A state-chartered bank based in Missouri must pay $5 million pursuant to a Consent Order with the Board of Governors of the Federal Reserve System resulting from charges of deceptive marketing practices.

What happened

The Federal Reserve alleged the bank ran afoul of Section 5 of the Federal Trade Commission (FTC) Act in solicitation of welcome letters for portfolios of balance transfer credit cards from other financial institutions offered to consumers through third parties known as independent service organizations (ISOs).

In 2008, the bank began entering into agreements with ISOs, and in 2009, it acquired a portfolio of balance transfer credit cards for an “Affirm” card. The ISOs marketed the Affirm cards to consumers who had existing debt as a credit card for which the initial credit limit would be equal to the amount of debt transferred to the card. As consumers paid off debt, new credit would become available for the consumers’ use. For example, the Affirm welcome letter stated: “The more you pay on your account each month, the more available credit you free up on your Affirm [credit card]!”

But according to the Federal Reserve, the bank—through the ISO—failed to disclose that finance charges and fees would reduce the amount of new credit available to a consumer after making a payment. “Therefore, consumers could have reasonably believed that by continuing to make timely minimum payments on their Affirm Card they would receive credit equal to the amount they paid, when, in fact, they did not due to the assessment of finance charges and fees,” according to the Consent Order.

About 588 consumer accounts were established by the bank using the challenged marketing materials.

The Federal Reserve also took issue with a second credit card portfolio with a product dubbed the “Emblem” card, which was marketed to consumers who had charged-off or past-due debt. Neither the solicitation letter provided prior to account opening nor the welcome letter sent after an account was opened accurately disclosed that participating in the Emblem card program could restart the statute of limitations for time-barred debt, the regulator said.

“Thus, the debt could be collected through a lawsuit by [the bank] or a third party, although [the bank] asserts that it has not pursued collection on these accounts, the ISO has not pursued collection on these accounts, and [the bank] has prohibited third parties from doing so in the future,” the Federal Reserve wrote.

Approximately 8,000 Emblem cards were issued to consumers with charged-off debts outside of the statute of limitations, according to the Consent Order.

To settle the allegations that its alleged practices violated Section 5 of the FTC Act, the bank agreed to enter into the Consent Order. In addition to payment of $5 million in restitution to affected cardholders, the bank said it would take steps to improve its compliance program and stop issuing new balance transfer credit card products.

The bank promised to “take all action necessary” to correct all violations of the FTC Act and agreed not to make or allow to be made “any misleading or deceptive representation, statement, or omission, expressly or by implication,” in connection with any extension of credit. Affirmatively, the bank said it would disclose “clearly and prominently, and on the same page” any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.

Further, the bank must submit an acceptable written plan to enhance its consumer compliance risk management program to ensure that the marketing, processing and servicing of consumer products and services offered through a third party comply with all consumer protection laws and regulations. It will be joined by a second written plan on how the bank intends to strengthen the board of directors’ oversight of the compliance risk management plan.

New agreements with third-party product providers (including ISOs) will be put on hold until the Federal Reserve approves the bank’s written plans.

To read the Consent Order, click here.

Why it matters

The Consent Order, which did not contain a civil money penalty, requires the bank to pay a total of $5 million in restitution to thousands of consumers for the allegedly deceptive marketing practices and to take steps to improve its consumer compliance program. Banks should remember that regulator scrutiny can result from the actions of third parties as well as their own marketing and advertising efforts.