Promontory Sightlines

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Promontory Sightlines: Consumer Financial Protection Developments

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December 5, 2013

Dear Clients and Friends,

The Consumer Financial Protection Bureau’s recent CARD Act report signaled tighter scrutiny of credit card rewards programs to determine how well financial institutions describe what they offer and deliver what they promise.

Rewards programs provide value to customers through airline miles, club points, and cash back — often supplemented by free hotel stays and double points on certain types of purchases — to compete for origination and transaction volume. Cards of all kinds — from charge cards aimed at high-spend customers to subprime credit cards — offer wide-ranging rewards. Card customers seem generally satisfied with rewards programs, which account for only 2.5% of all credit card complaints received by the CFPB.

The popularity of rewards programs has attracted regulatory attention. The bureau’s interest is grounded in two findings by third-party researchers: that consumers most frequently cite rewards programs as the reason they applied for a particular card and that the percentage of consumers who fully understand the programs has decreased. Approximately a third of consumers are unaware of rewards benefits associated with their cards.

Rewards programs are not subject to specifically defined regulatory requirements, but firms are obliged to disclose program terms and apply them fairly. The importance of rewards programs to consumers has heightened regulatory expectations for describing how customers acquire and redeem rewards — and how earned rewards can be forfeited. In this environment, any variance between a firm’s representations and what it delivers is likely to be viewed as a material consumer protection issue.

The frequency with which rewards offers are made, as well as the high volume of transactions to which they apply, can make meeting these expectations particularly challenging. Here, as in other areas where unfair, deceptive, or abusive acts or practices are a concern, good intentions and compliance processes are not enough to protect firms. A broader commitment to flawless execution in delivering on the firm’s promises is the difference between building stronger customer relationships and offer-fulfillment failures that carry significant regulatory risk.

That commitment begins with careful development of marketing materials and extends through the entire cycle in which customers acquire and use rewards points. Crafting plans that attract customers and present program details in plain-English are often in tension with the operational complexities of delivering promised rewards. For example, issuers who do not receive detailed information about purchases through travel agents or online aggregators may have trouble in making sure a customer gets double points for buying an airline ticket.

Monitoring the rewards that cardholders actually receive is also critical. Emphasizing rewards to attract applicants who may be more likely to revolve balances can increase UDAAP risk if program rules prevent accrual of rewards for customers who don’t pay monthly bills in full.

Strategies for leveraging the portion of the consumer population that is intensely focused on rewards can also provide an ounce of prevention. Steps include rigorous complaint management, as well as creating tools so that customers can determine which offers apply to specific transactions before and after they occur. Customers should be able to check how rewards apply to a particular purchase; monitor reward allocation; and contact the firm easily with questions or concerns about particular transactions.

Firms can best prepare for whatever form the CFPB’s inquiry ultimately takes — exams, enforcement actions, or rules — by evaluating the expectations they create about rewards products, and their operational performance in fulfilling them. The evaluation should:

  • Review the clarity and accuracy of publicly available information about rewards programs
  • Test consumer comprehension of rewards offerings
  • Develop a data framework for monitoring rewards-related behavior and risks
  • Monitor rewards-related complaints
  • Assess how clearly periodic statements disclose rewards conferred for specific transactions

Given the importance of rewards to attracting and retaining customers, the challenge for firms is to manage UDAAP risks inherent in the day-to-day operation of these programs without fundamentally altering their value proposition.

Yours truly,

Linda Gallagher
Managing Director
lgallagher@promontory.com
+1 202 370 0411

P-R Stark
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Please click here to continue receiving Consumer Financial Protection Developments.

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CFPB to Supervise Student-Loan Servicers

The CFPB issued a final rule on Dec. 3 to allow it to supervise certain nonbank student loan servicers for the first time, according to a bureau press release. Any nonbank student loan servicers with more than one million borrower accounts — whether federal or private loans — now fall under the expanded supervisory scope of the CFPB, pursuant to its authority to supervise larger nonbank participants in various retail banking markets. Director Richard Cordray said in a press call that the action “levels the playing field by covering the larger nonbank servicers, since our examiners are already supervising the largest student loan servicers that are banks.” He also highlighted complaints from borrowers who had trouble making prepayments or partial payments, as well as difficulties associated with servicing transfers. The CFPB has a fact sheet on the rule here. The bureau also published examination procedures for education loans.

