In this week’s podcast, we discuss key issues that need to be considered by banks and their merchant partners when entering into credit card co-branding relationships, including defining the scope of exclusivity, the terms of second-look programs, the role of the payment networks, and the handling of consumer data ownership and usage rights.

To listen to the podcast, click here.

 

 

The CFPB and New York Attorney General have agreed to a settlement with Sterling Jewelers Inc. of a lawsuit they filed jointly in a New York federal district court alleging federal and state law violations in connection with credit cards issued by Sterling that could only be used to finance purchases made in the company’s stores.  The proposed Stipulated Final Order and Judgment, which requires Sterling to pay a $10 million civil money penalty to the CFPB and a $1 million civil money penalty to the State of New York, represents the second settlement of an enforcement matter announced by the CFPB under Kathy Kraninger’s leadership as CFPB Director.  (In addition to a civil money penalty, the other settlement required the payment of consumer restitution.)

The complaint contains three counts asserted by the CFPB and NYAG alleging unfair or deceptive acts or practices in violation of the Consumer Financial Protection Act based on the following alleged conduct by Sterling:

  • Representing to consumers that they were completing a survey, enrolling in a rewards program, or checking on the amount of credit for which the consumer would qualify when, in fact, either the consumer or a Sterling employee was completing a credit application for the consumer without his or her knowledge or consent
  • Misrepresenting financing terms to consumers, including interest rates, monthly payment amounts, and eligibility for promotional financing
  • Enrolling consumers for payment protection plan insurance (PPPI) without informing them that they were being enrolled or misleading them about what they were signing up for

This alleged conduct is also the basis of two counts alleging state law violations asserted only by the NYAG.

In another count asserted only by the CFPB, Sterling is alleged to have violated TILA and Regulation Z by issuing credit cards to consumers without their knowledge or consent and not in response to an oral or written request for the card.  This alleged TILA/Reg Z violation is also the basis for a count alleging a state law violation asserted only by the NYAG as well as a count alleging a CFPA violation asserted by both the CFPB and NYAG.

In addition to requiring payment of the civil money penalties, the settlement prohibits Sterling from continuing to engage in the alleged unlawful practices and to “maintain policies and procedures related to sales of credit cards and any related add-on products, such as [PPPI], that are reasonably designed to ensure consumer consent is obtained before any such product is sold or issued to a consumer.  Such policies and procedures must include provisions for capturing and retaining consumer signatures and other evidence of consent for such products and services.”  By not requiring consumer restitution, the settlement differs from consent orders entered into by the CFPB under the leadership of former Director Cordray that required restitution by companies that had allegedly enrolled consumers in a product without their consent.

The CFPB has released its seventh annual report to Congress on college credit card agreements.  The annual report is mandated by the CARD Act.

The CARD Act requires mandatory reporting to the CFPB by card issuers on agreements with institutions of higher learning or certain affiliated organizations (such as alumni associations).  The information in the report is current as of the end of 2017.

In its report on 2016 data, the Bureau abandoned its prior practice of including in the annual report not only the information on college credit card agreements mandated by the CARD Act but also information on other financial products marketed to students such as debit cards.  Like the Bureau’s report on 2016 data, the new report discusses only college credit card agreements.

The CFPB’s findings based on the agreements and related information that issuers are required to submit annually to the CFPB include:

  • Reversing a trend that began in 2009, the number of college credit card agreements between issuers and schools or affiliated organizations increased in 2017.  The number of issuers maintaining at least one such agreement also increased.  However, the total number of associated credit card accounts and the amount paid by issuers to schools and affiliated organizations continued to decline.
  • Agreements between issuers and alumni associations remained the dominant college credit card agreements.
  • The share of the overall market held by the ten largest agreements as measured by each of the three metrics of agreement size—year-end open accounts, new accounts, and payment volume—stayed at or near 2016 levels, with the ten most lucrative agreements representing 41% of all payments made by issuers in 2017.

Under former Director Cordray’s leadership, the CFPB used the annual report as an opportunity to take schools to task for allegedly not meeting their obligation under the CARD Act to publicly disclose their college credit card marketing agreements (which, pursuant to the Official Commentary to Regulation Z, can be fulfilled by either posting the agreements on a school’s website or by making the agreements available on request, as long as the procedure for requesting the documents is reasonable and free of cost.)   The new report, like the Bureau’s report on 2016 data, makes no mention of this issue.

