The Consumer Financial Protection Bureau recently issued a bulletin (CFPB Bulletin 2014-02) warning credit card issuers to avoid potentially deceptive and abusive practices in connection with the marketing of credit card promotional APR offers. Among other things, the Bulletin highlights the challenges that companies face in complying with prescriptive federal law, specifically Regulation Z, while simultaneously anticipating the CFPB’s additional UDAAP concerns.

Promotional Balance Transfer Offers

The CFPB’s bulletin focuses on cost issues that arise in connection with 0% APR balance transfer offers. Regulation Z requires that balance transfer fees associated with these offers, e.g. a one-time balance transfer fee of 3% of the balance transferred, be disclosed in the account-opening disclosures. But an additional contingent cost of a balance transfer offer may arise in connection with new purchases if an issuer revokes the grace period and charges interest on new purchases because a promotional balance transfer amount is not paid in full.

The following example helps explain the CFPB’s concern: a consumer uses a card issuer’s 12 month 0% APR balance transfer offer to transfer a $1,000 balance and pays a 3% ($30) balance transfer fee. The consumer then makes $500 in new purchases subject to a 19.99% APR. When the consumer receives his next billing statement, he might expect to pay for the $500 in new purchases in full within the grace period and not experience the 19.99% APR finance charge, but pay nothing on the $1,000 transferred balance since was transferred  under the promotional 12 month 0% APR offer. In effect, the consumer might expect to pay nothing towards the $1,000 transfer balance for the entire 12 month 0% APR period, and pay for every month’s transactions in full without incurring any finance charges. However, some issuers consider carrying over a promotional balance as a trigger to revoke the grace period on new purchases, so that the consumer would be required to pay the 19.99% APR on the $500 of new purchases in month one, and all future new purchases.

Deceptive Practices

The CFPB’s bulletin states that deception may occur in connection with a 0% balance transfer offering if the true cost of the promotional interest rate offer, given the loss of the grace period, is misrepresented. As a result, failing to prominently disclose contingent costs – a “central characteristic of the product” — that occur as the result of the grace period being revoked will be considered deceptive by the CFPB.

Abusive Practices

Depending on all the facts and circumstances, 0% APR balance transfer offers may be considered abusive by the CFPB to the extent they take unreasonable advantage of consumers by: 1) failing to adequately disclose conditions of the promotional offer, namely the limited grace period on new purchases; and 2) exploiting consumers’ lack of understanding regarding the features and costs of the balance transfer offer.

Disclosures Above & Beyond Reg Z

While the CFPB acknowledges that Regulation Z does not require marketing materials to include additional disclosures regarding “the effect of accepting a promotional offer on the loss of the grace period on purchases,” it nevertheless expects issuers to further incorporate adequate measures to avoid UDAAP violations surrounding balance transfer offers. Among other things, the Bulletin states that such measures should include ensuring that, in addition to compliance with Regulation Z, all marketing materials “clearly, prominently, and accurately describe the material costs, conditions, and limitations associated with the offers” as well as “the effect of promotional APR offers on the grace period for new purchases.”