CFPB Encourages Changes to Deferred Interest Promotions
By Anita L. Boomstein, Partner, Global Payments
Deferred interest promotions should be more transparent, the Consumer Financial Protection Bureau told retail credit card companies in letters encouraging recipients to be more open with consumers.
What happened
Many retailers use credit cards with deferred interest promotions, where consumers are charged no interest for a set period if the promotional balance is paid in full by the end of the period. But in letters sent to “top retail credit card companies,” the CFPB outlined its concerns about the products, cautioning that consumers may be surprised by the “high, retroactive interest charges” that begin after the promotional period ends.
“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” bureau Director Richard Cordray said in a statement. “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.”
In 2015, the CFPB studied deferred interest products. While the bureau found that the promotions offer substantial benefits to some consumers, they pose “significant costs and risks” to others. “In particular, our review 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 wrote in its letters.
Because the costs are not incurred until the end of the promotional period, the costs of such offers are typically less transparent, the bureau said. Adding to the problem: consumers are unaware that interest actually starts accruing from the date of purchase and will be added back on top of the remaining principal balance if the promotional balance is not paid in full by the deadline at the end of the promotional period.
These charges can be “substantial,” the CFPB added, as the nonpromotional interest rate on such offers is generally around 25 percent. “Those who fail to pay off the balance in full, for example those with even a very small balance carried past the promotional expiration date, can end up owing much more in interest than the remaining balance due,” the bureau wrote. “We have received many consumer complaints from people who have found that they have incurred this unexpected charge.”
A large portion of the consumers who fail to repay their entire promotional balance before the deadline do manage to pay off the entire balance and associated interest charges shortly thereafter, leading the CFPB to speculate “that many consumers do not fully understand how deferred-interest promotions operate and the manner in which interest is assessed on these products,” a problem complicated when the account is used for other purchases as well.
“Successful implementation of deferred-interest programs requires robust compliance management systems and third-party oversight measures that ensure consumers are fully informed of the terms and true costs of promotional financing,” according to the letters.
The CFPB suggested an alternative: 0 percent interest promotions, where consumers are not assessed interest retroactively if the promotional balance is not paid in full by the end of the promotional period.
“As long as the end date of the promotional period is clearly disclosed, this approach is easier for consumers to understand,” the CFPB said. “And its costs may be more straightforward. If consumers do not fully repay by the promotional end date, they have the opportunity to resolve their debts without incurring an unexpectedly large lump-sum financial cost.”
While this change only benefits the consumers who fail to pay their promotional balances in full by the deadline at the end of the promotional period, “it is precisely these consumers who are likely to be most at risk,” the bureau noted, such as consumers who suffer an adverse economic shock like an unexpected medical bill or job loss. “This change in promotional terms may assist consumers who do not understand the full costs of failing to pay the deferred-interest promotional balances and make it easier for them to repay their debts following financial hardship.”
To read a sample letter from the CFPB, click here.
Why it matters
Why send the letters now? Last month a “major U.S. retailer, in partnership with one of the largest U.S. credit card issuers” decided to stop using deferred-interest promotions on its credit card program, the bureau said, switching to the 0 percent interest promotion option. “We commend this decision and want to bring it to your attention,” the letters stated. The CFPB’s letters also put retailers and card issuers on notice that the bureau is keeping an eye on deferred-interest promotions.
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Supreme Court: FDCPA Doesn’t Cover Owned Debt
By Charles E. Washburn Jr., Partner, Financial Services
A bank or other person may collect debts that it purchased for its own account without triggering the statutory requirements of the Fair Debt Collection Practices Act, a unanimous Supreme Court recently ruled.
What happened
The FDCPA was enacted in 1977, placing specific requirements on debt collectors. As defined by Section 1692a(6) of the statute, a “debt collector” is anyone who “regularly collects or attempts to collect … debts owed or due … another.”
