which was about 1 percent each year.
In March 2015, the CFPB issued a request for information seeking comments on “areas of concern” identified in its 2013 report and other “areas of interest.” The new report’s discussion of these areas includes the following:
- Deferred interest products. In remarks about the new report, Director Richard Cordray stated that such products “remain the most glaring exception to what has been the generally positive post-CARD Act trend toward upfront credit card pricing.” The CFPB found “significant indications that the lack of transparency in this market contributes to avoidable costs.” For example, the CFPB found that a significant share of consumers (almost one third) pay the remaining balance associated with a deferred interest promotion (principal and accrued interest) within two billing cycles after the end of the promotion. According to the CFPB, this “must call into serious question the notion that consumers understand the way in which the product works.”
- Subprime credit cards. The CFPB highlights the risk that issuers’ “greater reliance on origination and maintenance fees” results in a substantial portion of a consumer’s monthly payments being applied to fees and interest on fees rather than to principal. It also commented that agreements for such cards are “particularly difficult to read” and that despite “offering longer and more complex credit card terms than mass market issuers,” issuers send solicitations “disproportionately to consumers with lower levels of formal education.”
- Rewards programs. The CFPB is generally concerned with the ability of consumers to “evaluate the value proposition associated with different rewards programs” so that they can “select between cards on a rational basis—especially if they are likely to carry a balance on the card at some point in the future.” The potential barriers to consumers identified included:
- The availability and timing of disclosures and the use of multiple disclosure documents that create the potential for consumer confusion (e.g. giving the consumer a document containing full program terms and conditions and a separate marketing-oriented program guide);
- The “non-specificity” of program terms resulting from an issuer’s reservation of the right to change terms at any time;
- Consumer confusion surrounding expiration and forfeiture policies; and
- Complex requirements and unexpected restrictions for earning and redeeming rewards, with the CFPB noting that third-party involvement can add to consumer confusion.
- Debt collection. The report presents the results of the CFPB’s survey of the debt collection practices of “a number of large credit card issuers,” which included a review of debt sale and purchase agreements. The report states that “[g]iven that [the warranties in such agreements] certify the accuracy and completeness of the information provided to the debt buyer, as well as to the debt buyer’s ability to access documents validating the debt, limiting or omitting such warranties can impact the consumer debt collection experience."
While the report itself is not critical of other collection practices used by the issuers surveyed, various practices were criticized in the CFPB’s press release and Director Cordray’s remarks. For example, in the report, the CFPB noted that all of the issuers limited the number of calls per day in-house collectors could attempt on an account, with the limit ranging from four to 15 calls. In his remarks, Director Cordray stated that a policy that allows up to 15 calls a day or calls to a consumer on successive days “smack[s] of harassment.”
The report also discusses the use of third-party contingency collection companies and the significant role that such companies’ liquidation rates play in an issuer’s evaluation of their performance. In the report, the CFPB observed that this “adds to the incentive that the third-party contingency companies have to collect as much as they can from consumers and to do so as quickly as they can, before the debt is recalled.” Director Cordray stated that the incentives of recovering a contingency fee and demonstrating good performance “can combine to create a “perfect storm” for consumers, marked by pressure tactics and various forms of harassment.” It is likely these concerns will be reflected in the debt collection regulations that the CFPB is expected to propose. Such regulations are likely to address the practices of third-party debt collectors, debt buyers and creditors collecting their own debts.
- Grace periods. The CFPB referenced its 2014 bulletin regarding the marketing of promotional offers that could result in the loss of a grace period and stated that it “will continue to examine grace period practices to ensure consumers are informed about their operation as effectively as possible and that issuer practices fully comply with the law.”
Other areas discussed in the report include the readability of credit card agreements (which Director Cordray suggested can be shorter and more plainly worded); practices used to evaluate a consumer’s ability to pay; innovations in card security and the use of mobile devices to make credit card payments; and new entrants to the consumer lending market such as marketplace lenders and companies offering innovative point-of-sale financing products.
On January 15, 2016, Ballard Spahr attorneys will hold a webinar on the report from 12 p.m. to 1 p.m. ET. The webinar registration form is available here.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.
If you have questions, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, John L. Culhane, Jr., Mark J. Furletti, Scott M. Pearson, Joseph J. Schuster or Christopher J. Willis.Copyright © 2015 by Ballard Spahr LLP.
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