Insights / Financial Services Law Advisor

Readability and Deferred Interest Remain Concerns in CFPB's Biennial CARD ACT Report

By Jonathan B. Engel and Rich Zukowsky

10.21.21

On September 29, 2021, the Consumer Financial Protection Bureau (CFPB) released its fifth biennial report (Report) evaluating the state of the consumer credit card market. In addition to addressing impacts to the credit card market caused by the COVID-19 pandemic, the Report updates general data sets from the 2019 report and seeks to broadly assess the credit card market, including various issuer practices and consumer experiences.

Though these biennial reports do not consist of any rulemaking or express guidance, the content of these reports can be useful for determining areas of concern and enforcement priorities for the Bureau. Below we highlight some of the important takeaways from the 2021 Report.

Credit Card Agreements

Previous Bureau reports relied on samples of documents from the card agreement database due to bandwidth constrains. But technological investments in textual analysis software have allowed the Bureau to take a more holistic look, including by examining issuer-submitted card agreements with new word processing technologies.

The CFPB notes a few important findings associated with its review:

With regards to readability, the CFPB found that the "median Flesch-Kincaid grade level of 12.4 in the 2020 data indicates fewer than half of all agreements should be readable by a high school graduate. This has steadily increased from a value of 12.0 in 2016."
The use of arbitration clauses in credit card agreements appears to have increased over the past five years, though large issuers are more likely than smaller banks and credit unions to include arbitration clauses in their agreements.
Though the Bureau did not conduct a broad-based analysis of the availability of Spanish language services, the analysis of issuer-submitted card agreements revealed that less than one-third of the top 20 credit card issuers provide easily accessible Spanish translations of cardholder agreements on their public websites. This despite the CFPB's callout that "a wide swath of consumers may face difficulties understanding credit card terms and conditions if agreements are only available in English."

Credit Access

While the CFPB expresses appreciation for innovative underwriting approaches that use alternative data to expand credit access, it also warns that "credit access expansion . . . should be done responsibly and in a way that is understandable to consumers." The Bureau notes, for example, that "published findings from a New York Department of Financial Services investigation describe common consumer confusion related to the use of these technologies."

BNPL Risks

The Report addresses risks associated with the increasing prevalence of point-of-sale buy now, pay later (BNPL) loans, noting that "[c]ertain key differences between BNPL loans and credit cards may present risks to consumers."

Risks identified in the Report include:

Unlike credit card providers, BNPL lenders are not required to consider ability to repay before extending credit.
BNPL loans may not provide the same disclosures as other types of consumer credit.
BNPL late fees are not associated with specific regulations like credit card late fees.
BNPL users do not have the same billing error resolution procedures that are available to credit card users.

Promotions

The CFPB continues to express concerns regarding consumer understanding of the terms of deferred interest plans. The Bureau notes that consumers who do not pay off such plans prior to their expiration often incur significant interest costs.

Such costs have been increasing over the period for which the Bureau has data. The CFPB notes that "[d]eferred interest promotions continue to provide consumers with complex challenges when they decide how to finance a purchase, as well as in making payments on their balances. The Bureau continues to monitor this area for risks to consumers."

The Report also notes the potential for consumer confusion regarding the application of a grace period to purchase balances when a balance transfer is made. "Besides the initial fee and interest, consumers may also incur costs associated with the loss of a grace period on their purchase balances when making a balance transfer, which can result in an increase in interest charges on other purchases."

Pandemic Relief

The CFPB considered whether issuers felt constrained in offering pandemic relief programs as a result of Bureau-issued guidance and regulations. Although issuers indicated to the Bureau that that they did not feel constrained, the CFPB notes that it continues to monitor markets for indications that its COVID-19 related actions may cause undue burden or other unintended adverse consequences for consumers.

Emphasizing a theme present throughout the Report, the CFPB, in discussing pandemic relief issues, also discusses credit access issues for minority and low-income communities, and the Report expresses worry that many such consumers were unaware of or unable to take advantage of various issuer relief programs. Statistics provided by the Bureau indicate that nonwhite and low-income consumers did take advantage of such programs in greater numbers than white and high-income consumers, but it is difficult to determine whether the use was proportional to the pandemic's impact on each community.

* * * * *

DWT will continue to monitor further developments from the Bureau associated with its publication of the Report, including any actions taken or guidance provided associated with credit card agreements, credit access, BNPL risks, promotions, and pandemic relief.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.