American Bar Association
Business Law Section
Consumer Financial Services Committee
Annual Meeting – Chicago, Illinois
September 17, 2015
CARD Act: CFPB’s Request for Information
This program will explore the CFPB’s request for information regarding the impact of the CARD
Act, as required by Section 502(a) of the CARD Act (“2015 RFI”). The 2015 RFI covers
statutory requirements the CFPB must review including:
•
the terms of credit card agreements and the practices of credit card issuers;
•
the effectiveness of disclosure of terms, fees and other expenses of credit card plans;
•
the adequacy of protections against unfair or deceptive acts or practices or unlawful
discrimination relating to credit card plans
•
whether implementation of the CARD Act has affected the cost and availability of credit.
This program also will address additional requests on topics that go beyond the statutory
requirements, including:
•
information regarding online disclosures;
•
rewards products, grace periods;
•
deferred interest products, debt collection and ability-to-pay.
Moderator:
Obrea Poindexter, Partner, Morrison & Foerster LLP Washington, DC
Speaker(s):
Will Wade Gery, Consumer Financial Protection Bureau, Washington, DC (Invited)
Sara Buehler, Associate General Counsel, Chicago, IL
Lynne Barr, Partner, Goodwin Procter, Boston, MA
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HC# 4823-0287-5651
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HC# 4823-0287-5651
Credit Card Developments
INTRODUCTION
Credit cards have continued to be a focus of federal regulators over the past 12 months.
The Consumer Financial Protection Bureau (“CFPB”) and other regulators, including the Office
of the Comptroller of the Currency (“OCC”), have issued substantive guidance and taken
significant enforcements actions in the credit card space. The CFPB also has released noteworthy
reports on issues including arbitration, and has solicited extensive information from the credit
card industry to inform its biennial study of the credit card market as required under the Credit
Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”). 1 There also have
been significant market-based and technological developments. This survey (“Survey”)
highlights some of the key developments in the credit card market over the past year.
CREDIT CARD-RELATED DEVELOPMENTS FROM THE CFPB
Guidance on Credit Card Promotional APR Offers
On September 3, 2014, the CFPB issued a bulletin to inform credit card issuers of the
risks of engaging in deceptive or abusive acts or practices in connection with marketing of
promotional annual percentage rate (“APR”) offers (“Promotional APR Bulletin”). 2 In the
Promotional APR Bulletin, the CFPB states that certain solicitations for promotional offers may
1
Pub. L. No. 111-24, 123 Stat. 1734, 1755 (2009), 15 U.S.C. § 1616(a) (2012).
2
Consumer Fin. Prot. Bureau, CFPB Bulletin 2014-2, Marketing of Credit Card Promotional
APR Offers (Sept. 3, 2014), available at
http://files.consumerfinance.gov/f/201409_cfpb_bulletin_marketing-credit-card-promotionalapr-offers.pdf.
1
be determined to be deceptive if they “do not clearly and prominently convey” the terms of a
promotional APR offer and the relationship of such an offer to the grace period. 3 The
Promotional APR Bulletin also cautions that credit card issuers who “fail to provide adequate
information alerting consumers” about the relationship between promotional APR offers and
payments on promotional APR balances may be at risk of engaging in abusive conduct. 4
The Promotional APR Bulletin states the CFPB’s expectation that credit card issuers that
offer promotional APR programs employ marketing materials that clearly, prominently and
accurately describe the program (e.g., the material costs, conditions and limitations, and the
effect of the promotional APR offer on the grace period for new purchases). 5 The Promotional
APR Bulletin also states that credit card issuers are expected to update their compliance
management systems and controls to ensure that promotional APR offers are marketed in a
manner that “limits the risk of statutory or regulatory violations and related consumer harm.” 6
3
Id. at 1. The CFPB indicates that there is a particular risk of deception where a solicitation does
not clearly and prominently convey that a consumer who accepts a promotional offer, and
continues to use the credit card to make additional purchases, will lose the grace period on
additional purchases if the consumer does not pay the entire statement balance, to include the
amount subject to the promotional APR, by the payment due date. Id. at 2-3.
4
Id. at 3
5
Id. at 5.
6
Id.
2
Suspension of the requirement to submit credit card agreements
On April 17, 2015, the CFPB published a final rule that suspends for one year the
requirement under Regulation Z, which implements the Truth in Lending Act (“TILA”), that
credit card issuers submit their card agreements to the CFPB on a quarterly basis (“Final
Suspension Rule”). 7 New Section 1026.58(g) of Regulation Z suspends the Section 1026.58(c)
requirement that card issuers make quarterly submissions of credit card agreements to the CFPB
through the first business day on or after January 31, 2016. 8 According to the commentary
adopted under the Final Suspension Rule, issuers will be required to resume quarterly
submissions the first business day on or after April 30, 2016. 9 Notwithstanding the suspension,
issuers must continue to post credit card agreements on their Web sites. 10
The press release issued with the Final Suspension Rule states that, during the suspension
period, the CFPB “will work to develop a more streamlined and automated electronic submission
7
80 Fed. Reg. 21,153 (Apr. 17, 2015). See also 12 C.F.R. § 1026.58(c) (2014).
8
80 Fed. Reg. at 21,158 (to be codified at 12 C.F.R. § 1026.58(g)).
9
Id. (to be codified at 12 C.F.R. pt. 1026, Supp. I, cmt. 58(g)-1).
10
See id. (to be codified at 12 C.F.R. pt. 1026, Supp. I, cmt. 58(g)-3). See also 12 C.F.R.
§ 1026.58(d). The CFPB indicated that, during the suspension period, it will manually compile
agreements from certain large issuers’ Web sites and make them available to consumers on the
CFPB’s Web site. See 80 Fed. Reg. at 21,154.
3
system” that is “easier for issuers to use than the current manual submission system” and that
enables “faster posting of new and revised agreements” to the CFPB’s Web site. 11
Study on Arbitration as it Relates to Credit Cards
On March 10, 2015, the CFPB released a study on pre-dispute arbitration agreements,
which was conducted pursuant to section 1028(a) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Arbitration Study,” or “Study”). 12 Among other things, the Study
concludes that tens of millions of consumers use consumer financial products or services that are
subject to pre-dispute arbitration clauses; however, the data underlying the Study also makes
1111
See Press Release, Consumer Fin. Prot. Bureau, CFPB Finalizes Rule Aimed at Improving
Credit Card Agreement Submission Process (April 15, 2015), available at
http://www.consumerfinance.gov/newsroom/cfpb-finalizes-rule-aimed-at-improving-credit-cardagreement-submission-process/. Industry commenters urged the CFPB to “consult with financial
institutions before finalizing new technical specifications for the submission of credit card
agreements,” and while the CFPB responded that it will not release the technical specifications
through the notice-and-comment process, it “expects to consult” with financial institutions. See
80 Fed. Reg. at 21,155.
12
Consumer Fin. Prot. Bureau, Arbitration Study: Report to Congress, pursuant to Dodd-Frank
Wall Street Reform and Consumer Protection Act § 1028(a) (March 2015), available at
http://files.consumerfinance.gov/f/201503_cfpb_arbitration-study-report-to-congress-2015.pdf.
See also 12 U.S.C. § 5518(a) (2012) (requiring the CFPB to conduct a study of, and provide a
report to Congress on, the use of arbitration agreements in connection with offering or providing
consumer financial products or services).
4
clear that in many markets (e.g., credit cards, deposit accounts, and prepaid cards), consumers
are likely to have meaningful choice in whether to select a product with a pre-dispute arbitration
clause. 13 With respect to consumers’ understanding of the arbitration agreement, the Study
concluded that dispute resolution plays little to no role in consumers’ choice of a financial
product or service. 14 It should not be a surprise, therefore, that the Study concluded that
consumers were generally unaware of the arbitration clauses or opt-out opportunities in their
credit card contracts. 15 The Study also analyzes the outcomes of arbitration, individual and class
litigation, and suits brought in small claims courts, but the data quality and availability seem to
have limited the CFPB’s ability to draw definitive conclusions. 16
The CFPB is statutorily authorized, but not required, to promulgate regulations that
“prohibit or impose conditions or limitations on the use of” pre-dispute arbitration clauses,
13
The CFPB found that almost half of credit card loans outstanding (approximately 47 percent)
are not subject to pre-dispute arbitration clauses. See Arbitration Study at Sec. 2.3 (Table 1).
