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Volume XI, Number 271

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CFPB Offers Guidance on Deferred-Interest Programs and Disclosures

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. We take 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.

Copyright © 2021 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VII, Number 191
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About this Author

Gregory Parks, privacy and cybersecurity lawyer, Morgan Lewis
Partner

Gregory T. Parks counsels and defends retail companies and other consumer facing clients in matters related to privacy and cybersecurity, class actions and Attorney General actions, consumer protection laws, loyalty and gift card programs, retail operations, payment mechanisms, product liability, waste management, shoplifting prevention, compliance, antitrust, and commercial disputes. If it is important to a retail company, Greg makes it his business to know it. He handles all phases of litigation, trial, and appeal work arising from these and other areas. Greg is the co...

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Anne Marie Estevez, labor and employment lawyer, Morgan Lewis
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Anne Marie Estevez defends clients in complex, class, and collective action employment, Americans with Disabilities Act (ADA), public accessibility, and consumer class action cases in US federal and state court. Fluent in Spanish, she represents a broad range of US and international clients in employment and labor-based cases nationally, from wage and hour to discrimination to trade secrets litigation. Anne Marie also counsels employers nationally in these areas, negotiates high-level executive contracts and terminations, and handles due diligence for complex employment...

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Christina Edling Melendi, Morgan Lewis, Securities lawyer
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Christina Melendi’s corporate and securities practice focuses on representing public and private corporations and private equity sponsors and their portfolio companies in mergers and acquisitions, asset purchases, joint ventures, private and public equity and debt financings, securities offerings, and other general corporate matters. Christina also assists companies to raise capital in the public markets, including initial public offerings and secondary offerings. Christina counsels clients on SEC reporting and securities law disclosure, annual meeting and proxy related...

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Christina Vitale, Morgan Lewis, financial services and bankruptcy lawyer
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Christina M. Vitale litigates complex matters before US state and federal courts, with an emphasis on financial services, banking enforcement actions, and consumer protection class actions. Christina represents clients before federal and state regulatory agencies, including the Consumer Financial Protection Bureau, the Office of the Comptroller, and state attorneys general. She assists clients in matters relating to consumer protection matters and unfair/deceptive business practices, bankruptcy litigation and claims issues, forensic accounting issues including identity...

713.890.5764
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