 

The New York Court of Appeals has issued an opinion in Expressions Hair Design v. Schneiderman interpreting the state’s law that prohibits merchants from imposing a surcharge on credit card purchases (Section 518 of the state’s General Business Law). The court concluded that if a merchant posts its prices and charges lower prices to cash customers, it must post the price charged to credit card customers. As a result, the court also concluded that the law prohibits a merchant from using a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers.

The opinion was issued in answer to the following question certified to the NY court by the U.S. Court of Appeals for the Second Circuit: “Does a merchant comply with [Section 518] so long as the merchant posts the total dollars-and-cents price charged to credit-card users?” The Second Circuit certified the question following the U.S. Supreme Court’s decision last year in Expressions Hair Design and remand of the case to the Second Circuit. The Supreme Court ruled that Section 518 regulates speech, thereby making it subject to First Amendment scrutiny. The Second Circuit had initially concluded that Section 518 did not violate the First Amendment because it regulates only pricing, not speech. The Supreme Court vacated that decision and because the Second Circuit had not considered whether, as a speech regulation, Section 518 survived First Amendment scrutiny, remanded for the Second Circuit to do so.

The parties in Expressions Hair Design agreed that Section 518 does not prohibit differential pricing in which a merchant charges more to customers who pay by credit card. However, the plaintiffs, five merchants and their owners, sought to use a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers rather than a “dual-price” scheme in which a merchant posts two different prices—one for credit card customers and one for cash customers. The plaintiffs alleged that by prohibiting their use of a “single-sticker-price” scheme or restricting how they describe the price differential in a “dual-price” scheme, Section 518 violates the First Amendment because it regulates how they communicate their prices. The NY Court of Appeals concluded that although Section 518 does not allow use of a “single-sticker-price” scheme, it does not prohibit a merchant from using the word “surcharge” or any other words to communicate to customers that the credit card price is higher than the cash price.

The Second Circuit will now need to determine whether Section 518, as interpreted by the NY Court of Appeals, is a valid restriction on commercial speech under Supreme Court precedent. Such precedent is discussed in the Second Circuit’s opinion certifying the Section 518 question to the NY court. The Second Circuit suggested that if Section 518 were to be understood to compel the disclosure of an item’s credit card price alongside its cash price, it might properly be analyzed under Supreme Court precedent that applies a lenient standard of review to laws that require commercial entities to make certain disclosures to prevent consumer deception or confusion.

The CFPB has issued a report focusing on end-of-year credit card borrowing and repayment of credit card balances in the following year.  The report is based on data from the Bureau’s Consumer Credit Panel, a nationally-representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies.

The report explores how credit card borrowing evolves during and after the annual November/December peak in consumer spending, how quickly these balances are repaid in subsequent months, and how the year-end period of borrowing may correlate with financial distress.

The report’s key findings include:

  • The year-end rise in consumer debt is most pronounced in general purpose credit card debt and retail store card debt.  General purpose credit card balances rise nearly 4 percent from their October baseline as compared with retail store card balances which rise 8 percent increase from their October baseline.  In contrast, auto loans and home equity credit lines do not exhibit similar seasonality.  The CFPB observes that to the extent the consumers who take on new credit card debt during the holiday season are the same consumers who repay that debt shortly thereafter in the following year, it is an indication that, on average, consumers may use year-end credit card borrowing as relatively short-term financing.
  • The seasonality in borrowing on general purpose credit cards is most pronounced for consumers with prime and superprime credit scores. In contrast, general purpose credit card balances for consumers with subprime credit scores exhibit relatively little seasonality.  The CFPB observes that this difference is at least partially attributable to higher card utilization rates of consumers with subprime credit scores.
  • Delinquency rates on credit cards rise during and after the holiday season, with the seasonality in delinquencies apparently driven by consumers with subprime credit scores.  These patterns may indicate financial distress among some credit card borrowers at the end of the year.  The CFPB observes that the decline in delinquencies that begins in February and accelerates in March may be attributable to consumers’ receipt of tax refunds and the use of such refunds to pay down debt.

The CFPB issued its third biennial report on the credit card market last week.  The report represents the first major report issued by the CFPB since former Director Cordray’s resignation and President Trump’s designation of Mick Mulvaney as Acting Director.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires the CFPB to perform periodic market reviews.  The CFPB’s first CARD Act report was issued in October 2013 and its second report was issued in December 2015.  Unlike those reports, the new report does not identify “areas of concern” or “areas of interest” that create risks for consumers and instead takes an objective approach to the information presented.

