Increased regulatory scrutiny over the offering, marketing and billing practices used for add-on products has led to a marked increase in the number of regulatory enforcement actions and consent orders imposed on credit card issuers. Add-on products are credit card products that are ancillary to the actual extension of credit; some examples of these products include debt protection products, identity theft protection products and credit score monitoring products. Notably, regulatory scrutiny has increased for all credit card issuers, regardless of size and regardless of the primary regulator for the issuer. Indeed, the CFPB and other regulators are making good on the CFPB’s October 2013 promise to increase scrutiny over the marketing and sale of add-on products.
For example, on April 7, 2014, a large credit card issuer agreed to pay approximately $772 million to settle OCC and CFPB claims that the issuer violated section 5 of the FTC Act, 15 U.S.C. §45(a) (“Section 5″), by using deceptive marketing and billing practices relating to certain add-on products. In the Order, the regulators allege that, among other violations, the issuer 1) billed customers for the full cost of the add-on product even though the customers were not receiving all of the product’s advertised benefits, and 2) enrolled customers in products without obtaining their affirmative consent.
Similarly, the FDIC determined that a small bank issuer engaged in deceptive and unfair acts and practices in violation of Section 5. Some of the criticized practices included add-on products. The FDIC recently imposed a $1 million civil money penalty and ordered the issuer to 1) refund all interest charged by the issuer during a “zero percent interest for 12 month” promotional offer, and 2) clearly and accurately disclose to credit card customers that enrollment in a particular add-on product was not required to obtain or maintain a bank issued credit card.
Card issuers must act now to ensure their practices fully comply with applicable statutes, regulations and regulatory expectations. The following set of considerations is adapted from a CFPB Bulletin and provides an analytical framework for issuers to consult when conducting a compliance review. To ensure the issuer is marketing and selling credit card add-on products in a manner that limits the potential for statutory or regulatory violations, the issuer should take the following actions:
- Adequately disclose important product terms and conditions and always avoid deceptive acts, practices or tactics. Marketing materials, including direct mail materials, telemarketing scripts and electronic and print advertisements, must fully and accurately reflect the terms and conditions of the product and not be deceptive or misleading. Banks are encouraged to evaluate the following factors:
- Is the statement prominent enough for a reasonable consumer to notice?
- Is the information presented in an easy-to-understand format that does not contradict other information relating to the product?
- Is the information in a location where a reasonable consumer can be expected to look?
- Is the information in close proximity to the claim it qualifies?
- Obtain affirmative consent before enrolling consumers in the add-on product. Banks must not enroll customers in add-on products without clear affirmative consent, which should be obtained only after the consumer has been informed of the terms and conditions of the add-on product.
- Disclose the voluntary nature of the enrollment process. The purchase of add-on products cannot be required as a condition of obtaining credit. Therefore, banks should evaluate their current practices to ensure oral and written statements to consumers do not require enrollment in an add-on product prior to the extension of credit.
- Only bill customers for services that are actually performed. Issuers should only bill for services actually performed and should ensure that customers receive all advertised product benefits when they are charged the full amount of the product’s cost. The failure to provide all advertised benefits without a corresponding reduction in fees will lead to adverse consequences.
- Appropriately design and monitor employee incentive or compensation programs. Employee incentive programs tied to the sale and marketing of add-on products must be designed to ensure that the programs do not create incentives for employees to provide inaccurate information about the products. Issuers must frequently analyze sales tactics, including all scripts and manuals used by the issuer’s customer service centers, to ensure the following obligations are met:
- The customer service representatives accurately state the terms and conditions of the various products;
- Attempts to rebut the customer’s attempt to decline the product are made in accordance with established and clearly defined bank guidance. Ideally, such guidance will include the appropriate rebuttal language that may be used, clearly define when such language is appropriate, and limit the number of times rebuttal attempts may be made;
- Customer service representatives are not regularly deviating from approved scripts;
- Cancellation requests are handled in an appropriate manner.
- Design and employ effective compliance management programs. Programs should be designed to ensure compliance with prohibitions against deceptive acts and practices, as well as all other Federal and state consumer financial protection laws and regulations, including the Truth in Lending Act and the Equal Credit Opportunity Act. Issuers should:
- Conduct periodic quality assurance reviews;
- Engage an independent auditor to objectively evaluate the add-on program;
- Monitor any affiliates or third-party service providers that perform marketing or other functions related to the add-on products to ensure they are complying with applicable law;
- Implement an appropriate channel for resolving consumer complaints; and
- Design and implement a comprehensive training program for employees involved in the marketing, sale and operation of add-on products.