Now that the Consumer Financial Protection Bureau has finalized most home loan regulations and otherwise has completed initial rulemakings under the Dodd-Frank Act, the agency is casting about for additional areas to regulate, as shown by recent pronouncements regarding the automated clearinghouse network and credit card reward programs.
In a speech to The Clearing House Association, CFPB Director Richard Cordray said the electronic payment system hasn’t kept pace with technology and needs to be modernized. “We are all aware of consumers who find unexpected debits on their bank statements, or are victimized by third parties who may take inappropriate advantage of the efficiency and trust on which these systems are built,” he said. “We all know that consumers do not fully understand how these systems work, which leaves them vulnerable to abuses.”
The first step in the process: gather information. Cordray said the CFPB will reach out to the industry for input and would also like to improve the agency’s understanding of computer analytics to look for potential payment trends to identify “outliers” that could be recurring sources for irregular or failed claims for payment.
“Working together, we would be better able to identify and enforce the law against illegitimate firms that are otherwise able to reduce their own costs by hitching a free ride on the payments system,” Cordray said. Increased comprehension by the agency would also place it “in a better position to consider changes in law or practice that may be needed,” he added.
In his remarks, Cordray also acknowledged a recent proposal by NACHA – The Electronic Payments Association, the organization that establishes the rules for the ACH network. NACHA proposed changes including reducing the level of permissible unauthorized debit entries from 1 percent to 0.5 percent, setting the return threshold for all causes at 15 percent, and creating new requirements for reinitiated debit entries.
Another newly announced area of focus for the Bureau: credit card reward programs, specifically the sufficiency of program disclosures and whether additional consumer protections are required.
In an e-mail to Bloomberg news, Cordray said the CFPB “will be reviewing whether rewards disclosures are being made in a clear and transparent manner, and we will consider whether additional protections are needed,” adding that consumers often face “detailed and confusing rules” about how to use their rewards.
According to Bloomberg, the agency’s interest was piqued not by consumer complaints but concern that the rewards offered by a given card are the primary motivation behind a consumer’s decision to obtain it.
The story tracks a report issued by the CFPB in October in which the Bureau specifically referenced credit card rewards programs as an “area of concern” that “may pose risk to consumers and that will warrant further scrutiny by the Bureau.”
Program terms such as the value of reward points and forfeiture and redemption rules may be too confusing for consumers, the report noted, and better disclosures may be warranted for topics such as how rewards are earned and the formula for calculating rewards.
Why it matters: The CFPB has grown over a short period of time to become a large, well-funded federal agency with a singular focus on consumer financial protection. As it completes issuance of regulations mandated by the Dodd-Frank Act, the agency will not rest, and will look for other financial services provided to consumers that the agency believes are in need of further regulation. Its pronouncement regarding the ACH network and credit card rewards programs provides two examples of this expansive view of the CFPB’s authority. Accordingly, all participants in consumer financial services, including merchants using such services, such as receiving payments from consumers through the ACH network, and card issuers offering rewards programs, should pay close attention to CFPB pronouncements, and should consider submitting comments on proposed regulations.