Also unlike the prior reports, the new report does not begin with an introductory message replete with editorializing similar to the “Message from Director Corday” that began the prior reports.  In addition, the CFPB’s press release announcing the new report, unlike the CFPB press releases announcing the prior reports, also takes an objective approach by describing several of the report’s key findings and eliminating “sensationalized” headlines or judgmental language suggesting improper industry conduct.  Indeed, rather than adopting a tone that is critical of industry, the CFPB observes in the “Final Note” of the report’s Executive Summary that the quantitative and qualitative indicators discussed in the report “generally suggest a positive picture for consumers in the credit card market” and states that this proposition is supported by direct consumer surveys such J.D. Power’s report “that in 2017 consumers reported their highest level of satisfaction with this market to date.”

The CFPB’s findings include:

  • Most measures of credit card availability have remained stable or increased since the 2015 report, with total outstanding credit card debt now at pre-recession levels and delinquency and charge-off rates showing an increase over the last year.
  • The importance of private label cards and secured credit cards in the non-prime market is growing, with issuers appearing to put increased weight on credit line management as a risk control mechanism.
  • Overall, since 2015, issuers have lowered their daily limits on debt collection phone calls for delinquent credit cards and appear to have pursued more internal collection activity either through in-house or first-party collectors rather than third party collectors, with a majority of issuers now supplementing their internal collection strategy with email use.  Fewer issuers sold debt in 2015 and 2016 than in prior years, with those continuing to sell debts planning to increase their sales of charged-off debt in 2017.
  • More consumers are now engaging with financial products, including credit cards, through digital portals on computers and mobile devices and shop for, originate, and service credit card accounts digitally.

Among the “areas of concern” identified in the 2013 and 2015 CARD Act reports were rewards programs and deferred interest products.  With regard to rewards programs, while the new report notes that the 2015 report “identified a number of area of potential concern regarding rewards card practices” and  “a number of these issues persist,” it states that “progress has been made by others.”  Referencing a letter to the CFPB from the American Bankers Association setting forth principles and practices “that would address at least some of those concerns” if adopted by rewards-cards issuing banks, the CFPB commented that it was “encouraged by efforts to improve the clarity and user-friendliness of rewards cards products and disclosures, and continues to monitor rewards programs closely for opportunities to improve consumer experiences and outcomes.”

With regard to deferred interest, although the CFPB notes in the new report that deferred interest promotions benefit consumers who pay their promotional balance in full within the promotional period but “are more costly for consumers who do not,” the CFPB does not raise concerns about consumers’ understanding of these products as it did in prior reports.  Consumer concerns are only referenced in a footnote in which the CFPB states that although industry contends that deferred interest promotions provide value to consumers, consumer advocates have called for such promotions to be banned or substantially restructured.

In the 2015 report, the CFPB raised various concerns about subprime credit cards, such as their fee structure and the education level of the consumers to whom they were marketed.  Rather than highlighting risks presented by subprime cards, the CFPB describes such cards in the new report as products that “offer [consumers who lack prime credit scores] the dual possibility of access to the credit card market as well as an avenue for building or rehabilitating credit record when timely payments are made.”  The report reviews the products offered by “subprime specialists,” a term that covers “card-issuing banks as well as non-bank program managers that may play a role in designing and servicing credit card products in this segment of the market.”  The CFPB looks at product structure and issuer practices for unsecured general purpose cards, secured general purpose cards, and private label cards, as well as consumer experiences and outcomes in the subprime market.  Also indicative of the CFPB’s change in tone is the following statement in its discussion of secured cards:

“The major risk to consumers using secured credit cards is that of severe delinquency or default.  A consumer who fails to make timely payments on their secured card could find that their attempt to rehabilitate or establish their credit record has failed.  However, the credit reporting consequences of secured card failure are generally no different than for any other credit card.  This risk is the risk all consumers take when they utilize card credit.”

