Compliance Blog

The CFPB is sounding the alarm on deferred interest credit cards.  Earlier this month the Bureau issued a letter to retail credit card companies, encouraging them to use more transparent promotional offers.

Citing the results of its 2015 study on deferred interest credit products, the CFPB's letter notes that these promotional products "offer substantial benefits to some consumers, but carry significant costs and risks to others."  As an alternative to deferred interest financing, CFPB is encouraging 0% interest offers, which the Bureau believes is more transparent and carries less risk for consumers.

What's the problem?           

To attract customers and to encourage spending, some private label or store brand credit cards offer deferred interest promotional financing.  These types of credit promotions generally offer "0% interest if paid in full" during a set period of time (usually 6 months to a year).  During this defined promotional window, consumers who repay the full promotional balance can obtain free financing on the purchase of big-ticket items. But consumers who do not fully repay the balance by the close of the promotional window will find themselves hit with “high, retroactive interest charges” that kick in once the promotional period ends.

We've all seen these offers and have perhaps been enticed into opening a store card to buy a big screen TV or a fancy new dishwasher.  So what's the problem?

The CFPB says the issue is primarily a lack of transparency. While deferred interest cards are generally marketed to consumers as "no interest" promotions, in actuality, interest starts accruing from the date of purchase and is retroactively added back on top of the remaining principal if the consumer does not pay the full promotional balance by the end of the defined window.  Keeping in mind that the regular interest rates on these store brand cards tend to run around 25%, consumers may be hit with a substantial lump sum interest charge when the promotion period ends. Because the costs of deferred interest financing are not evident until the end of the promotion, consumers are often surprised to have incurred this unanticipated interest charge. 

The CFPB is concerned that consumers do not fully understand how deferred interest promotions operate and how interest is assessed on these products.  Exhibit A: The CFPB's 2015 study found that a large portion of consumers who failed to repay their full promotional balance before the end of their deferred interest deadline actually paid off the full promotional balance and the lump sum interest charge shortly after the promotion expired.  This certainly seems to support the CFPB's suspicion that consumers are either unable to understand the back-end pricing features that characterize these products, or to effectively manage deferred interest promotions in a way that they may avoid paying interest.

The Bureau's concerns are even more pronounced for subprime borrowers and other at-risk consumers.  According to the CFPB’s 2015 study, subprime or deep subprime consumers fully repay their balances within the promotional period only about 50% of the time.  Meanwhile, consumers with prime or super-prime scores pay off their promotional balances almost 90% of the time.  The CFPB's letter also notes that consumers suffering financial hardship—for example, individuals experiencing job loss or facing an unexpected medical expense—are particularly vulnerable to incurring "an unexpectedly large lump-sum financial cost."

What does this mean?

This is not the first time the CFPB has raised concerns about deferred interest credit cards; the Bureau has been signaling its aversion to these types of products for years. (See, CFPB’s 2015 study; this blog; that enforcement action.)  However, the CFPB's letter is expressly encouraging retail card companies to replace deferred interest promotions with 0% promotions, clearly indicating that it views deferred interest products as "high-risk."  While the letter indicates that programs with "robust compliance management systems and third-party oversight measures," may support the successful implementation of a deferred interest program, the CFPB offers little additional guidance on what a compliant program might look like. 

Time will tell if the Bureau will follow its ongoing pattern of regulating through enforcement, by pursuing greater enforcement action relative to deferred interest cards.

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McWatters Named NCUA Chairman

Good news for credit unions:  President Trump has designated Acting NCUA Board Chairman J. Mark McWatters as the tenth Chairman of the NCUA Board, effective June 23. 

McWatters was nominated to the NCUA Board by then-President Obama on January 7, 2014.  He joined the NCUA Board on August 26, 2014 following his confirmation by the Senate.  He has been serving as Acting Board Chairman since January 23.