By Keith Gauer, Financial Services Attorney at Davenport Evans

On January 16, the CFPB and the New York Attorney General announced a settlement of claims against Sterling Jewelers, Inc. The claims arose out of Sterling’s point of sale customer financing programs.  Sterling engages in the jewelry business under several well-known brand names, including Kay Jewelers, Goodman, and Jared the Galleria of Jewelry.   While “every kiss begins with Kay” may be one of their mottos, the CFPB was not enthralled with their business practices! According to the Complaint in the case, Sterling’s model fostered a high pressure sales environment where jewelry salespersons were incentivized to maximize the sale of credit products.  The CFPB asserted that Sterling salespersons:

  • Obtained credit applications from potential customers by misrepresenting to them that their personal information was only being submitted to see if they qualified for credit or to register them for a rewards card or loyalty program.
  • Failed to disclose to customers that the information they provided to Sterling would result in a hard credit inquiry on the customers’ credit report.
  • Failed to disclose that customers were purchasing optional credit insurance as part of the transactions.
  • Misrepresented the terms and conditions of the credit products, including the interest rates and repayment terms, and failed to provide proper disclosures.

In support of these allegations, the CFPB cited Sterling’s sales culture of training their salespersons to push credit products, with incentives based on the number of credit applications submitted.  Employees were allegedly evaluated, promoted and terminated based on their ability to market the credit products, with supervisors turning a blind eye toward misrepresentations in an effort to meet credit product goals. The CFPB’s complaint asserted that this conduct violated federal and state laws including TILA, Regulation Z, and the Consumer Financial Protection Act.

Faced with the allegations, Sterling stipulated to a settlement in which it agreed to (i) pay civil money penalties of $10 Million to the CFPB and $1 Million to the State of New York, (ii) avoid misrepresentations in connection with the application and disclosure of credit products and credit insurance, and (iii) adopt policies and procedures designed to ensure consumer consent is obtained prior to selling any such credit products in the future.

The Sterling settlement is further evidence of several ongoing regulatory trends.  First,  regulators are less than enamored by aggressive sales cultures surrounding the origination of consumer financial products.  When a business (or bank…think Wells Fargo’s account opening fiasco) fosters an unchecked sales culture incentivizing front line salespersons to maximize credit applications and loans, the regulators see the potential for problems, including misrepresentations and outright fraud.  Second, the marketing of “add on” products such as credit insurance has been a hot button issue for regulators for years.  If the add on products are not properly and fully disclosed, including the optional nature of the product and its fees and coverage, regulators are bound to have concerns.

Finally, while the bank originating the credit products was not identified as a defendant in the Sterling case, banks offering credit products through third parties at the point of sale should pay close attention to the regulators criticisms of the Sterling model.  Banks offering these products should carefully review the contracting party’s sale practices, including training materials, incentive compensation programs, and monitoring methods to be certain that the third party has procedures in place to ensure that credit products are not being misrepresented to consumers.  Banks may also want to consider ongoing monitoring through third party audits or “secret shopper” checks to verify that the products are being marketed in a compliant fashion.  While none of these steps will completely eliminate the misrepresentation risks for point of sale programs, they would be helpful in demonstrating that the bank was exercising appropriate management and control of its marketing vendor.

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