The CFPB has issued an approval order through its Compliance Assistance Sandbox Policy (CAS Policy) to Synchrony Bank in connection with a proposed “dual-feature” credit card (DFCC) program.

The CFPB instituted the CAS Policy in 2019 in an attempt to encourage innovation through the testing of financial products that could benefit consumers but might pose regulatory uncertainty.  Under the CAS Policy, a sandbox applicant can obtain approvals, as applicable, under the provisions of the TILA, ECOA, and EFTA that provide a safe harbor from liability under such laws.  The approval order issued to Synchrony provides Synchrony with a safe harbor from liability under TILA and Regulation Z in federal or state enforcement actions and private lawsuits for any act done or omitted in good faith in conformity with the approval order.  The order has a 36-month duration.

As described in the approval order, a DFCC is initially issued to a consumer as a secured credit card for which the consumer provides a deposit account as security.  After at least one year, a DFCC consumer that satisfies certain eligibility requirements is given the option of graduating to use the unsecured feature of the DFCC.  In its application to the CFPB for the approval, Synchrony committed to impose an APR on the DFCC’s secured feature that is substantially lower than the APRs currently offered on many other secured cards.  Once unsecured, the DFCC’s APR would be higher than the APR it had when secured.

A consumer who is offered and wishes to use the unsecured feature must affirmatively opt in and, if the consumer opts in, he or she will not have to wait or reapply for a new account to graduate to unsecured use.  The security deposit will be used to pay the outstanding balance, with the remainder returned to the cardholder.  DFCC customers who are not offered the opportunity to graduate to unsecured use or prefer not to graduate can continue to use the DFCC on a secured basis.

The approval order sets forth a series of compliance determinations that address the application of various Regulation Z requirements for credit cards to the DFCC program and the graduation from the secured to unsecured feature, including the application and account-opening disclosure requirements, change-in-terms requirements, ability to pay requirements, and rate revaluation requirements, and explain the basis for the Bureau’s conclusions that Synchrony’s approach to disclosures and other aspects of the DFCC program comply with such requirements or are not triggered by the manner in which the DFCC program operates.

The Bureau also identifies “additional factors” it considered in issuing the approval order.  Such factors include the DFCC program’s “innovative structure” as well as “the transparency of its graduation process, the importance of consumer choice in the program overall, and the program’s potential to deliver a lower price for secured use than what is generally available in the secured card market.”  The Bureau states that it “sees the latter as an especially notable aspect of the DFCC Program because secured cards are an important means of access to credit for consumers with lower credit scorers and they carry the potential for improving scores for consumers who use them successfully.”