14
See Arbitration Study at Sec. 3.4.1.
15
See Arbitration Study at Sec. 1.4.2 (stating that “[c]onsumers are generally unaware of
whether their credit card contracts include arbitration clauses. Consumers with such clauses in
their agreements generally either do not know whether they can sue in court or wrongly believe
that they can do so.”)
16
See, e.g., Arbitration Study at Sec. 4.2.1 (stating that “[t]he Bureau recognizes that the number
of filed arbitrations is not a metric that can be looked at in isolation. We do not know the
numbers of credit cardholders, checking account holders, or payday borrowers with potentially
viable legal claims.”)
5
subject to certain conditions. 17 In order to do so, the CFPB must find that any such prohibition or
limitation is in the public interest and for the protection of consumers. Moreover, such a
Regulation must be supported by findings that are consistent with the Arbitration Study. 18
Proposed Prepaid Card Rule
On December 23, 2014, the CFPB published a proposed rule to regulate prepaid accounts
under Regulation E, which implements the Electronic Fund Transfer Act, and Regulation Z
(“Prepaid Proposal”). 19 Important for purposes of this Survey, to address the select prepaid
account programs that offer overdraft services or credit features, the Prepaid Proposal would
17
See 12 U.S.C. § 5518(b) (2012) (providing that “[t]he Bureau, by regulation, may prohibit or
impose conditions or limitations on the use of an agreement between a covered person and a
consumer for a consumer financial product or service providing for arbitration of any future
dispute between the parties”) (emphasis added).
18
See id. Note that the CFPB included arbitration in its spring 2015 rulemaking agenda
(http://www.consumerfinance.gov/blog/spring-2015-rulemaking-agenda/), and there have been
signals that a proposed rule is forthcoming.
19
79 Fed. Reg. 77,102 (Dec. 23, 2014). Under the Prepaid Proposal, “prepaid account” would
mean a card, code or other device capable of being loaded with funds, not otherwise an account
under Regulation E (or a gift card or certain other types of limited-purpose cards), that is
redeemable upon presentation at multiple, unaffiliated merchants for goods or services, or usable
at either automated teller machines or for person-to-person transfers. Id. at 77,297.
6
amend fundamental definitions and terms under Regulation Z. 20 For example, the Prepaid
Proposal would modify the definition of “credit” under section 1026.2(a)(14) of Regulation Z to
include “an authorized transaction on a prepaid account where the consumer has insufficient or
unavailable funds in the prepaid account at the time of authorization,” as well as “a paid
transaction on a prepaid account where the consumer has insufficient or unavailable funds in the
prepaid account at the time the transaction is paid.” 21
20
Many of the proposed amendments appear to be aimed at preventing circumvention or evasion
of the credit-related restrictions under Regulation Z and Regulation E. See, e.g., 79 Fed. Reg. at
77,204 (stating that “the Bureau is also proposing...to adopt other rules specific to prepaid
accounts that offer credit features…to prevent evasion of the Regulation Z protections.”)
21
79 Fed. Reg. at 77,214. Another definitional change is proposed for the term “finance charge.”
The commentary accompanying the Prepaid Proposal would expand this definition to include
“any service, transaction, activity, or carrying charge imposed in connection with an extension of
credit, for carrying a credit balance, or for credit availability where that fee is imposed on a
prepaid account in connection with credit accessed by a prepaid card….” 79 Fed. Reg. at 77,329.
While the Prepaid Proposal would expressly exempt from coverage as a credit card a prepaid
card where the “prepaid card only accesses credit that is not subject to any finance charge or fee”
and is not “payable by written agreement in more than four installments” (79 Fed. Reg. at
77,333), the modified definition of “finance charge” could render this exemption meaningless.
All prepaid accounts could effectively be viewed as having a credit feature because of the
inability to control so-called force-pay transactions, which can send an account into overdraft,
for example, when a network is offline and uses a stand-in balance or when a merchant does not
7
As a result, under the Proposed Rule, prepaid accounts that access, for a fee, overdraft
services would be considered “credit card accounts” for purposes of Regulation Z. 22 This
treatment is a departure from the Regulation E treatment of overdraft protection for traditional
deposit accounts. 23 In so doing, the CFPB elects not to extend the opt-in right of consumers for
overdraft protection in traditional deposit accounts, in favor of a comprehensive regime
regulating overdraft protections, despite the fact that, in contrast to overdraft protection for
deposit accounts, the CFPB acknowledges that “except for a few exceptions [ ], [prepaid
accounts] are generally not offered with an overdraft service nor other credit features.” 24
Request for Information in Advance of CARD Act Report
seek authorization for the full amount of a transaction (e.g., an authorization for a restaurant
transaction that does not include a tip).
22
To achieve this result, the Prepaid Proposal would amend Regulation Z and Regulation E so
that the existing exemptions for overdraft services on traditional deposit accounts would not
apply to overdraft services on prepaid accounts.
23
See 12 C.F.R. § 1005.17(a) (2014) (defining “overdraft service” to mean a service under which
a financial institution assesses a fee or charge on a consumer’s account held by the institution for
paying a transaction (including a check or other item) when the consumer has insufficient or
unavailable funds in the account).
24
79 Fed. Reg. at 77,106. See also 12 C.F.R. § 1005.17(b) (2014) (setting forth the opt-in
requirement for deposit accounts).
8
On March 19, 2015, the CFPB published a notice and request for information regarding
the impact of the CARD Act, as required by Section 502(a) of the CARD Act (“2015 RFI”). 25
The 2015 RFI, like the 2012 RFI, covers statutory requirements for the review, including: (1) the
terms of credit card agreements and the practices of credit card issuers; (2) the effectiveness of
disclosure of terms, fees and other expenses of credit card plans; (3) the adequacy of protections
against unfair or deceptive acts or practices or unlawful discrimination relating to credit card
plans; and (4) whether implementation of the CARD Act has affected: (i) the cost and
availability of credit, particularly with respect to non-prime borrowers; (ii) the use of risk-based
pricing; or (iii) credit card product innovation. 26
The 2015 RFI also requests information on additional topics that are beyond the statutory
requirements for the review. Specifically, the 2015 RFI requests information regarding online
disclosures, rewards products, grace periods, add-on products, fee-harvester cards, deferred
interest products, debt collection and ability-to-pay. Many of these non-statutorily required
categories arise out of the findings of the 2013 CARD Act report. 27 The CFPB’s report based on
the 2015 RFI is expected later this year.
Report on Increased Consumer Access to Credit Scores through Credit Card Issuers
25
80 Fed. Reg. 14,365 (March 19, 2015). The CARD Act requires that the CFPB conduct this
review every two years (see 15 U.S.C. § 1616(a) (2012)); the last such effort was undertaken
beginning in late 2012 (“2012 RFI”). See 77 Fed. Reg. 75,410 (Dec 20, 2012).
26
See 80 Fed. Reg. at 14,365-14,366.
27
See 80 Fed. Reg. at 14,366. The 2013 CARD Act Report is available at
http://files.consumerfinance.gov/f/201309_cfpb_card-act-report.pdf.
