InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB issues interpretive rule likening BNPL accounts to credit cards under Regulation Z
On May 22, the CFPB issued an interpretive rule stating its position that certain consumer protection provisions of Regulation Z applied to Buy Now, Pay Later (BNPL) accounts. The interpretive rule asserted that “digital user accounts” used to access BNPL credit are considered “credit cards” under Regulation Z.
According to the CFPB, BNPL “digital user accounts” fell within TILA and Regulation Z’s definition of a credit card because they qualified as an “other credit device” or “other single credit device.” The CFPB likened its interpretation of “credit device” to the Fed’s interpretation of “access device” in Regulation E, which included non-physical payment codes to initiate an electronic fund transfer. Further, the CFPB stated that because BNPL “digital user accounts” were usable “from time to time to obtain credit,” they met the definition of a “credit card” under Regulation Z.
As a result, the CFPB’s interpretive rule stated that entities issuing such accounts were “card issuers” and therefore “creditors” who are “broadly subject” to the regulations in Subpart B of Regulation Z. The interpretive rule noted that although Subpart B was entitled “Open-End Credit,” it nevertheless applied to closed-end BNPL credit issued through a digital user account if such credit was not subject to a finance charge and was not payable by written agreement in more than four installments. Subpart B included provisions applicable to, among other things, disclosures, consumer disputes, billing errors, and refunds.
The CFPB will request public feedback on the interpretive rule but will reserve the right to move forward without revisions if they are not warranted. The CFPB will submit a report with the interpretive rule to the Senate, the U.S. House, and the U.S. Comptroller General (head of the GAO) prior to the rule’s published effective date.
CFPB’s credit card late fee rule stayed
On May 10, the U.S. District Court for the Northern District of Texas entered an opinion and order granting the plaintiffs, comprising several trade organization, its motion for preliminary injunction and placed a stay on the CFPB’s credit card late fee rule. As previously covered by InfoBytes, a suit was filed against the CFPB by multiple trade organizations to challenge the Bureau’s final rule to amend Regulation Z and limit most credit card late fees to $8.
The court decided not to address the plaintiffs’ arguments regarding the CARD Act, TILA, and APA violations due to the Court of Appeals for the Fifth Circuit opinion that the CFPB's funding structure was unconstitutional; therefore, any regulations promulgated by the CFPB would be unconstitutional. For that reason, due to the CFPB’s unconstitutional structure found by the 5th Circuit, the District Court decided that all factors weighed in favor of issuing a preliminary injunction and thus staying the final rule.
CFPB reports consumer complaints on credit card rewards programs
On May 9, the CFPB issued a report on credit card rewards programs which highlighted the CFPB’s views on issues affecting millions of consumers. The report opened with a note that the CFPB received over 1,200 complaints regarding credit card rewards in 2023, reportedly a 70 percent increase since before the pandemic, and according to the CFPB, the research found that the benefits of rewards programs “fail to exceed” the costs of credit cards for many borrowers. The report identified four themes: consumers felt misled by vague or hidden conditions that do not match marketing materials from issuers; consumers lost out when card issuers devalue rewards; consumers faced obstacles when card issuers do not resolve redemption issues; and consumers lost rewards when accounts are closed.
In a live panel between the Director of the CFPB, Rohit Chopra, Secretary of the DOT, Pete Buttigieg, and airline trade leaders on credit card reward programs, Chopra noted that there were 550 million credit cards in the U.S. which collectively account for over $1 trillion in consumer debt. Chopra also stated the CFPB will review how it can protect consumers against the devaluation of credit card points. In the panel, Chopra asked the trade groups what they would like the CFPB to do regarding credit card terms and conditions: some organizations asked for greater transparency in points systems, with one suggesting that credit card issuers’ ability to change terms mid-contract should be prohibited.
