On December 18, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a circular to “other law enforcement agencies,” urging them to take action against certain credit card practices. The CFPB highlights alleged legal violations by some credit card companies, particularly in relation to the devaluation of rewards points and the clarity of terms and conditions for earning and redeeming rewards.

The question the CFPB presented to itself in the circular was whether credit card issuers can violate the law if they or their rewards partners devalue earned rewards or otherwise inhibit consumers from obtaining or redeeming rewards. The CFPB’s response was affirmative, stating that covered persons and their service providers may violate the prohibition against unfair, deceptive, or abusive acts or practices (UDAAP) in various circumstances. These include instances where the redemption values of rewards that consumers have already earned or purchased are devalued, consumers’ receipt of rewards is revoked or canceled based on buried or vague conditions, or consumers have reward points deducted from their balance without receiving the corresponding benefit of the rewards. The circular emphasizes that even if some of the conduct in question is attributable to a third party, such as a merchant partner, covered persons may still be liable, and observes that provisions in the rewards terms and conditions permitting such conduct may not be enough to overcome designation as an unfair or deceptive practice, at least where they are “buried” or “vague” and customers cannot reasonably understand them.

Concurrently with the circular, the CFPB also released an Issue Spotlight on retail credit cards, which typically offer store-specific rewards and loyalty programs. The research found that retail credit cards, more than 80% of which are issued by four major banks, tend to have higher interest rates compared to traditional credit cards. Specifically, 90% of retail cards report a maximum annual percentage rate (APR) above 30%, while only 38% of non-retail general-purpose cards have such high rates. The CFPB found this concerning given that many private label cards have a fixed APR, meaning all cardholders, regardless of creditworthiness, are charged the same rate.

Key findings in the Issue Spotlight, include:

• Underwriting Practices: According to the CFPB, the use of less restrictive underwriting can put consumers at greater risk of incurring debt they cannot afford. Private label store cardholders are more likely to carry a balance and make only the minimum payment compared to general-purpose cardholders. The annualized charge-off rate for private label cards is nearly double that of general-purpose cards.
• Aggressive Sales Tactics: Half of retail card applications are submitted at the point of sale, where the CFPB reported that consumers experience aggressive sales tactics. Moreover, while the primary reason consumers report opening a store card is a discount or promotion on a specific purchase, complaints indicate that consumers sometimes struggle to redeem promotions after receiving the card.
• Profit Sharing: According to the CFPB, profit-sharing agreements between retailers and issuers may incentivize increased marketing to encourage spending. Retailers receive a portion of the interest and fees collected from cardholders, providing a consistent revenue stream in addition to sales.
• Consumer Confusion: In the research, consumers reported significant confusion about the products they signed up for, with some believing they were registering for a free loyalty program rather than a credit card. Others describe receiving a different card than they applied for or being migrated to another card without sufficient notice.
• Increased Costs: According to the CFPB, large retail credit card issuers have increased the cost of their cards through paper statement fees and higher APRs. The CFPB has observed an increasing number of complaints related to these fees and ongoing frustration with late fees.

In a purported effort to promote transparency and competition in the credit card market, the CFPB has launched a new tool called Explore Credit Cards. This tool is intended to allow consumers to compare more than 500 credit card options using unbiased, comprehensive data.

Our Take

This action comes at a time of transition for the agency, with President-Elect Trump expected to appoint a new director soon after taking office. Today’s circular and Issue Spotlight suggest that the CFPB is seeking to ensure continued oversight and enforcement of consumer protection laws during this period of change by encouraging other regulators and enforcement agencies to take up these issues.

Nevertheless, our view is that the CFPB’s position that rewards programs cannot be subject to change is significantly divorced from reality. Rewards programs, especially those offered by merchants, are constantly subject to change based on factors that the credit card issuer cannot control, and we believe it is unrealistic to expect card issuers to exert control over merchants’ rewards programs, or to hold issuers liable for merchants’ changes to those programs. Nor do we believe it is realistic to suggest that merchants’ changes to rewards programs are inappropriate: those changes can be driven by factors like the underlying cost of providing rewards and other factors. So long as the possibility of rewards changes is adequately disclosed to consumers, we do not see the basis for asserting that such changes are violations of law.

Having said that, credit card issuers and their merchant partners should be aware of the possibility for increased scrutiny in this area. It is essential for issuers and merchants alike to provide clear and transparent information about their rewards programs, including those related to changes in the valuation of rewards.