9
On February 19, 2015, the CFPB released a report entitled “Consumer Voices on Credit
Reports and Scores” (“Credit Scores Report”). 28 The Credit Scores Report concludes that a
growing number of financial services companies provide their customers with regular access to
their credit scores, for example, on monthly credit card statements or online, and that such access
provides an opportunity to engage consumers regarding their credit reports. 29 As a result, the
Credit Scores Report concludes that consumers may be motivated to learn more about their credit
histories, check their credit reports, and take action to improve their credit reports and scores. 30
CFPB ENFORCEMENT ACTIONS
Credit Card Add-on Product Enforcement Actions
In July 2015, the CFPB entered into three consent orders with entities that allegedly
engaged in misconduct in offering or facilitating the offering of credit card add-on products. 31 In
the first two consent orders, two credit card add-on product vendors allegedly enrolled
consumers in credit card add-on products that purported to provide consumers with credit
28
Consumer Fin. Prot. Bureau, Consumer Voices On Credit Reports And Scores (Feb. 2015),
available at http://files.consumerfinance.gov/f/201502_cfpb_report_consumer-voices-on-creditreports-and-scores.pdf.
29
Id. at 19.
30
Id. at 19-21.
31
See CFPB v. Affinion Group Holdings, Inc., et al., Case No. 5:15-cv-01005 (D. Ct. 2015);
CFPB v. Intersections Inc., Civil Action No. 1:15-cv-835 (E.D. Va. 2015); In the Matter of
Citibank, N.A.; Department Stores National Bank; and Citicorp Credit Services, Inc. (USA),
CFPB File No. 2015-CFPB-0015 (2015).
10
monitoring and credit report retrieval benefits, and billed consumers for such benefit, but in some
instances failed to provide the full services offered and failed to refund fees to those
consumers. 32 In addition to restitution of more than $7 million, the two vendors were ordered to
pay more than $3 million in civil money penalties. 33
In the third consent order, the CFPB alleged that a national bank and its affiliates engaged
in deceptive marketing of credit card add-on products, conduct that violated the Telemarketing
Sales Rule with respect to telemarketing of certain credit card add-on products, and certain unfair
acts or practices by billing for add-on products and accepting payments for such products
without fully providing the services offered in some instances. 34 As a result of the alleged
conduct, the CFPB ordered the national bank and its affiliates to provide $700 million in
restitution, discontinue the alleged illegal conduct, and pay a $35 million civil money penalty. 35
Fee-Harvester Card Consent Order
32
See Press Release, Consumer Fin. Prot. Bureau, CFPB Takes Action Against Companies For
Unfair Billing Of Credit Card Add-On Products And Services (July 1, 2015), available at
http://www.consumerfinance.gov/newsroom/cfpb-takes-action-against-companies-for-unfairbilling-of-credit-card-add-on-products-and-services/.
33
Id.
34
CFPB File No. 2015-CFPB-0015, at 9-22. See also 16 C.F.R. §§ 310.3(a), 310-4(a)(7)
(Telemarketing Sales Rule).
35
CFPB File No. 2015-CFPB-0015, at 36-47.
11
On February 4, 2015, the CFPB entered into a consent order with a subprime credit card
company for allegedly charging illegal fees and engaging in deceptive acts and practices. 36 With
respect to the allegations of illegal fees, the CFPB alleged that the company assessed an annual
fee and, in certain cases, a paper-based statement fee, which together constituted more than
25 percent of the consumer’s $300 credit limit, in violation of the TILA and Regulation Z
limitation on fees during the first year after account opening. 37 As the consent order relates to
deceptive acts and practices, the CFPB alleged that the company made false statements about
certain fees and implied that security deposits on certain cards would be insured by the Federal
Deposit Insurance Corporation when this was not the case. 38 The credit card company agreed to
pay $2.7 million in restitution and a $250,000 penalty, in addition to submitting plans for
corrective actions and card agreement documentation to the CFPB for the next five years. 39
36
In the Matter of Continental Finance Company, LLC, CFPB File No. 2015-CFPB-0003
(2015), available at http://files.consumerfinance.gov/f/201502_cfpb_consent-order_continentalfinance.pdf.
37
Id. at 6-7. See also 15 U.S.C. § 1637(n)(1) (2012), 12 C.F.R. 1026.52(a)(1) (2014) (providing
that the total amount of fees a consumer is required to pay with respect to a credit card account
under an open-end (not home-secured) consumer credit plan during the first year after account
opening must not exceed 25 percent of the credit limit in effect when the account is opened).
38
CFPB File No. 2015-CFPB-0003, at 7.
39
Press Release, Consumer Fin. Prot. Bureau, CFPB Orders Subprime Credit Card Company to
Refund $2.7 Million for Charging Illegal Credit Card Fees (Feb. 4, 2015), available at
12
SELECT CREDIT CARD-RELATED DEVELOPMENTS FROM OTHER REGULATORS
OCC Enforcement Action Involving Credit Card Add-On Products
On March 26, 2015, the OCC entered into a consent order with a national bank alleging
that practices related to certain credit card add-on products violated Section 5 of the Federal
Trade Commission Act. 40 According to the consent order, the bank’s customers who enrolled in
credit monitoring and credit report retrieval services were required to provide sufficient personal
verification information and consent before their credit reports could be accessed; however,
customers that did not provide the required information or consent were billed for the full fee of
the product. 41 The OCC further alleged that certain customers were charged for the services
multiple times without receiving additional features or benefits from multiple enrollments. 42 The
bank was ordered to provide customers restitution, and the OCC assessed a $6 million civil
money penalty on the bank. 43
Department of Defense Military Lending Act Rule
On July 22, 2015, the Department of Defense (“DOD”) adopted changes to its rules
implementing the Military Lending Act (“MLA”) that expand the scope of the MLA to cover
http://www.consumerfinance.gov/newsroom/cfpb-orders-subprime-credit-card-company-torefund-2-7-million-for-charging-illegal-credit-card-fees/.
40
In the Matter of Santander Bank, National Association, OCC AA-EC-2015-03 (2015). See
also 15 U.S.C. § 45(a)(1) (2012).
41
OCC AA-EC-2015-03, at 2.
42
Id.
43
In the Matter of Santander Bank, National Association, OCC AA-EC-2015-04, at 3 (2015).
13
new types of consumer credit, including credit cards. 44 Generally, under the final rule, consumer
credit is defined to cover any credit extended to a “covered borrower” for personal, family or
household purposes that is subject to a finance charge or is payable by written agreement in more
than four installments. 45
The final rule prohibits a creditor from charging a consumer a military annual percentage
rate (“MAPR”) that is greater than 36 percent for any billing cycle. 46 There are complex rules for
calculating the MAPRs that apply to credit card accounts, which permit creditors to exclude
finance charges, aside from interest, application fees and participation fees, if such fees are
“bona fide” and “reasonable.” 47 The final rule also requires creditors to provide extensive
disclosures to consumers, prohibits creditors from requiring borrowers to submit disputes to
44
80 Fed. Reg. 43,559, 43,607 (July 22, 2015) (to be codified at 32 C.F.R. pt. 232).
45
Id. (to be codified at 32 C.F.R. § 232.3(f)(1)). “Covered borrowers” are defined to include any
consumer who, at the time he or she is obligated on a credit transaction, is a service member who
is on “active duty” or a spouse or dependent of such a person. Id. (to be codified at 32 C.F.R.
§ 232.3(g)(1)). Creditors may use an online DOD database or another method to determine
whether a consumer is a “covered borrower.” Id. at 43,609 (to be codified at 32 C.F.R.
§ 232.5(b)).
46
Id. at 43,608 (to be codified at 32 C.F.R. § 232.4(b)).
47
Id. (to be codified at 32 C.F.R. § 232.4(d)). In general, to determine whether a fee is bona fide
and reasonable and need not be included in the MAPR, a creditor must compare the amount of
the fee with the amount typically imposed by other creditors for the same or a substantially
similar product or service. Id. at 43,608-43,609.
