As the Federal Trade Commission continues to step up its efforts to police deceptive advertising across industries and product categories alike, other governmental divisions are following suit. The FDIC, for example, has turned its attention to financial institutions alleged to be engaging in deceptive practices related to credit card solicitations and credit card rate increases—the first such actions of this nature for the FDIC since its action against CompuCredit in 2008.
The FDIC recently announced the issuance of two cease-and-desist orders—one against American Express Centurion Bank and the other against Advanta Bank Corp, both for deceptive credit card practices.
The order issued against American Express Centurion Bank (“AMEX”) alleged that the bank failed to provide timely notices to cardholders that their credit lines were being reduced, at the same time that the bank sent them convenience checks. Consequently, when cardholders tried to use the checks—believing they had credit limit room—the checks were dishonored, resulting in the consumers incurring bounced check fees, which the FDIC alleged was an unfair practice under Section 5 of the FTC Act. AMEX agreed to make restitution of $160 per dishonored check, or an aggregate of approximately $3 million, as well as to implement new procedures for reviewing credit limits and notifying consumers of changes to their limit. The institution also agreed to establish procedures that would allow customers to obtain pre-authorization to use a convenience check, before using the same to make purchases.
The order issued against Advanta Bank Corp. (“Advanta”) (which ceased issuing cards in May 2009) alleged that Advanta marketed and advertised a cash-back reward feature on certain of its business credit card accounts that was rarely attainable, if at all. For example, the advertised percentage cash-back was only available for certain purchases, and indeed, the FDIC alleged that it was effectively impossible to earn the stated percentage of cash-back reward payments, thereby rendering Advanta’s marketing materials as deceptive. As a result, the FDIC concluded that Advanta’s solicitations were likely to mislead a reasonable customer, and therefore, Advanta engaged in a pattern of deceptive acts or practices in violation of Section 5 of the FTC Act.
The FDIC also alleged that Advanta had substantially increased annual percentage rates (APRs) on cardholders that had neither exceeded their credit limits nor were delinquent in making payments on their accounts. The FDIC alleged that these rate increases had been implemented in an unfair manner, and without adequate notice as to (i) the amount or the reason for the increase, or (ii) the procedures to opt-out of the rate increase.
These questionable practices have also led to the recent decision of both the American Arbitration Association (“AAA”) and the National Arbitration Forum (“NAF”) to cease providing a forum for disputes between customers and their credit card companies (as well as cellphone companies). The AAA has stated that it will stop participating in consumer-debt collection disputes until new guidelines are established. Among the problems cited by both groups, provisions such as mandatory arbitration hearings in credit card agreements require customers to unknowingly waive important rights. According to the Minnesota Attorney General, Lori Swanson, who recently settled with the NAF over arbitration / debt-collection practices, “This is an issue beyond any one problem company. It is a systemic industry wide problem. Consumers are giving away rights without evening knowing it.” The practice of arbitrating consumer-debt collection matters has also caught the attention of Congress, where a congressional sub-committee is scheduled to hold a meeting on this various issue this week.
Maintaining this momentum of heightened regulations in the financial industry, on June 17, 2009, the Obama administration unveiled its plan for Congress and several regulatory agencies to adopt a comprehensive series of changes that would increase the role of the federal government in almost every aspect of the financial services industry, including the marketing and advertising of financial products. For example, if adopted as proposed by the President, the proposal would create several new federal agencies, offices, and councils, including a new Consumer Financial Protection Agency (CFPA), dedicated to policing consumer financial products and services.
The CFPA has been designed to regulate the offering of consumer financial products and services in their entirety, save those instruments that will continue to be regulated by the SEC or the CFTC. Its proposed authority is very broad, with a mandate to promulgate, interpret and enforce rules implementing all existing federal consumer financial services and fair lending laws. More importantly, its authority would extend not only to banks, thrifts and credit unions, but also to mortgage lenders, title insurers, money service businesses, advertising and marketing agencies, issuers of prepaid or stored value cards, consumer reporting agencies, debt collectors, certain lessors, certain investment advisors, and those that engage in financial data processing. To do that, the proposed legislation transfers all of the authority over these products and services from the federal bank regulatory agencies and the FTC to the CFPA. While the FTC would retain some back-up authority (as would the bank regulators), this will be a substantial change in the regulatory landscape.
For financial institutions, this all spells trouble. There are already myriad regulations that govern their activities. Adding yet another bureaucratic agency and the resulting collision of jurisdiction and inconsistent principles will only confuse an already difficult situation. But whether the CFPA comes to be or not, the horizon for banking regulation is certainly clouded with the likelihood of more oversight than ever before.