Retail Did You Know?
Dear Retail Clients and Friends,
Many of you likely offer "no interest" promotions on store credit cards to your customers. The Consumer Financial Protection Bureau (CFPB) recently published a letter offering guidance focused on these deferred-interest products—a signal that the CFPB is watching these financial offers, so it is important to have fulsome disclosures for consumers. This edition of Morgan Lewis Retail Did You Know? takes a look at the CFPB's guidance and highlights its key points.
Background
On June 8, the CFPB sent the letter guidance to several retail credit card companies regarding the use of deferred-interest promotions, specifically referencing the fact that a major US retailer—in partnership with its credit card issuer—recently decided to end deferred-interest promotions on its credit card program. This letter followed a 2015 CFPB study evaluating deferred-interest products. The study found that these types of products offer substantial benefits to some consumers, but also involve significant costs and other risks. Deferred-interest promotions typically provide consumers with no-interest payment plans for a specific period of time (usually 12 months). However, if any balance remains when the promotional period ends, consumers are charged accrued interest on this promotional balance from the time of purchase. The interest rate on these cards is typically around 25%.
CFPB's Concerns and Key Takeaways
In its letter, the CFPB encouraged top retail credit card companies and retailers to consider providing potential consumers with clear information about these types of promotions as well as the risks for consumers if they choose to participate in them. The CFPB raised concerns that "deferred-interest products may lack transparency to consumers, as a consequence of the back-end pricing that can be a feature of these products." The CFPB study found that a large portion of consumers paid off the entire promotional balance and associated interest charges shortly after the promotional period ended. The CFPB interpreted this data to potentially indicate that "many consumers do not fully understand how deferred-interest promotions operate and the manner in which interest is assessed on these products. A lack of transparency can harm consumers by impeding their ability to manage their finances successfully. The potential for confusion only increases if these accounts are used for other purchases as well."
In addition to clear and fulsome disclosures of the promotional offers and the true costs to consumers, the CFPB noted that robust compliance management systems and third-party oversight are also important to the successful implementation of deferred-interest programs.
Practical Implications
The CFPB's guidance signals that it is watching promotional offers made by retailers and retail credit card companies and the disclosures they provide to consumers. Retailers should, therefore, be familiar with this guidance when working with their card issuer partners to consider effective promotional offers and disclosure policies. It is worth noting that in every instance where the CFPB has issued this type of letter guidance, it followed up with a sweep and resulting enforcement, and subsequently asserted that its letter put the recipient on notice regarding unacceptable practices. Additionally, the CFPB's discussion of clear disclosures is important because, if properly constructed, disclosures may prove to be a useful method of communicating with consumers and potentially limiting exposure to possible enforcement actions by the CFPB or claims by consumers.
How We Can Help
We can assist our clients to better understand the CFPB's letter guidance and its impact on our clients' current retail practices. We have experience evaluating and developing disclosures for financial products and retail marketing programs that comply with federal, regulatory, and state laws regarding deceptive or unfair practices and have advised numerous US and international retailers on these areas.
This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.