14
arbitration, and prohibits creditors from imposing “onerous” dispute notification requirements. 48
Finally, the final rule provides that any credit agreement that fails to comply with the rules or
contains a provision prohibited under the MLA is “void from the inception of the contract.” 49
Compliance with the DOD final rules for credit cards is required by October 3, 2017. 50
MAJOR DEVELOPMENTS IN THE CREDIT CARD MARKETPLACE
High-profile breaches at major retailers that compromise information relating to millions
of payment card accounts continue to appear in the headlines. For example, on September 18,
2014, The Home Depot confirmed that it had experienced a breach affecting information on
payment cards used at its U.S. and Canadian stores. 51 The Home Depot reported that the breach
may have involved more than 50 million payment card accounts. 52 The Home Depot breach
follows the Target Corporation breach of late 2013 and a number of other high-profile breaches.
Credit card issuers, network providers, retailers and technology providers continue to
invest heavily in technologies to improve cybersecurity. For example, in September 2014, Apple
48
Id. at 43,610-43,611 (to be codified at 32 C.F.R. §§ 232.6, 232.8(c)).
49
Id. at 43,611 (to be codified at 32 C.F.R. § 232.9(c)).
50
Id. at 43,612 (to be codified at 32 C.F.R. §§ 232.13(c)). An appropriate DOD authority may
extend the credit card compliance date for an additional year, until October 3, 2018. Id.
51
Press Release, The Home Depot, The Home Depot Completes Malware Elimination and
Enhanced Encryption of Payment Data in All U.S. Stores; Provides Further Investigation Details,
Updates Outlook, at *1 (Sept. 18, 2014), available at http://media.corporateir.net/media_files/IROL/63/63646/HD_Data_Update_II_9-18-14.pdf.
52
Id.
15
Inc. introduced Apple Pay, a near-field communication (“NFC”) based payment solution
available on select Apple devices. 53 Apple Pay relies on tokenization; that is, instead of using a
primary account number (“PAN”), a unique device account number is assigned, encrypted and
stored in the secure element of the device, and the device account number, along with a
transaction-specific dynamic security code, is used to process each payment. As a result,
consumers using Apple Pay do not reveal their PAN to merchants accepting Apple Pay. Apple
Pay also relies on biometrics to verify the cardholder’s identity.
Another important technological development is the implementation of EMV in advance
of the liability shift, discussed below, in the fourth quarter of 2015. 54 EMV chip cards use
cryptograms that are unique to each transaction and, thus, make it more difficult to counterfeit
cards and limit the value of stolen payment card data (i.e., because the chip produces a one-time
use code for each transaction, the cryptogram has limited value for future use). 55 As of the
October 1, 2015 liability shift date, in-store counterfeit fraud liability will shift to the party that
53
See generally Apple Inc., Your Wallet. Without the Wallet., available at
https://www.apple.com/apple-pay/.
54
Note that the EMV liability shift does not apply to fraud associated with card-not-present
transactions or lost or stolen cards. Fraud related to these types of transactions is subject to
existing liability and chargeback rules.
55
See generally Visa Inc., What’s an EMV Chip Card?, available at
http://usa.visa.com/personal/security/chip-technology/emv-chip.jsp.
16
has not adopted chip technology (i.e., the issuer’s chip card or the merchant’s chip terminal). The
degree of penetration of EMV technology in advance of the liability shift remains uncertain.
dc-803522
17
Nessa Feddis
Senior Vice President & Deputy Chief Counsel for
Consumer Protection and Payments
Center for Regulatory Compliance
202 663 5433
[email protected]
May 18, 2015
Ms. Monica Jackson
Office of the Executive Secretary
Bureau of Consumer Financial Protection
1700 G Street, NW
Washington, DC 20552
Re:
Request for Information
Consumer Credit Card Market
Bureau of Consumer Financial Protection
80 Federal Register 14365 (March 19, 2015)
Dear Ms. Jackson:
The American Bankers Association (ABA)1 is pleased to submit our comments to the request for
information of the Bureau of Consumer Financial Protection Bureau (Bureau) regarding the consumer
credit card market pursuant to the Credit Card Accountability Responsibility and Disclosure Act of 2009
(CARD Act). Section 502(a) of that act requires the Bureau to conduct a review every two years of the
consumer credit card market, including a review of the terms of credit card agreements and practices
and the impact of the CARD Act on the cost and availability of credit, particularly with respect to nonprime borrowers.2 The Bureau requests information about twelve specific topics as well as any
information that may be relevant to a review of the credit card market, including the impact of the
CARD Act on that market.
While the CARD Act was intended to provide consumers with significant benefits, we remain
particularly concerned that the CARD Act has resulted in less credit card credit availability for
consumers, especially subprime consumers, and that this reduction in the availability of credit may have
resulted in people turning to less attractive options to meet their credit needs. ABA urges the Bureau to
assess the extent to which consumers are turning to other sources of short-term credit and to consider
the impact of anticipated, new regulations governing small dollar loans on the availability of legal
alternative sources of credit. The net effect of the entire regulatory scheme may be that many low and
moderate income (LMI) consumers will have few, if any, short-term credit options available within the
1
The American Bankers Association is the voice of the nation’s $15 trillion banking industry, which is
composed of small, regional and large banks that together employ more than 2 million people, safeguard $11
trillion in deposits and extend more than $8 trillion in loans.
2
Consistent with the Bureau’s 2013 CARD Act Report, the impact of the CARD Act should be measured not
from the effective date of the CARD Act, but from the time it was clear that there would be new laws that would
fundamentally impact credit card practices, that is, when or shortly after the Board of Governors of the Federal
Reserve (Board) proposed Regulation AA’s substantive amendments that were later incorporated as key features
into the CARD Act (restrictions on interest rate increases for existing balances). Card issuers would not have waited
until passage of the actual CARD Act or its effective dates to begin considering and making changes to their
business model.
regulated financial system, increasing incentives for recourse to less useful and perhaps even illegal
financial sources by LMI borrowers.
In addition, it is important that the Bureau keep this in mind when it considers imposing regulations
on reward programs and deferred interest programs so as not to encourage further shift to less optimal
products for consumers. We believe these unintended consequences must be identified and evaluated
before the Bureau proposes additional requirements.
ABA’s comment will focus primarily on the reduced availability of credit cards, the higher cost of
credit, rewards programs, and deferred interest products.
IMPACT OF THE CARD ACT ON CREDIT CARD MARKETS
The CARD Act has provided consumers with benefits in terms of an increased ability to predict the
future cost of credit transactions, but this has predictably come with significant negative
consequences, in terms of both the availability and the cost of credit to consumers.
The CARD Act has yielded significant negative consequences for consumers.
 First and foremost, credit card credit is less available, particularly for subprime borrowers
who have limited credit histories or are new to the workforce, including young people and
immigrants.
 Second, for those who are able to attain credit, average credit lines are lower than preCARD Act levels.
 Third, borrowers who are able to obtain credit cards face higher costs of credit than they
otherwise would in the absence of the CARD Act.
On the surface, there have been positive developments from the CARD Act for some customers. For
example, (with few exceptions) interest rate increases on existing balances have been eliminated. Less
than one percent of existing balances are now re-priced, compared to nearly 6% of accounts in the
fourth quarter of 2009. Consumers are paying substantially less in late payment and over-the-limit fees.
The average monthly late payment fee has declined from $2.75 at the end of 2008 to $1.48 in the fourth
quarter of 2014. This drop in monthly fees reflects both a decrease in the number of delinquent
accounts and a decline in the average late fee per incidence. Similarly, over-the-limit fees have fallen
from $1.10 in Q4 2008 to just $0.01 in Q4 2014.

Availability of Credit
A key component of the CARD Act protects customers from unexpected interest rate increases on
existing credit card balances; however, there have been significant trade-offs. First, because card issuers
(1) receive imperfect information about potential borrowers at the time of application, and (2) are now
limited in their ability to raise interest rates on existing balances to cover increases in risk, they are more
2
likely to deny credit to applicants seen as potentially high-risk. For the same reasons, they are also more
likely to impose higher interest rates at the outset of the lending relationship to cover risks adequately.