Ricky Henson borrowed money from CitiFinancial Auto to purchase a car and then defaulted on the loan. Santander Consumer USA Inc. purchased the loan from CitiFinancial and sought to collect it. Henson filed a putative class action alleging that Santander’s collection efforts ran afoul of the FDCPA.
But the bank moved to dismiss the suit, arguing that it did not qualify as a “debt collector” under the statute because it did not regularly seek to collect debts “owed … another.” Instead, Santander only attempted to collect debts that it purchased and owned. A district court and the U.S. Court of Appeals for the Fourth Circuit both agreed.
Henson filed a writ of certiorari with the Supreme Court, noting that a circuit split existed on the issue. While the Eleventh Circuit reached the same conclusion as the Fourth Circuit, the Third and Seventh Circuits ruled otherwise. The justices granted cert and heard oral argument earlier this term.
In a unanimous opinion—and the first authored by new justice Neil Gorsuch—the Court sided with the bank, finding it “hard to disagree with the Fourth Circuit’s interpretive handiwork.”
“After all, the Act defines debt collectors to include those who regularly seek to collect debts ‘owed … another,’” the justices said. “And by its plain terms this language seems to focus our attention on third party collection agents working for a debt owner—not on a debt owner seeking to collect debts for itself. Neither does this language appear to suggest that we should care how a debt owner came to be a debt owner—whether the owner originated the debt or came by it only through a later purchase. All that matters is whether the target of the lawsuit regularly seeks to collect debts for its own account or does so for ‘another.’”
The plaintiffs argued that this reading of the FDCPA did not account for tense, as “owed” is the past participle of the verb “to owe.” To Henson and the other borrowers, this meant the statute excludes loan originators but embraces debt purchasers like Santander. If Congress wanted to exempt all present debt owners from the definition, it would have used the present participle “owing,” the plaintiffs told the justices.
“But this much doesn’t follow even as a matter of good grammar, let alone ordinary meaning,” Justice Gorsuch wrote. Past participles are “routinely” used as adjectives to describe the present state of a thing (for example, “burnt toast is inedible” or “a fallen branch blocks the path”) and the definition also uses the word “due” to describe a debt currently due at the time of collection. “So to rule for [the plaintiffs] we would have to suppose Congress set two words cheek by jowl in the same phrase but meant them to speak to entirely different periods of time,” the Court said.
Neighboring provisions of the statute demonstrate that Congress used the word “owed” to refer to present and not past debt relationships, the justices added, and other contextual clues can be found as well, including that lawmakers had no problem distinguishing between originators and purchasers.
The plaintiffs also hung their hat on public policy, arguing that the FDCPA was intended to protect consumers and incentivize debt collectors to treat borrowers well. Given the growth of the defaulted debt market since the statute’s passage, Henson contended the Court should recognize the need to include banks like Santander in the definition of “debt collector” with an eye toward fulfilling Congress’ goal of deterring untoward debt collection practices.
But the justices were not persuaded. “All this seems to us quite a lot of speculation,” Justice Gorsuch wrote. “And while it is of course our job to apply faithfully the law Congress has written, it is never our job to rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have done had it faced a question that, on everyone’s account, it never faced.”
Sticking with the motto “that [the legislature] says … what it means and means … what it says,” the justices said the issue was a matter for Congress, and not the Court, to resolve, affirming dismissal of the lawsuit.
To read the opinion in Henson v. Santander Consumer USA, Inc., click here.
Why it matters
The Supreme Court’s decision resolves a significant split among the federal appellate courts with a declaration that the FDCPA’s definition of a “debt collector” does not apply to a company collecting debts in default that it purchased. The justices explicitly left two questions not pursued by the parties unanswered, however: whether a business engaged in third-party debt collection falls under the statute when collecting on its own accounts and whether the Court should apply a broader definition of “debt collector” that encompasses those engaged “in any business the principal purpose of which is the collection of any debts.” Financial institutions should also keep in mind that because the Court’s opinion is limited to the FDCPA, they could still face additional requirements and potential liability under state debt collection laws.
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