While referring to the issue as a “challenge” rather than an “area of interest or concern,” the CFPB does raise a concern about disclosures in its discussion of digital account servicing, meaning online account servicing portals and smart-phone based account servicing applications.  The CFPB comments that while digital platforms that allow consumers to access and manage their accounts can have clear benefits for consumers and issuers, they “may also present some challenges.”  The CFPB observes that consumers who do not receive paper statements but also do not digitally access their statements, “may not see required disclosures containing certain account information, such as the full picture of the fee burden on an account, or the expected cost of carrying balances over certain lengths of time.”  Noting that the 2015 report found that only 10% of active accounts actually opened an online statement in a given quarter, the CFPB states that, combined with the increasing share of accounts opting out of paper statements, “this means that, for a significant and growing portion of accounts, the account holder does not see account statements at all.”

The new report includes a detailed discussion of third-party credit card comparison (TPC) websites that allow consumers to obtain information about multiple cards.  For purposes of its report, the CFPB looked at TPC sites that are operated by a third party that is not a credit card issuer, are regularly and frequently updated to reflect new product information, display different information in response to user input, and link directly to issuers’ product application sites.  Among the topics discussed in the report are how a consumer interacts with a TPC, the nature of the information provided by a TPC site, and TPC site business practices such as revenue agreements and models, how the cards shown to consumers are selected and presented, and editorial independence.  The report also includes a section on product innovation that discusses how adoption of the Europay, MasterCard, and Visa standard (i.e. “chip” cards) has progressed in the United States, the types of mobile wallets that have seen growth in recent years, developments in the personal installment loan market that have resulted from increasing participation by fintech and other non-bank lenders, and  developments in closed-end point-of-sale lending products.

The report’s objective approach is certainly a welcome change.  The  CFPB’s general satisfaction with the industry, however, does not mean that it will cease to hold issuers responsible for compliance with the consumer financial protection laws, including the Truth in Lending Act and Regulation Z.  While CFPB enforcement activity is likely to decrease under the Trump administration, CFPB supervisory activity is not expected to change significantly.

In addition, Democratic state AGs have indicated that they intend to fill any vacuum created by a less aggressive CFPB approach to enforcement.  State AGs and regulators have direct enforcement authority under various federal consumer protection statutes and, pursuant to Section 1042 of the Consumer Financial Protection Act, can bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.

On February 7, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

  • Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.
  • Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.

 

 

 

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank.  The adjustments reflect changes in the Consumer Price Index in effect on June 1, 2017 and will take effect January 1, 2018.

CARD Act.  The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor.  The calculation did not result in a change for 2018 to the current minimum interest charge threshold (which requires disclosure of any minimum interest charge above $1.00).  The calculation also did not result in a change for 2018 to the first and subsequent violation safe harbor penalty fees.  Such fees remain at $27 and $38, respectively.

HOEPA.  HOEPA requires the CFPB to annually adjust the total loan amount and fee thresholds that determine whether a transaction is a high cost mortgage.  In the final rule, for 2018, the CFPB increased the current total loan amount threshold from $20,579 to $21,032, and the current points and fees threshold from $1,029 to $1,052.  As a result, in 2018, a transaction will be a high-cost mortgage (1) if the total loan amount is $21,032 or more and the points and fees exceed 5 percent of the total loan amount, or (2) if the total loan amount is less than $21,032 and the points and fees exceed the lesser of $1,052 or 8 percent of the total loan amount.

Ability to repay/QM rule.  Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan cannot exceed to satisfy the requirements for a QM.  The CFPB must also annually adjust the related loan amount limits.  In the final rule, the CFPB increased these limits for 2018 to the following:

  • For a loan amount greater than or equal to $105,158 (currently $102,894), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $63,095 (currently $61,737) but less than $105,158, points and fees may not exceed $3,155
  • For a loan amount greater than or equal to $21,032 (currently $20,579) but less than $63,095, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $13,145 (currently $12,862) but less than $21,032, points and fees may not exceed $1,052
  • For a loan amount less than $13,145 (currently $12,862), points and fees may not exceed 8 percent of the total loan amount

 

The CFPB has issued its March 2017 complaint report that highlights credit card complaints.  The report also highlights complaints from consumers in Massachusetts and the Boston metro area.  On April 13, 2017, from 12:00 p.m. to 1:00 p.m.ET, Ballard Spahr will hold a webinar, “The CFPB’s Consumer Credit Card Market RFI and Other Important Recent Credit Card Developments.”  Click here for more information and a link to register.