CFPB Releases Revised Mortgage Examination Procedures

The CFPB on Nov. 27 released updated TILA and RESPA examination procedures that reflect the bureau’s efforts through October 15, 2013, to revise previously released mortgage regulations.

British Government Announces Cap on Payday Lending

The U.K. Chancellor of the Exchequer announced on Nov. 25 that the government will seek a cap on payday loan costs through an amendment to bank-reform legislation currently in Parliament. Under the amendment, the Financial Conduct Authority would introduce a cap that covers the total cost of credit, including interest, arrangement, and penalty fees. The FCA has been asked to include the payday loan initiative in its work program for taking over credit-sector regulation from the Office of Fair Trading in 2014. The announcement follows earlier reviews by the OFT and FCA that concluded against the early introduction of such a cap.

CFPB Study on How Deposit Regulation Affect Operations

On Nov. 22, the CFPB released a 176-page study on the operational effects of deposit regulations as part of an effort to avoid imposing unnecessary regulatory costs. The bureau conducted in-depth case studies of seven banks ranging in asset size from less than $1 billion to more than $100 billion to determine compliance costs related the Truth in Savings Act, the Electronic Fund Transfer Act, the Fair Credit Reporting Act, and privacy requirements. “The case studies revealed that implementation activities among the seven participants were most concentrated in Operations and Information Technology business functions. Human Resources, Compliance, and Retail functions were also impacted more than other operational functions,” said a bureau blog post.

OCC and FDIC Release Guidance on Deposit-Advance Products

On Nov. 21, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. announced the release of separate, but near-identical, guidance for deposit-advance products. “These products share a number of characteristics seen in traditional payday loans, including: high fees; very short, lump sum repayment terms; and inadequate attention to the consumer’s ability to repay,” the guidance stated. “As such, a bank needs to be aware of these products’ potential to harm consumers, as well as elevated credit, reputation, operational, and compliance risks.” The OCC’s guidance is here; FDIC’s is here.

Cordray Remarks at Clearing House Annual Conference

The CFPB posted Director Richard Cordray’s Nov. 21 remarks at the Clearing House Annual Conference, at which he discussed the bureau’s new mortgage rules, nonbank competition, and the payments system, among other topics. It is “important to keep moving forward to deliver a greater degree of certainty for those engaged in the mortgage market,” Cordray said. “This is a goal that industry has emphasized to us time and again. It is timely now to climb out from under the existing regulatory overhang as other pieces of the mortgage reform puzzle are being contoured around” the bureau’s qualified-mortgage rule. He also mentioned the importance of a level playing field, including for nonbanks, and asked for the banking industry’s help in identifying potential marketplace violations.

CFPB, FTC Testify on Servicemember Fraud

CFPB assistant director Holly Petraeus and Federal Trade Commission deputy director Charles Harwood testified Nov. 20 before the Senate Committee on Commerce, Science, and Transportation on military servicemember fraud. Both outlined a number of predatory lending and fraud practices that disproportionally affect servicemembers, such as high-cost credit.

CFPB Announces First Enforcement Action against a Payday Lender

On Nov. 20, the CFPB announced its first enforcement action against a payday lender — Cash America International — over what it said were “multiple violations of consumer financial protection laws,” including robo-signing of paperwork, illegally overcharging servicemembers, and impeding the CFPB’s exam of the company. Under the enforcement action Cash America agreed to pay a $5 million civil money penalty, refund $14 million to consumers, dismiss pending collections lawsuits, and improve internal compliance systems. The consent order is here.

CFPB Unveils “Know Before You Owe” Mortgage Disclosure Forms

The CFPB on Nov. 20 announced its final rule requiring the usage of bureau-developed loan estimate and closing disclosure mortgage forms. The new forms are intended to “improve consumer understanding, aid comparison shopping, and help prevent closing table surprises for consumers,” CFPB Director Richard Cordray said. Cordray outlined the process behind the development of the forms in a subsequent press call, in which he disclosed that the bureau is looking into creating an electronic “smart” version of the loan estimate form. The implementation deadline for the new disclosures is August 1, 2015.