Second, card issuers’ limited ability to raise interest rates on existing balances has caused credit card
issuers to reduce the availability of credit for borrowers that present risks that are more difficult to
evaluate, typically borrowers with lower risk scores.
The effect of the CARD Act is clear from the data. As shown in Table 1, the distribution of accounts
by risk type has shifted towards “super-prime” borrowers, as these low-risk borrowers’ share of
accounts increased over the last six years, while the shares of subprime accounts and prime accounts
have decreased. The number of super-prime accounts has surpassed its 2008 high of 151 million, yet
subprime and prime account volume remain down 35% and 16%, respectively. Further, the number of
new subprime accounts (opened for less than 24 months) in 2014 was roughly half of 2008 levels; yet
new super-prime account volume has largely rebounded from recession levels.
These data clearly indicate that credit has become more constrained for higher risk borrowers since
passage of the CARD Act. Managing credit cards is an important way for people to build their credit
history and become eligible for other types of loans (e.g., auto loans and mortgages), so when subprime
borrowers cannot obtain credit cards, their future financial choices are more limited.3 Indeed, as
Director Cordray recently stated, “[a lack of] credit history can create real barriers for consumers looking
to access the credit that is often so essential to meaningful opportunity – to get an education, start a
business, or buy a house. Further, some of the most economically vulnerable consumers are more likely
to be credit invisible.”4
Table 1: Account Volume and Distribution by Risk, 2008 – 2014
Risk Category
Super-prime
(Credit score > 759)
Prime
(Credit score = 680 – 759)
Subprime
(Credit score < 680)
Distribution of Accounts
2008.Q4
2014.Q4
46.9%
Total Accounts (millions)
New Accounts (millions)
2009.Q4
2014.Q4
% Change
2009.Q4
2014.Q4
% Change
52.3%
151
160
6%
28
27
-4%
30.0%
28.6%
105
87
-16%
29
23
-23%
23.0%
19.1%
89
58
-35%
35
19
-46%
Source: Argus Information and Advisory Services, Keybridge LLC
Data in this chart include general purpose cards issued by companies that provide data to Argus, covering over 90% of the general purpose
credit card market.
3
While we have not reviewed data based on age, young people may also have been denied access to credit
card credit as a result of the CARD Act, given their lack of credit history and the specific provisions of the Act
related to people under 21 years of age. The lack of access may have impacted young people’s ability to build a
credit history and caused them to turn to alternative, less attractive credit products.
4
“CFPB Report Finds 26 Million Consumers Are Credit Invisible,” CFPB Newsroom, May 5, 2015.
3

Credit lines
Data showing declines in individual credit card lines also demonstrate a contraction in credit card
credit. As shown in Table 2, since 2008, average credit lines have declined for all three risk categories,
but this trend is most pronounced for subprime and prime accounts. The average credit line for
subprime accounts has declined in seventeen of the last nineteen quarters and is 24% below its 2009
high, while the average credit line for prime accounts is down 29% from the first quarter of 2009.
Table 2: Average Credit Line for New and All Accounts, 2009 – 2014
Total Accounts ($)
Risk Category
Super-prime
(Credit score > 759)
Prime
(Credit score = 680 – 759)
Subprime
(Credit score < 680)
New Accounts ($)
2009.Q4
2014.Q4
% Change
2009.Q4
2014.Q4
% Change
$12,799
$11,097
-13%
$10,012
$8,867
-11%
$10,025
$7,156
-29%
$6,605
$4,922
-25%
$4,747
$3,613
-24%
$3,278
$2,352
-28%
Source: Argus Information and Services, LLC, Keybridge LLC

Cost of credit
As ABA noted in our comment for the last CARD Act review, the CARD Act appears to be making
credit more expensive. For example, continuing prior trends, the average purchase annual percentage
rate (APR) has risen from 14.23% in the fourth quarter of 2008 to 15.87% at the end of 2014. In addition,
annual fees have also increased, as 12% of accounts now pay an annual fee (up from 10% in 2008), and
the average annual fee is $62.31 as of the fourth quarter of 2014 (up from $53.43 in 2008). Further,
while the effective finance charge yield for all accounts has fallen steadily since early 2010,5 this is
largely a function of the sharp reduction in credit availability to prime and subprime borrowers. Indeed,
when looking only at new accounts, the effective finance charge yield has increased by 23 basis points
since the beginning of 2013, suggesting that the cost of credit for these new accounts is increasing
relative to the overall portfolio of accounts.
5
The effective finance charge yield is the annualized interest income generated by a portfolio expressed as a
percentage of a portfolio’s assets.
4
Table 3: Annual Fees, 2008 – 2014
Average Annual Fee
($, All Accounts)
Accounts with Annual Fee
(Percent of Total)
2008.Q4
2014.Q4
Change
$53.43
$62.31
$8.88
(17% increase)
10%
12%
2.0%
Source: Argus Information and Advisory Services, LLC; Keybridge LLC
Further, as noted in our prior comment letter, the discrepancy between credit card cost trends and
trends in other consumer credit types suggests that factors unique to the credit card market—most
likely the CARD Act – are keeping credit costs elevated.
This conclusion is reinforced when the consumer credit card market is compared to the small
business credit card market, which is not covered by the CARD Act (See Table 4). The sharp movement
away from subprime accounts in the consumer card market is not reflected in data from the small
business card market, as the share of subprime business card accounts in 2014 (13.4%) is largely
unchanged since 2008 (13.6%). Moreover, small business accounts have experienced a smaller increase
in average APR since the end of 2008 (up 6.5%) than that seen in consumer accounts (up 11.5%),
suggesting that card issuers may be increasing initial rates in response to the CARD Act. This is an
unintended but entirely predictable market response to the CARD Act.
Table 4: Average Purchase APR for Consumer and Business Accounts, 2008 – 2014
Average Purchase APR
Credit Card Type
Consumers
(All Accounts)
Small Businesses
(All Accounts)
2008.Q4
2014.Q4
% Change
14.2%
15.9%
11.5%
13.9%
14.8%
6.5%
Source: Argus Information and Advisory Services, LLC; Keybridge LLC
ABILITY TO PAY
The ability to repay provision of the CARD Act is causing some qualified borrowers to be denied
credit, particularly lower-income individuals.
Section 1026.51(a) of Regulation Z, which implements Section 109 of the CARD Act, provides that
card issuers must not open a credit card account or increase any credit limit unless the card issuer
“considers the consumer’s ability to make the required minimum periodic payments under the terms of
the account based on the consumer’s income or assets and the consumer’s current obligations.” It
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further provides, “It would be unreasonable for a card issuer not to review any information about a
consumer’s income or assets and current obligations or to issue a credit card to a consumer who does
not have any income or assets.” While well-intentioned, this “ability to pay” requirement is causing
some otherwise qualified consumers to be denied credit card accounts or to receive lower credit limits
— particularly lower-income individuals.
While the requirement to “consider” the applicant’s income and assets is not prescriptive, data
suggest that card issuers seeking to avoid supervisory criticism apply the Regulation Z ability to pay rule
strictly. As shown in Table 2, compared to the first quarter of 2009, average credit lines were down 28%
for new subprime accounts, 25% for new prime accounts, and 11% for new super-prime accounts in Q4
2014. Additionally, as previously discussed, new account volumes are also down (particularly for
subprime and prime borrowers, who tend to have lower incomes than super-prime borrowers). Put
simply, a significant number of applicants who would otherwise qualify for a credit card account under
the issuer’s underwriting standards are being rejected due to Regulation Z’s ability to pay provisions.