General findings include the following:

  • As of March 1, 2017, the CFPB handled approximately 1,136,000 complaints nationally, including approximately 26,300 complaints in February 2017.
  • Debt collection continued to be the most-complained-about financial product or service in February 2017, representing about 30 percent of complaints submitted.
  • Debt collection complaints, together with complaints about credit reporting and student loans, collectively represented about 62 percent of the complaints submitted in February 2017.
  • Complaints about student loans showed the greatest month-over-month decrease, decreasing 51 percent from January 2017.  According to the CFPB, there was a spike in student loan complaints in January 2017 “around the time the CFPB took a major enforcement action against a loan servicer.”  At the same time, student loans had the greatest percentage increase based on a three-month average, increasing about 429 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior CFPB monthly complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increasing percentages represented by student loan complaints received by the CFPB most likely reflects the change in where such complaints are sent.
  • Payday loans showed the greatest percentage decrease based on a three-month average, decreasing about 286 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017).  Complaints during those periods decreased from 399 complaints in 2015/2016 to 286 complaints in 2016/2017.  In the February 2017 complaint report, payday loans also showed the greatest percentage decrease based on a three-month average.
  • Montana, Georgia, Missouri, and South Carolina experienced the greatest complaint volume increases from the same time last year  (December 2015 to February 2016 compared with December 2016 to February 2017) with increases of, respectively, 53, 53, 39, and 39 percent.
  • West Virginia, Kansas, and New Hampshire experienced the greatest complaint volume decreases from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017) with decreases of, respectively, 6,  3, and 3 percent.

Findings regarding credit card complaints include the following:

  • The CFPB has handled approximately 116,200 credit card complaints since July 21, 2011, making credit cards the fourth-most-complained-about product, representing 10 percent of all complaints.
  • The most common issues identified in complaints involved billing disputes, particularly disputes involving fraudulent charges.  Consumers complained about the receipt of confusing guidance when notifying their credit card company of such charges and difficulty in having the charges removed even after receiving notice from the credit card company that the dispute was resolved favorably.
  • Consumers complained about problems with rewards programs, such as being unable to take advantage of benefits after meeting program requirements for such benefits and online information that contradicted information received from customer representatives.
  • Consumers complained about the terms of deferred-interest programs, including confusion as to how payments were applied to multiple balances.  Deferred-interest and rewards programs are among the topics on which the CFPB is seeking information in the RFI about the credit card market that it issued last month.
  • Consumers reported issues related to card issuance, such as unsolicited credit cards and problems arising in portfolio conversions from one lender to another.

Findings regarding complaints from Massachusetts consumers include the following:

  • As of March 1, 2017, approximately 20,600 complaints were submitted by Massachusetts consumers of which approximately 15,400 were from Boston consumers.
  • Mortgages was the most-complained-about product, representing 26 percent of all complaints submitted by Massachusetts consumers, which was higher than the national average rate of 24 percent of all complaints submitted by consumers.
  • Average monthly complaints received from Massachusetts consumers increased 19 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017), lower than the increase of 22 percent nationally.

 

The CFPB released its annual report on college credit card agreements (the fifth issued by the CFPB), together with a compliance bulletin regarding the obligation of colleges and universities under the CARD Act to publicly disclose their credit card marketing agreements.

Like the CFPB’s 2014 and 2015 annual reports, the new report consolidates the CFPB’s mandatory reporting under the CARD Act on college credit card agreements and “other information on financial products offered or marketed to students collected via our various market monitoring tools.”  According to the CFPB, this consolidation of information “will further the Bureau’s mandate in a manner consistent with our goal to focus holistically on the suite of issues facing student financial consumers beyond directly financing the costs of their education.”  For that reason, the CFPB “reframed” the report by titling it an annual report on “Student banking” and using one section of the report to discuss student debit cards and bank accounts and another section to discuss college credit cards.  The CFPB also notes that in a departure from prior practice, it is releasing all current and historical data collected by the CFPB and Federal Reserve Board “in a single, consolidated dataset alongside this report” and intends to maintain this dataset on an ongoing basis.  (The Fed submitted two CARD Act annual reports before responsibility for the report was transferred to the CFPB.)