Chopra Discusses Student Loans at St. Louis Fed

Rohit Chopra, the CFPB’s student loan ombudsman, spoke at the Federal Reserve Bank of St. Louis on Nov. 18 to discuss issues in the student-loan market to which the Federal Reserve System should devote its attention. Chopra highlighted two: the lack of student-loan refinancing options and the lack of reliable information on student-loan origination and performance.

CFPB Report Finds Financial Marketing Dwarfs Financial Education

On Nov. 18, the CFPB published a report comparing the financial industry’s spending on financial education in relation to spending on financial marketing. “For every dollar put towards financial education, $25 is spent on financial marketing, which can make it difficult for consumers to find objective information,” the bureau said in a press release. The CFPB also posted remarks from both Director Cordray and Camille Busette, the assistant director for the office of financial education, during a press call on the report.

FTC Settles Payment-Processing Scam Allegations with Process America

The FTC announced a Nov. 18 settlement with payment processor Process America Inc. and its owners, which it said used “unfair tactics to open and maintain scores of merchant accounts” the perpetrator of a work-at-home scheme known as Google Money Tree. The FTC said Process America knew or should have known that it was processing more than $15 million of unauthorized payments to consumers’ debit and credit cards. Under the terms of the settlement, the defendants are barred from future payment-processing activities. This action follows a 2012 settlement involving the company primarily responsible for the Google Money Tree scheme.

CFPB Takes Action Against Mortgage Insurer

The CFPB announced Nov. 15 that it filed a complaint and proposed consent order against Republic Mortgage Insurance Corp. for allegedly paying illegal kickbacks to mortgage lenders in exchange for business over a period of more than 10 years. The bureau said it believed RMIC provided the kickbacks through “essentially worthless” captive reinsurance arrangements with lender affiliates. Under the proposed consent order, RMIC has agreed to end the practice, pay $100,000 in penalties, and submit to monitoring by the CFPB.

Cordray Defends CFPB’s Disparate-Impact Approach in Indirect Auto

Director Cordray defended the CFPB’s March auto-lending bulletin in a speech at the Nov. 14 CFPB Auto Finance Forum. Cordray stressed that the bureau’s approach was “not new” and addressed industry-wide criticism head-on: “If anyone is uncertain about our resolve, let me do my best to dispel that uncertainty this morning. We will make every effort to do the job that Congress has set out for us, which is to identify and root out unlawful, discriminatory lending practices, including practices that, in the words of the Supreme Court, are ‘fair in form but discriminatory in operation.’”

Cordray Testimony before Senate Banking Committee

The CFPB posted a transcript of Director Cordray’s remarks before the Senate Banking Committee on Nov. 12. In his testimony, Cordray disclosed that the bureau has received “more than 230,000 consumer complaints on credit reporting, debt collection, money transfers, bank accounts, and services, credit cards, mortgages, vehicle and other consumer loans, and private student loans” since it started collecting complaints. He also emphasized that the bureau will continue to monitor closely the student-loan industry.

New CFPB Tool Helps Consumers Find Housing Counseling

The CFPB on Nov. 8 launched a tool to help consumers find local housing-counseling agencies. The bureau also published guidance for lenders on how to provide mortgage borrowers with lists of local housing-counseling agencies, pursuant to a Dodd-Frank Act requirement. The bureau recommended that lenders unable to build those lists by the rule’s Jan. 10, 2014, effective date send borrowers directly to the online tool.

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Promontory's Consumer Protection Team includes:

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Konrad Alt

Konrad Alt
Managing Director
kalt@promontory.com
+1 415 986 4160

Michael Dawson

Michael Dawson
Managing Director
mdawson@promontory.com
+1 202 384 1080

Linda Gallagher

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice

lgallagher@promontory.com
+1 202 370 0411

Stuart King

Stuart King
Managing Director
sking@promontory.com
+44 207 997 3402

Simon McDougall

Simon McDougall
Managing Director
smcdougall@promontory.com
+44 207 377 2367

BJ Sanford

BJ Sanford
Managing Director
bsanford@promontory.com
+1 202 384 1020

Julie Williams Julie Williams
Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087
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Promontory Sightlines Consumer Financial Protection Developments

 
EDITOR IN CHIEF

P-R Stark

GLOBAL HEAD OF THE
CONSUMER PROTECTION PRACTICE

Linda Gallagher

FOUNDER AND CEO
Eugene A. Ludwig

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801 17th Street, N.W.
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Washington, DC 20006

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