Bank granted motion to dismiss in credit card sign-up bonus class action
On April 15, the U.S. District Court for the Northern District of California entered an order granting a defendant bank’s motion to dismiss a plaintiff’s claims relating to alleged false advertising in connection with a credit card, with leave to amend. Plaintiff alleged that after responding to a social media advertisement for a credit card in December 2022, promising a $200 cash sign-up bonus for spending $500 within the first three billing cycles, he applied for and was approved for the card. However, the terms of the agreement he entered into with defendant did not mention the sign-up bonus, and he never received it. Consequently, plaintiff sued for "Breach of Contract Including Breach of the Covenant of Good Faith and Fair Dealing," asserting that defendant’s actions are part of a broader marketing strategy to entice customers to apply for defendant’s credit cards. Defendant filed a motion to dismiss the case based on two arguments: (i) plaintiff lacks the necessary Article III standing; and (ii) plaintiff failed to state a claim upon which relief can be granted.
The court sided with the defendant on both arguments determining that (i) the plaintiff failed to establish the “traceability” element of standing because it is not clear when the advertisement was seen or what it specifically promised; and (ii) the contract did not include a promise for a sign-up bonus, such that no breach of contract had occurred.
The court provided plaintiff with leave to amend within 45 days from entry of the order.
Democratic senators pen letter to trade org. that brought suit against CFPB’s credit card late fee rule
On April 14, two Democratic senators, Sen. Elizabeth Warren (D-MA) and Sen. Sheldon Whitehouse (D-RI), wrote a letter to the head of a commercial trade organization that brought a lawsuit against the CFPB, challenging the CFPB’s rule capping credit card late fees. As previously covered by InfoBytes, the trade organization and other business groups sued the CFPB, challenging its recent final rule limiting most credit card late fees to $8. The senators wrote that the trade organization’s decision to sue was “outrageous and unwarranted” as the senators sought an explanation for the opposition.
The senators stated that the lawsuit was “frivolous,” and argued that the trade organization neglected “Main Street businesses” and instead was “doing the dirty work of its big bank members” who charged these high fees. Bolstering their position that the rule would cover large credit card issuers only, the senators noted that the rule would be expected to apply to less than one percent of the 4,000 financial institutions offering credit cards. Further, the senators argued that this lawsuit was a pattern of the trade organization representing the interests of large corporations, citing a report that found that only 23 of the 28 million small businesses in the U.S. benefited from the trade organization’s litigation. In seeking an explanation, the senators requested answers to a series of questions, including “How did [the trade organization] reach the decision to sue the CFPB to stop the agency from putting this rule in place?” and “Has the [trade organization] conducted an economic analysis of how the CFPB proposal would impact its members?”
5th Circuit reverses District Court’s decision to transfer credit card late fee case
On April 5, the U.S. Court of Appeals for the Fifth Circuit held that the U.S. District Court for the Northern District of Texas lacked jurisdiction to transfer a case challenging a CFPB rulemaking to the U.S. District Court for the District of Columbia. The 5th Circuit’s decision did not examine whether the transfer order was proper, but rather whether the court had jurisdiction to enter it. As previously covered by InfoBytes, the U.S. District Court for the Northern District of Texas granted the CFPB a change of venue on March 28 because only one of the six plaintiffs resided in Fort Worth. The 5th Circuit found that the lower court erred by granting the CFPB’s motion to change venues instead of ruling on the plaintiffs’ motion for preliminary injunction. The plaintiffs filed a writ of mandamus and argued the lower court “abused its discretion” by transferring the case while the plaintiffs’ appeal was outstanding, and that the lower court did not have jurisdiction to order the transfer. The 5th Circuit agreed and ruled that once a party appeals a district court’s decision, the district court “has zero jurisdiction to do anything” to change the case. The 5th Circuit granted the plaintiffs’ petition of mandamus, vacated the district court’s transfer order, and ordered the district court to reopen the case.
This case has been brought by multiple trade organizations to challenge the CFPB’s attempt to alter the structure and amount of credit card late fees through its alleged authority under the CARD Act, as covered by InfoBytes here.
