CFPB Takes First Enforcement Action Against Deferred-Interest Cards

WASHINGTON — The Consumer Financial Protection Bureau on Tuesday accused GE Capital Retail Bank of misleading consumers into a health care credit card product that retroactively charged exorbitant interest rates, marking the agency's first significant attempt to go after such offerings.

CFPB officials said that a GE Capital subsidiary, CareCredit, signed up millions of consumers at medical offices for a credit card that was marketed with a "no interest if paid in full" teaser.

But the company actually charged high interest rates on the full balance that only appeared after the promotional period ended. The CFPB ordered the companies to refund up to $34.1 million to more than 1.2 million consumers who signed up for the CareCredit card at medical offices.

"When people seek medical care, they are in a particularly vulnerable situation. … Unlike when they are at a bank or when they receive unsolicited mail, they are not 'on guard' financially. They are not thinking carefully about the terms of a financial contract — fees, penalties, interest rates," CFPB Director Richard Cordray said during a conference call. "Their focus is on getting physically better. So it is particularly important that a credit card company offering personal lines of credit to pay for health care is doing everything to the letter of the law — that they are treating people fairly, with dignity, and with the utmost transparency."

It was the first formal action the agency has taken against a misleading deferred-interest card product since it warned about such tactics in its markets report in October. It was also the bureau's first public action related to the health care industry in which it targeted the largest card provider in that niche, officials said.

"We will continue to monitor these products carefully, and most especially we will not tolerate financial companies that take advantage of patients and their loved ones. Consumers paying for medical or dental procedures should not be asked to sign up for complex financial products whose key terms are not adequately explained," Cordray said. "Medical debt is already a big problem for many Americans. Poor credit card transparency should not be making the problem even worse."

The CFPB said more than 175,000 doctors, dentists and other medical providers were enrolled in CareCredit's product and were selling it to customers in their offices. Though the card was being offered to consumers through staff at medical offices, the CFPB said it is CareCredit's fault for not properly training medical staff on their product. As part of the order, CareCredit is required to properly train medical staff and call most of the consumers who sign up for the card to inform them on the terms of the deal, in addition to properly disclosing terms upfront. It must also now directly enroll consumers with transactions of $1,000 or more through a representative at CareCredit and not at a medical office.

"During the course of our investigation, we found that many patients did not receive paper copies of the credit card agreement and instead relied on staff at health care offices to explain it to them," Cordray said. "Some staff had received little or no training from CareCredit. Some providers themselves admitted that they were confused about the actual consequences of the deferred-interest terms."

About 4 million consumers are actively enrolled in the CareCredit card and roughly 85% of them were placed in the deferred-interest financing plan, the CFPB said. Cordray noted that many of those customers thought they signed up for an interest-free loan or an in-house payment plan with their doctor. In fact, CareCredit was accruing a nearly 27% annual interest rate on the card during the "no interest" promotional period — typically lasting six months to two years — which was applied in full if the customer did not pay off the balance in time.

CareCredit's interest rate "is substantially higher than the rate on standard, general-purpose credit cards that the patient might otherwise have used to pay the bill," Cordray said. "The result can be that the patient is misled into signing up for a very expensive loan."

The investigation was triggered after receiving a "substantial" amount of consumer complaints, Cordray said. The CFPB used its authority through the Dodd-Frank Act to cite CareCredit for engaging in unfair and deceptive practices since January 2009.The order calls for GE Capital and CareCredit to handle the $34 million reimbursement fund for affected consumers whose claims will be reviewed by an independent adjudicator. It also calls for CareCredit to issue clearer disclosures about the deferred interest rate and to warn customers in advance when the no interest rate period ends.

CFPB officials were careful not to say they were trying to eliminate the "no interest" teaser rate periods commonly used by card companies. Even the order against CareCredit just requires the company to be clear on its disclosures and rate increases, rather than forcing it to lower the rate or remove the product entirely. Still, the CFPB is heavily scrutinizing how companies market such products, particularly if card companies charge the rate retroactively — a tactic commonly used among store-branded retailers.

"The general-purpose credit card market often offers promotional rates with an interest-free period. Such cards typically involve no potential retroactive assessment of interest," Cordray said. "But deferred-interest products are very different, and consumers often do not recognize the difference. As was true in this case, they can end up costing vulnerable consumers a lot of money."