Annual Report.  The CFPB’s findings in the new report regarding debit cards and bank accounts, which are based on its analysis of approximately 500 marketing agreements for such products in the Department of Education’s (ED) newly-created database, include:

  • In October 2015, the ED issued a final rule revising its Title IV Higher Education Act cash management rules to add new restrictions on financial products used to disburse credit balance funds to students.  The revised rule requires a school to ensure that the terms of such products are “not inconsistent with the best financial interests of students.”  The ED’s rule distinguishes between financial products offered under “tier one (T1) arrangements” and “tier two (T2) arrangements.”  T1 arrangements are arrangements between schools and a third-party servicer under which the servicer performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the school to financial accounts offered by the servicer.  T2 arrangements are arrangements between a school and a vendor that offers financial accounts through a financial institution and under which financial accounts are offered and marketed directly to students.  Accounts offered under T1 arrangements are subject to various restrictions, including a prohibition on overdraft and point-of-sale fees.  While acknowledging that such restrictions do not apply to accounts unless they are offered under T1 arrangements, the CFPB nevertheless appears to be suggesting that any marketing agreement a school enters into should either prohibit overdraft or other types of fees or place daily or other limits on such fees.  The CFPB observes that “largely, accounts marketed under general marketing agreements do not feature the baseline protections against high fees afforded to students offered under [T1 arrangements].  This may raise questions for colleges and other stakeholders considering whether general marketing agreements that permit high fees are consistent with the best financial interests of their students.”  The CFPB comments that marketing agreements generally do not require financial institutions to notify or seek approval from schools for future fee increases and some agreements do not require financial institutions to provide colleges with regular access to detailed data about fees.  It notes that under the ED’s rule, a school can satisfy its obligation to provide accounts that are “not inconsistent with the best financial interests of students” by documenting that it conducts periodic reviews to determine if account fees are consistent with prevailing market rates.  The CFPB suggests that schools would be “in better position to advocate for protections and more favorable terms” and have “a better ability to protect students from excessive fees” if they are provided with advance notice of changes to terms related to fees and detailed information on the amount and frequency of fees charged to students.
  • Noting that the ED’s rule requires schools to maintain the ability to terminate a marketing agreement based on student complaints, the CFPB comments that most agreements it reviewed did not require financial institutions to establish a system to identify, track and resolve student complaints related to school-sponsored products or provide periodic complaint reports to schools.  The CFPB observes that this practice “could better-position the college to analyze and act on information contained in these complaints.”

The CFPB’s findings in the new report regarding college credit cards, which is based on the agreements and related information that issuers are required to submit annually to the CFPB, include:

  • Continuing a trend that began in 2009, the number of college credit card agreements, the total number of associated credit card accounts open at year-end 2015, and the amount paid by issuers to schools and affiliated organizations (such as alumni associations) declined again in 2015.
  • While agreements between an issuer and an alumni association represented a smaller share of agreements than in 2014, such agreements still represented more than half of all agreements reported to the CFPB and increased their predominance in other metrics, representing two-thirds of all associated accounts and three-quarters of all associated payments.
  • There were 254 agreements in effect as of year-end 2015.  The CFPB contrasts with the Department of Education’s calculation that in 2015 at least 832 colleges had agreements covering the provision of debit or prepaid card services to their students.

Compliance Bulletin.  The CARD Act requires colleges and universities to publicly disclose their credit card marketing agreements.  The Official Commentary to Regulation Z  (Comment 1026.57(b)-1) provides that colleges and universities can satisfy the CARD Act requirement for public disclosure either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.

The bulletin notes that in its December 2015 CARD Act report, the CFPB reported that after reviewing a sample of 25 colleges and universities with the largest number of accounts subject to active credit card agreements, it found that most schools did not make copies of these agreements available on their websites and most failed to provide alternatives ways to access the agreements.  The bulletin warns schools that they “put themselves at high risk of compliance failure when they do not use website disclosure.”  It states that based on the CFPB’s market monitoring and investigations, “[e]xcept in rare cases, schools that did not publish agreements on their websites, but rather instituted other procedures and mechanisms instead, created delays and burdens to access the information.”  The CFPB advises schools, “[g]iven this clear record,” to “begin publishing these agreements on their websites without delay if they are not already doing so.”

The bulletin also discusses the treatment of agreements that are no longer in effect, stating that while the CFPB has not interpreted how the CARD Act’s disclosure requirement applies to such agreements, “disclosure of such agreements is consistent with the transparency goals underlying the [requirement] where such agreements continue to be used to market or issue cards to students.”  The CFPB recommends that schools continue to provide students with access to such agreements until the following events have occurred: (1) the agreement’s stated term has expired, (2) the card issuer is no longer obligated to make any payments to the school under the agreement, and (3) cards are no longer marketed or issued to students under the terms of the agreement.