Kansas updates UCCC provisions including credit card surcharges
On March 29, the Governor of Kansas signed into law HB 2247, a comprehensive bill that updated UCCC provisions in an effort to regulate the credit industry more efficiently, and moved provisions from the UCCC to the Kansas Mortgage Business Act, among other things. The bill amended provisions relating to credit card surcharges—allowing retailers and other persons to impose a surcharge on a customer who uses a credit card payment if such retailer or person provided a clear and conspicuous disclosure of the surcharge amount at the point of entry or sale or in advance of the transaction. The bill nearly tripled the “threshold amount” on certain consumer loans and leases from $25,000 to $69,500. The bill also clarified license requirements, among other things. HB 2247 will go into effect on July 1.
CFPB wins approval to move credit card late fee case to Washington, D.C.
On March 28, the U.S. District Court for the Northern District of Texas granted the CFPB’s motion to transfer a case to the U.S. District Court for the District of Columbia after identifying several concerns regarding litigating the case in the Texas venue. This case has been brought by multiple trade organizations to challenge the CFPB’s attempt to alter the structure and amount of credit card late fees under its alleged authority under the CARD Act, covered by InfoBytes here. The court agreed to transfer the case after finding that both defendants, along with three of the six plaintiffs, resided in Washington where the rule at issue was promulgated; comparatively, only one of the six plaintiffs resided in Fort Worth.
The court analyzed both private- and public-interest factors. On private-interest factors, the court agreed that Washington was a more practical venue, noting that eight of the ten attorneys representing the parties list offices in Washington, while only one plaintiff was headquartered in Texas. The court concluded that plaintiffs also have not identified any substantial or practical issues with this case being held in Washington. On public interest factors, the court weighed the comparative dockets and noted that, on average, a case in Washington would be resolved faster than in Texas. The court also reasoned that there was a strong interest in having the case decided in Washington. “The Rule at issue in this case was promulgated in Washington D.C., by government agencies stationed in Washington D.C., and by employees who work in Washington D.C. Most of the Plaintiffs in this case are also based in Washington D.C. and eighty percent of the attorneys in this matter work in Washington D.C. Thus, the [U.S. District Court for the District of Columbia] has a stronger interest in resolving this dispute, as it is the epicenter for these types of rules and challenges thereto.”
Business groups sue the CFPB over credit card late fee rule
On March 7, several business groups (plaintiffs) sued the CFPB rule in the U.S. District Court for the Northern District of Texas over its announced credit card late fee rule. As previously covered by InfoBytes, the Bureau’s new final rule limited most credit card late fees to $8, among other actions, and was met immediately with criticism from banks and legislators.
The plaintiffs’ complaint claimed the CFPB completed the rule hastily to implement a pledge made by President Biden around his State of the Union Address to reduce credit card late fees by 75 percent. The complaint further asserted the CFPB skipped necessary steps, made economic miscalculations, and otherwise breached the Administrative Procedure Act. As alleged, the Bureau likely understated “the volatility of card issuers’ cost-to-fee ratios pertaining to late fees” and improperly relied on data which does not allow for the recovery of a “reasonable and proportional” penalty fee. On the Bureau’s use of the Y-14M data, the complaint alleged the new rule ignored peer-reviewed studies and instead opted to base the rule on an internal study using confidential data that was not available for examination during the period allocated for public comment. The plaintiffs argued the final rule would incur “substantial compliance costs” by amending printed disclosures, using the cost-analysis provisions, and notifying consumers of changes in interest rates to recoup costs, among other problems. The complaint also cited TILA’s effective-date provisions and the Bureau’s embattled funding structure to support the argument that the final rule would cause irreparable harm.
State of the Union Address: President Biden addresses the banking industry
On March 7, President Biden delivered his 2024 State of the Union Address, where he highlighted how his administration is actively working to reduce costs for consumers by addressing issues such as corporate price gouging and alleged “junk fees.” According to a related White House Fact Sheet, the Biden Administration was focusing on corporate practices that may contribute to high prices, urging companies to lower their prices in line with decreasing input costs and stabilize supply chains. Biden highlighted the CFPB’s proposed rule on overdraft fees and the final rule on credit card late fees as progress in reducing alleged “junk fees.”
Furthermore, the fact sheet highlighted the CFPB’s scrutiny of alleged practices by branded retailers and airline credit cards of devaluing points and miles and luring in consumers with misleading deferred interest products.