In addition to Regulation Z, other regulatory factors also have impacted how card issuers grant
credit and increase credit lines. For example, the Office of the Comptroller of the Currency (OCC)
generally limits card issuers’ use of income estimators. This means that when opening an account, card
issuers subject to OCC examination are limited to considering only the income figure provided on the
application, which might not include non-wage income. This requirement also may delay or even
prevent a credit line extension for customers who have demonstrated a positive change to their risk
profile, because card issuers often have difficulty obtaining updated income information from
customers. The difficulty in increasing credit lines due to the ability to repay requirement makes it
difficult for issuers to provide sustainable accounts to higher risk borrowers through a traditional
approach to managing exposure to higher risk customers, such as by initially extending credit to these
borrowers but with low credit limits and then raising those credit limits as the borrowers demonstrate
their ability to manage their accounts. This means that many low and moderate income consumers,
whom the CARD Act was intended to help, now have less access to credit cards to help them manage
unexpected expenses or larger purchases.
REWARDS PROGRAMS
The Bureau has requested information on consumer understanding of rewards card programs and
the potential benefits and costs of requiring additional disclosures. Rewards programs are an important
tool for virtually all types of consumer-oriented businesses that depend on loyal, repeat customers.
Not surprisingly, programs in the form of rewards that are unique to the card issuer as well as
rewards that are offered in partnership between a card issuer and other businesses are highly popular
with credit card holders, as reflected in data showing significant growth of such accounts. At the end of
2014, there were approximately 251 million rewards card accounts, and spending with rewards cards
neared 90% of total credit card spending.
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
Consumers like and understand rewards.
The growth of rewards programs demonstrates their popularity across all risk categories. (See
Figure 1.) Since 2008, use of rewards cards has grown –
 from 42% to 59% for subprime accounts;
 from 60% to 73% for prime accounts; and
 from 65% to 79% for super-prime accounts.
The number of rewards card accounts has increased 8% since 2010, while non-rewards accounts have
decreased nearly 46% over this period. Rewards cards now make up 73.3% of total credit card accounts.
(See Figure 2.) Among new accounts, the growing popularity of rewards is even more apparent,
accounting for 78.9% of new account volume in the fourth quarter of 2014.
Figure 1: Rewards Card Accounts as Share of Total Accounts, by Risk Category
Rewards Cards Share of Total Accounts, by Risk Category
Percent
100%
Super-prime
80%
Prime
60%
Subprime
40%
20%
0%
2008.Q4
2009.Q4
2010.Q4
2011.Q4
2012.Q4
2013.Q4
2014.Q4
Source: Argus Information and Advisory Services, LLC; Keybridge LLC
7
Figure 2: Share of Total Account Volume, Rewards vs. Non-Rewards
Share of Total Account Volume, Rewards Cards vs. Non-Rewards Cards
Percent
Rewards Cash/Points/Miles
100%
75%
50%
Rewards –
Air Co-brand
Rewards –
Non-Air Co-brand
Non-Rewards
Data Missing
3%
42%
16%
36%
20%
29%
30%
27%
22%
22%
25%
6%
6%
6%
6%
35%
33%
20%
20%
5%
5%
5%
37%
36%
40%
41%
42%
42%
42%
2008.Q4
2009.Q4
2010.Q4
2011.Q4
2012.Q4
2013.Q4
2014.Q4
25%
0%
Source: Argus Information and Advisory Services, LLC; Keybridge LLC
In Q4 2014, rewards spending accounted for 90%, or $377 billion, of total credit card spending, up
from 79% in 2008. (See Figure 3.) These spending trends are consistent across risk categories and types of
rewards cards. For example, for the category of cash/points/miles cards (which make up more than half
of rewards card accounts), average monthly spending for subprime accounts in 2014 was 84% higher than
non-rewards cards, while for prime accounts it was 131% higher and for super-prime accounts it was
230% higher. Similarly, for non-airline cobrand cards (which comprise 35% of rewards card accounts),
average monthly spending was 63%, 53%, and 138% higher for subprime, prime, and super-prime
accounts, respectively, than for non-rewards cards. Consumers’ heavy reliance on rewards cards reflects
their popularity and an increased level of engagement that reduces the likelihood of consumers losing out
on rewards points due to inactivity.
Rewards card customers also report that they understand how to use their credit card rewards
program. An Ipsos Public Affairs survey released in March 2015 found that 93 percent of those with a
credit card rewards program found that it was “very easy” or “somewhat easy” to understand how to use
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their credit card rewards program. The 2014 J.D. Power survey found that 97 percent of consumers with a
rewards credit card understand and 63 percent of them “completely” understand how to earn credit card
rewards.6 It also found that 80 percent of consumers “completely” understand the redemption process.7
Moreover, consumer complaints related to rewards cards are very limited. As of April 7, 2015, only
2% of the credit card complaints contained in the Bureau’s Consumer Complaint Database related to bank
and credit union “rewards,” providing further evidence that consumers understand the terms of rewards
programs, view rewards cards favorably, and reap substantial benefits from them.
Figure 3: Total Credit Card Spending, Rewards vs. Non-Rewards, 2008 – 2014
Total Credit Card Spending, by Product Type
$ Billions, All Accounts
Rewards Cash/Points/Miles
Rewards –
Air Co-brand
Rewards –
Non-Air Co-brand
Non-Rewards
Missing
$480
$420 B
$400
$389 B
$369 B
$345 B
$329 B
$321 B
$320
$293 B
$240
$160
79%
86%
85%
81%
90%
89%
88%
$80
$0
2008.Q4
2009.Q4
2010.Q4
2011.Q4
2012.Q4
2013.Q4
2014.Q4
Source: Argus Information and Advisory Services, LLC; Keybridge LLC

6
7
Consumers who use rewards cards are engaged and manage them well, further demonstrating
that they value and understand the programs.
J.D. Powers, “2014 U.S. Credit Card Satisfaction Survey,” at 80.
Id. at 85.
9
Data show that rewards card accounts have significantly higher monthly payment rates than do nonrewards accounts. For non-rewards accounts, the average monthly payment is 11.6% of the outstanding
balance, but monthly payment rates are 24.6% for cash/points/miles accounts, 32.5% for non-airline
cobrand rewards accounts, and 48.4% for cobrand airline accounts. This trend holds true across all three
risk categories. Rewards accounts also are maintained at a higher rate than non-rewards cards. Using
January 2013 as a reference point, the retention rate for rewards accounts in December 2014 was 81.0%,
while the retention rate for non-rewards accounts was 74.6%. Our members report that sustained use of
a card and responsible management of spending and payments is consistent with customer
understanding of the card account, including the rewards terms.

Rewards offer consumers a wide array of choices.
Rewards programs are varied, and consumers have choices about the type of rewards as well as the
card issuer and credit card terms. Consumers can choose programs that are tied solely to credit card use
or “partnered” rewards programs in which a third party, such as an airline, is involved. Some programs are
card-specific, and others are “tender neutral” in that rewards can be earned using any payment channel
— the rewards card, a check, debit card, or cash. Rewards also may accumulate through miles traveled or
other alternative mechanisms. Further, although some rewards are in the form of “cash back,” others are
in the form of points or benefits that can only be used for certain purposes or at certain businesses. In
programs where rewards are earned in the form of points or other credits, such as airline miles, the nonbank partner (e.g., an airline) establishes the specific terms of the rewards (e.g., redemption and breakage
rules), while the card issuer merely acts as one of several contributing partners. In these cases, the bank
cannot control critical terms and how and when they may change and evolve.
The broad variation in rewards programs reflects the wide array of choices that consumers have
already made. However, unlike the purely monetary features of a credit card, rewards reflect other more
subjective choices such as preferences for a particular airline or retail merchant. These preferences
cannot be compared meaningfully in monetary or objective terms, and any effort to create a standardized
comparison system or disclosure regime would encounter difficult, and perhaps insurmountable, hurdles.
Moreover, the fact that many rewards programs are operated by third parties, which would not be
subject to a new disclosure requirement, would introduce an unlevel playing field that could lead to
consumer confusion rather than increased understanding. Finally, while we do not believe it is feasible to
create “uniform” disclosures given the diversity of programs, the Bureau should have clear evidence of
consumer lack of understanding before imposing expensive new disclosure regulations, the costs of which
would be reflected in what consumers pay.
