Deferred and waived interest programs, convenience checks, promotional rates, and grace periods are popular credit card features with consumer, creditors, and retailers – as well as the Consumer Financial Protection Bureau (CFPB). Last year the CFPB signaled to the industry that it had concerns about use of these loan features and doubts regarding consumer understanding of the proper use of credit containing these features. Earlier this week the CFPB issued Bulletin 2014-02, which provides more detailed guidance on the marketing of grace periods and promotional rates for credit cards.
It is important to keep in mind that although the Bulletin was directed to credit card issuers and credit card programs, it should serve as a lesson for any creditor that offers credit with similar features. Any creditor that offers deferred or waived interest programs should incorporate this guidance into their policies and procedures.
What is a Grace Period?
Based on its studies, the CFPB believes that many consumers cannot accurately define what the “grace period” is on their credit cards. Regulation Z defines a “grace period” as:
The date by which or the period within which any credit extended may be repaid without incurring a finance charge due to a periodic interest rate and any conditions on the availability of the grace period. (12 C.F.R. § 1026.5.)
In practical terms, this means if a consumer’s credit account carries a balance, he will not have a grace period and will incur finance charges – even if the consumer pays off a new purchase. This is best demonstrated by way of example.
- March 1 – Consumer makes a $1,500 purchase (has unpaid balance of $100)
- March 15 – Billing cycle closes
- April 6 – Payment due date
- April 5 – Consumer pays off $1,500 purchase
Because the consumer had an outstanding balance, he does not have a grace period. His next periodic statement will include finance charges on a balance of $1,600 going back to the original purchase date, plus finance charges on the remaining balance of $100 through the end of the billing cycle.
Regulation Z requires credit card issuers to disclose the grace period in four points during the customer relationship using prescribed “safe harbor” language: (i) on or with solicitations or applications to open a credit card account; (ii) at account opening; (iii) on periodic statements; and (iv) with checks that can be used to access a credit card account. Even if a creditor provides these four disclosures, which consist of language provided by the agency, in a way that complies with Regulation Z, the creditor is not insulated from UDAAP claims related to the marketing and implementation of credit that contains grace periods. However, as discussed above, the CFPB is concerned that the 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. The importance of this should not be lost on creditors and their retail partners.
- Avoid Misleading Claims. As expected, when marketing promotional rates and grace periods, card issuers promote the benefits associated with these credit features, such as saving money and avoiding interest charges. The Bureau has observed some issuers either do not include any information about the loss of the grace period, or include the information but obfuscate it through “fine print” placement or technical language that fails to clearly explain the full terms, risks, and potential costs of the offer. To avoid a charge of misleading advertisements, ensure that your marketing pieces contain clear language placed in a prominent location, and that a reasonable consumer’s net impression is an accurate understanding of the product’s cost.
- Avoid Abusive Claims. The CFBP’s concern with these loan features extends beyond marketing practices; the Bulletin indicates an issuer may take unreasonable advantage of consumers by failing to adequately inform them of the conditions for maintaining a grace period and by exploiting their lack of understanding to impose additional costs. Thus, creditors must make reasonable efforts to alert consumers to the relationship between the grace period on new purchases and the acceptance of a promotional APR offer in the marketing materials for such an offer.