CFPB Warns of Flaws in Credit Card Market

WASHINGTON — There are still significant problems in the credit card market despite a 2009 reform law that curtailed billions of dollars in unexpected fees, the Consumer Financial Protection Bureau said in a report Thursday.

In its assessment of the impact of the Credit Card Accountability, Responsibility and Disclosure Act, the agency cited concerns in areas such as debt collection, deceptive rewards programs and so-called deferred interest products, where interest is charged on an accrued balance after a promotional rate expires.

"Although the CARD Act effectively addressed many problematic practices in the credit card market, we think certain risky practices still pose concerns," CFPB Director Richard Cordray said in prepared remarks before a Consumer Federation of America conference on Thursday. "Indeed, deferred interest products remain the most glaring exception to what has been the generally positive post-CARD Act trend toward upfront credit card pricing."

Cordray said such products are particularly common at retailers like electronic stores.

"With annual interest rates of around 25%, these cards are much more expensive than general purpose credit cards," he said. "If the consumer misses the payment deadline, then the back-end pricing will kick in and a $500 TV can end up costing considerably more than the original price tag."

Rewards programs are also on the CFPB's radar after the agency surveyed consumers and found that many select a card based on the rewards provided, often without knowing the card provider can change the terms at any time.

"They are lured by the promise of airline miles, hotel visits, points toward purchases, and a variety of other attractive offers. But the specific terms of rewards programs are often not available to consumers until after they have already applied for the card," Cordray said. "Even then, the terms of rewards tend to be obscured by glossy program guides, which provide only partial information. Once people are enrolled, they may face detailed and confusing rules about how they can actually use their rewards."

Additionally, the CFPB raised concerns with so-called "subprime specialists" who offer cards to subprime borrowers at costs higher than what they could get in the main market and using cumbersome card agreements.

"The average total cost of credit can be twice as high when it is provided by a subprime specialist as compared to mass-market credit cards used by consumers with subprime credit scores. These subprime specialists derive over half their revenue from fees, with much of that revenue coming from application or origination fees," Cordray said. "These cards put many consumers at risk by eating up their monthly payments with fees and interest charges that impede them from paying down their principal balance."

Debt collection has also long been a focus of concern for the CFPB, with a proposal expected in that area soon. The agency's report found that some card issuers surveyed had policies in which they could call the consumer up to 15 times a day.

"These practices smack of harassment," Cordray said.

The report found more than half of the large credit card banks surveyed rely on third-party collectors before the consumer's account is charged off, which Cordray said is uncommon compared to the typical practice of the bank charging off the debt first.

"Indeed, some banks turn over more than 80% of their charged-off accounts to third-party collectors. Some attempt to oversee as many as 21 separate debt collectors at a time," he said. "Over the past several years, the bureau has found numerous problems in the practices used by many of these debt collectors and debt buyers, including the inaccuracy and incompleteness of some of their information."

Despite the concerns raised by the CFPB, the CARD Act has helped consumers overall in saving them at least $16 billion in so-called "gotcha" fees from 2011 through 2014, the agency said.

"At the same time, we found that credit is now cheaper and more available and the credit card business has remained an attractive, profitable business for banks, with default rates that are now at historic lows," Cordray said. "In short, more effective regulation has created a safer, more affordable credit card market with more opportunities available to consumers. Responsible lenders are now able to do business on fair and transparent terms. That is a remarkable achievement."

Cordray used the report to hit back at the industry for offering doomsday predictions when the law first went into effect.

"When these reforms were being debated, many in the credit card industry reacted as if the sky were falling … And they gave fire-and-brimstone warnings that the negative effects of the changes would expand over time and would likely not be fully known for several years," Cordray said. "Well, several years have now passed and we can clearly conclude that these predictions were dead wrong."

The report found that credit availability jumped 10%, or $325 billion, in 2012 to $3.5 trillion in available credit by early 2015.

Cordray also debunked similar industry predictions of tightening in the mortgage market when the Qualified Mortgage rule took effect in January 2014 and more recently, when the integrated mortgage disclosure rules took effect in October.

"When our Know Before You Owe mortgage disclosure rule took effect two months ago, some again asserted that its implementation would paralyze the market. In fact, applications for home purchase mortgages were up 22% year-over-year in October," Cordray said. "Reports from participants across the market seem to be indicating that implementation of the new rule is going fairly smoothly. So it seems that these anxieties were much like the errant predictions of technological disaster stemming from Y2K, which of course never materialized."