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DEFERRED INTEREST PRODUCTS
The Bureau has asked for information about deferred interest products that allow the customer to pay
for the purchase over time interest-free, but retroactively assess interest if the balance is not paid in full
by a specific date. Such programs include those offered and paid for by retailers under agreements with
credit card issuers. Much like a discount or sale, the deferred interest is a means for retailers to attract
customers, compete, and increase sales. Deferred interest products also increase engagement and loyalty
with a retailer’s customer base by providing customers with the tools they desire to make large ticket,
unexpected purchases.

The deferred interest programs are popular and beneficial to consumers and retailers.
Deferred interest programs provide consumers with an option to defer payment and avoid paying
interest for the deferral period. Frequently, this option is provided at no cost to the consumer. These
programs are particularly beneficial and attractive to consumers who unexpectedly must make a large
purchase and lack the necessary funds or savings to do so.8 Deferred interest options allow them to make
the purchase when they need to and spread the payments over time without incurring interest charges, if
paid as agreed. Customers benefit from periodic payments that work with their budget, and they can
avoid paying interest.9
As the Bureau found, “even among subprime consumers, a majority of consumers” who choose the
deferred interest plan repay within the deferred interest period and benefit from the free loan.10 One
credit card issuer reports that 80 percent of its customers repay within the deferred interest period. It
reports that of the 20 percent who do not, 75 percent repay in full within twelve months, demonstrating
responsible financial management. Only five percent of deferred interest customers do not repay within
twelve months after the end of the deferred interest period, which includes those whose accounts are
eventually charged off and who never repay their debt. The minority of deferred interest customers who
do not repay within the deferred interest period behave as other revolvers, and with or without the
deferred interest option, would likely have revolved their balance. Moreover, research shows that those
who pay interest choose deferred interest programs again, demonstrating that these customers
understand and value the program.
8
One issuer reports that 58 percent of its deferred interest customers used the deferred interest feature to
purchase a household product that was broken or worn down.
9
Moreover, the majority of consumers who do not repay within the deferred interest period pay no more –
and may pay less – than what they would have paid if they had charged the purchase to a general purpose credit
card without the deferred interest option. Depending on the program, customers who repay in full within 12
months of the end of the deferred interest period may pay less than they would have paid if they had charged the
purchase to another card and paid interest from the date of purchase, even if the interest rate on the other card is
lower. This assumes they are continuing to use the card for purchases and making payments and are not just
paying down the balance. Some customers using a deferred interest payment option may not have a card with a
lower rate. Those that do have the option to transfer the balance to a card with a lower interest rate at any time.
10
80 FR 14366 (March 19, 2015).
11

Consumers understand the product.
Providing consumers with a free option to defer payment clearly benefits consumers. ABA cautions
the Bureau against imposing additional disclosure obligations in the absence of clear evidence of
consumer misunderstanding of the terms of deferred interest programs, which available data do not
show. Indeed, the large percentage of those who repay without paying interest and the repeated use by
those who do is strong evidence that consumers understand deferred interest products. Moreover, the
disclosures consumers receive, both those required by federal regulations and those provided voluntarily
by lenders, help to ensure customers understand the terms before entering the agreement.
Under Regulation Z, card issuers must provide special disclosures related to deferred interest
balances and reminders of the date by which borrowers must pay to avoid paying accrued interest
charges. Specifically, card issuers must disclose the timeframe of the promotion period and the postpromotional APR clearly and conspicuously and may only use the phrase “no interest” if the phrase “if
paid in full” precedes disclosure of the deferred interest period. In addition, during the deferred interest
period, the front page of every periodic statement must disclose separately the deferred payment balance
and deferred interest as well as the due date by which the deferred interest balance must be paid to
avoid the deferred interest. Each periodic statement provided during the deferred interest period must
contain language similar to, “You must pay your promotional balance in full by [date] to avoid paying
accrued interest charges.” Furthermore, under the regulation, consumers may request that payments be
made to the deferred interest rate balance rather than to a high-interest rate balance. Banks are routinely
examined to ensure compliance with these regulations.
In addition, some issuers voluntarily provide enhanced disclosures. For example, some provide
information about the deferred interest on the receipt. Others, in addition to the reminder required to be
in the periodic statements, phone, e-mail, and text customers in the two months prior to the end of the
deferred interest period to remind them that they will owe the deferred interest if they do not pay in full
by end of the deferred interest period.
Because retailers also have a strong interest in their customers’ experience and satisfaction with
their brand and store, they work closely with any credit card partner to ensure customer satisfaction with
regard to the deferred interest program. Issuers will cancel the relationship with a partner if there are a
noticeable number of complaints.
Moreover, our members continue to analyze consumer communications to determine whether they
may be improved to ensure that consumers understand the product, the consequences of not paying in
full before the end of the deferred interest period, and the date by which they must pay in full to avoid
paying the deferred interest.
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GRACE PERIODS
Card issuers have tested or are testing language to ensure that consumers understand the
implications of losing a grace period if a promotional or deferred interest balance is not paid in
full.
The Bureau has asked about consumer understanding of “grace periods.” Most card issuers offer
consumers a grace period on new purchases if the previous balance has been paid in full. Consumers are
increasingly taking advantage of grace periods. The share of “transactors,” or individuals who pay off their
balance in full each month, comprises nearly a third of all accounts, up from 21% in 2008.
With regard to customer understanding of grace periods, the Bureau’s September 3, 2014, Bulletin11
reflects its concern that customers may not understand that a grace period for new purchases is
conditioned on full repayment of a balance subject to a promotional rate (e.g., a balance transferred from
another credit card or balance reflecting a special purchase) or deferred interest. The Bulletin reminded
card issuers to ensure that marketing materials clearly state the impact on the grace period if a customer
does not pay in full by the statement due date the deferred interest or promotional balance. More
specifically, all marketing materials must “clearly, prominently, and accurately describe the material costs,
conditions, and limitations associated with the offers” and “prominently and accurately describe the
effect of promotional APR offers on the grace period for new purchases.”
Card issuer practices vary with regard to continuing to provide a grace period even though a
promotional or deferred interest balance has not been paid in full. In light of the Bulletin, card issuers
have tested or are testing language to ensure they are in compliance and that consumers understand
their disclosures. For example, one card issuer is moving away from the use of the term “grace period,” as
its testing suggests it is not always understood. Instead, language such as “you will start to pay interest
from…” or “when you begin to pay interest” more clearly conveys the practice and its consequences.
DISCLOSURES OF TERMS, FEES, AND OTHER EXPENSES, AND ONLINE DISCLOSURES
Credit card agreements were simplified and made more readable during the period between
2008 and 2012. Further simplification is not immediately expected in follow-up to these
efforts, particularly in view of legal requirements that affect content and length.
The Bureau has asked whether the length and complexity of credit card agreements have changed
over the last two years, and it has inquired about the effectiveness of disclosures of credit card fees and
terms. As the Bureau found in its CARD Act Report of 2013, card issuers have streamlined their credit card
agreements in recent years.
Card issuers continue to evaluate the readability of their agreements and make appropriate
adjustments, even following the substantial efforts made between 2008 and 2013. Legal requirements,
11
See CFPB Bulletin 2014-02.
13
including regulatory requirements, have however constrained opportunities for further significant
simplification of credit card agreements in the current time frame.
ONLINE DISCLOSURES
The Bureau notes that its prior study found that “most consumers who make on-line payments do not
access their monthly statement and instead use online portals which do not contain these disclosures.” It
asks how card issuers ensure consumers who use different channels, including mobile, receive effective
disclosures, both at the point of application and in managing existing accounts.
Although this inquiry is couched in terms of online disclosures, the Bureau is raising a broader issue
about the effectiveness of disclosures— regardless of whether they are accessed in paper or electronic
format – and when they are read. The Bureau, for example, has not suggested that cardholders make the
minimum payment online more frequently than they make the minimum payment by other means. Nor
has the Bureau established a causal relationship between any such payment behavior and whether or not
the minimum payment disclosures have been read and understood by the cardholder.
