Last week, the Consumer Financial Protection Bureau (CFPB) sent letters to the CEOs of several issuers of store brand credit cards warning of fairness and transparency concerns with deferred-interest promotions. The CFPB has been gradually increasing the pressure on deferred-interest products using an approach similar to the one it used for add-on products—a series of bulletins, reports, and enforcement actions that effected change outside of the formal rulemaking process.
Last week’s letters echo concerns raised in the Bureau’s 2015 CARD Act report1, which centered on a perceived inability of consumers, particularly those with subprime credit scores, to understand and effectively manage deferred-interest promotions in order to avoid paying interest. In prepared remarks issued last week, CFPB Director Richard Cordray emphasized the potential for consumers who do not repay within the promotional period to be surprised by an unmanageable balance, a risk that increases when marketing messages are “questionable or even illegal.”2 According to the CFPB’s 2015 report, subprime or deep subprime consumers repay in full within the promotional period only about 50% of the time while consumers with prime or super-prime scores do so almost 90% of the time.
The letters sent last week did not require the recipient issuers to stop offering deferred-interest products. However, the letters follow several years of consistently negative attention on these products from the CFPB and other financial regulatory agencies. The CFPB has likened deferred interest to the penalty fees and other low-transparency, “back-end” pricing that the CARD Act largely eliminated.3 In last week’s letters, the CFPB expressly encouraged the industry to replace deferred-interest promotions with zero-interest programs, signaling that it will view deferred-interest promotions as a high-risk product for which a safer alternative exists. All of this raises a fundamental question for issuers and retailers: Is there a viable deferred-interest program?
The CFPB’s letter and Director Cordray’s remarks leave open the possibility that a maximally transparent deferred-interest program backed by “robust compliance management systems and third party oversight measures” could pass regulatory muster. The CFPB has not described the characteristics of a compliant program for the industry, which may emerge piecemeal through enforcement actions.
It is clear, however, that enhanced disclosures are not a complete answer. Rules adopted by the Federal Reserve Board in 2010 already require disclosure of the most important terms—such as the deferred APR, when the promotional period ends and the effect of failing to pay by that date. The CFPB’s 2015 report suggested one additional disclosure-based best practice—including in the minimum payment the amount required to pay off the balance in full during the promotional period—but substantive fairness concerns remain.
The CFPB has not indicated publicly whether it is currently pursuing enforcement actions related to deferred-interest programs. However, questions about these programs were included in the CFPB’s March request for information, which will form the basis of the Bureau’s next CARD Act report. In addition to reviewing the 2015 CARD Act report, retail credit card companies should examine their compliance management systems and consumer complaint data and that of their third-party service providers.