ABA encourages the Bureau to explore the effectiveness of credit card disclosures broadly and the
costs of any changes in disclosure requirements, as we believe that there are opportunities for simplifying
and making credit card disclosures more effective.12 However, before adopting any new disclosure rules,
which will impose significant costs on creditors, testing and data should demonstrate that such changes
will have a significantly positive consumer impact. Also, any such review should not relieve consumers
from exercising their responsibility to review statements or other disclosures that are readily accessible
through the click on a link on a website or the tap of a key on a keyboard.
INNOVATION
The Bureau has also asked whether the CARD Act has impacted innovation. It is axiomatic that it is
difficult to measure what has not happened. Clearly, the CARD Act limitations on issuer practices have
prevented innovation in areas that are prohibited by the Act. More broadly, however, ideas not presented
or pursued cannot be evaluated or measured. Card issuers may be reluctant to advance innovative
features out of fear that after significant investment in a novel feature that distinguishes them from their
competitors, a regulator or plaintiff’s lawyer will second guess the card issuer and challenge the feature as
noncompliant with the Truth in Lending Act or as an unfair, deceptive, or abusive act or practice. The
regulatory risk can be too high to take the chance. Thus, while it is difficult if not impossible to provide
12
See ABA comment letter of September 10, 2014, on the Bureau’s request for information on the use of
mobile financial service by consumers and its potential for improving the financial lives of economically vulnerable
consumers. The letter notes, for example, that banks are improving mobile banking experience as they overcome
technical challenges to be able to optimize the browsing experience (e.g. allow easy centering of personal
information through a small screen) to be able to offer mobile access through a mobile’s browser.
http://www.aba.com/Advocacy/commentletters/Documents/clMobilePaymentsFinal091014.pdf
14
specific examples of “the road not taken,” we believe that the CARD Act and other regulations operate to
suppress a climate of innovation that would be beneficial to consumers.
CONCLUSION
While the CARD Act has benefited some consumers, there have been important tradeoffs. Credit card
credit has become less available to consumers, particularly subprime consumers, which may have caused
them to shift to less attractive credit options. In addition, credit card credit has become more expensive.
The Bureau should be mindful of such potential shifts to less optimal sources of consumer credit when
considering regulation for reward and deferred interest programs. We appreciate the opportunity to
comment on this important subject and are happy to discuss further.
Sincerely,
Nessa Eileen Feddis
Cc. Dan Smith, Assistant Director, Office of Financial Institutions and Business Liaison
15
CFPB CARD Act
Request for
Information
American Bar Association
Business Law Section
Consumer Financial Services Committee
Obrea
Poindexter
Annual
Meeting
September 17, 2015
CARD Act RFI Overview
• On March 19, 2015, the CFPB published a notice and RFI on the
impact of the 2009 Credit Card Accountability Responsibility and
Disclosure Act (“CARD Act”)
– The CARD Act requires the CFPB to conduct a review of the
consumer credit market every two years
– The first CFPB RFI on the consumer credit market was published
in late 2012, culminating in the 2013 publication of the CFPB’s
first CARD Act report
– The CFPB said the comments received on the current RFI will
help the CFPB “inform future policy decisions”
mofo
1
CARD Act RFI Overview
• The CARD Act RFI solicited information on several statutorily
required topics, including:
– The terms of credit card agreements and the practices of credit card
issuers
– The effectiveness of disclosures of terms, fees and other costs of
credit card plans
– The adequacy of protections against unfair or deceptive acts or practices
– The CARD Act’s impact on the cost and availability of credit
• Focus on non-prime borrowers
• The use of risk-based pricing
• Credit card product innovation
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2
CARD Act RFI Overview
• The CARD Act RFI solicited information on six additional topics
covered in the CFPB’s 2013 CARD Act report:
– Online disclosures – How consumers receive required
disclosures through online and mobile channels
– Rewards products – Are rewards disclosures made in a
transparent and understandable manner?
– Grace periods – Do consumers understand grace periods and
can disclosures be more transparent?
– Add-on products – How to prevent unfair or deceptive
practices
– Fee harvester cards – How prevalent and what costs
– Deferred interest programs – Do vulnerable consumers
understand risks?
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3
Rewards Programs
• The CFPB requested information on consumer understanding of, and
the transparency with which issuers disclose to consumers,
information regarding eligibility, value and other rules that apply to
rewards offers associated with credit cards
• The CARD Act RFI also solicited information on the potential benefits
and costs of requiring additional disclosures
– Use of credit cards associated with rewards programs has grown across all
risk categories since 2008
– The 2013 CARD Act report cites a study that reveals that “an attractive
rewards program” is the leading reason to apply for a credit card
– The ABA, in its RFI comment letter, said that at the end of 2014, there
were approximately 251 million rewards card accounts, and spending with
rewards cards neared 90% of total credit card spending
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4
Grace Periods
• In September 2014, the CFPB issued a bulletin to inform credit card
issuers of the risks of engaging in deceptive or abusive acts or
practices in connection with the marketing of promotional annual
percentage rate (“APR”) offers
• The CFPB bulletin states that certain solicitations for promotional
offers may be determined to be deceptive if they “do not clearly and
prominently convey” the terms of the promotional APR offer and the
relationship of such an offer to the grace period
• Following this guidance, the CARD Act RFI asked for information
about consumer understanding of “grace periods”
• The RFI noted two 2013 CARD Act report observations
– For consumers who do not pay their balance in full each month, a key
determinant of their cost of credit is the grace period
– Disclosing the complex rules governing the availability of a grace period
is quite challenging
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5
Promotional Rate Programs & Deferred Interest Programs
• The CARD Act RFI solicited information on deferred interest programs
– What alternatives to deferred interest products exist for “vulnerable
consumers”
– Such consumers’ understanding of the costs associated with retroactively
assessed interest
• The 2013 CARD Act report identified concerns related to “the potential risks
to consumers posed by deferred interest products” and “whether those
consumers appreciate the high interest rate risk that might occur at the end
of the promotional period”
• Notwithstanding the perceived risk identified in the 2013 CARD Act report,
the RFI acknowledges that, across all consumer risk tiers, most consumers
benefit from the interest savings in deferred interest programs
– The RFI states that “even among subprime consumers, a majority of consumers”
who choose a deferred interest plan repay within the deferred interest period and
benefit from the free loan
– And, the success rate for consumers as a whole exceeds 80 percent
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6
Add-On Products
• The CFPB also requested information regarding so-called add-on
products
– The CFPB notes that credit card issuers market or have marketed various
‘‘add-on’’ products to card users, including debt protection, identity theft
protection, credit score monitoring, and other products that are
supplementary to the extension of credit
– The CFPB said it has found through its supervisory and enforcement
work that add-on products are frequently sold in a manner that is unfair,
abusive or deceptive
• The CARD Act RFI solicited information regarding
– The frequency with which card issuers offer additional products that are
supplementary to the extension of credit
– The steps issuers take to prevent unfair, abusive or deceptive marketing
practices with respect to such products
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7
Table 1: Account Volume and Distribution by Risk,
2008 – 2014
Source: Argus Information and Advisory Services, Keybridge LLC
Data in this chart include general purpose cards issued by companies that provide data to Argus,
covering over 90% of the general purpose credit card market.
Table 2: Average Credit Line for New and All
Accounts, 2009 – 2014
Total Accounts ($)
Risk Category
Super-prime
(Credit score > 759)
Prime
(Credit score = 680 – 759)
Subprime
(Credit score < 680)
New Accounts ($)
2009.Q4
2014.Q4
% Change
2009.Q4
2014.Q4
% Change
$12,799
$11,097
-13%
$10,012
$8,867
-11%
$10,025
$7,156
-29%
$6,605
$4,922
-25%
$4,747
$3,613
-24%
$3,278
$2,352
-28%
Source: Argus Information and Services, LLC, Keybridge LLC