When the CARD Act was signed into law in May 2009, Congress intended to make rates and fees associated with credit cards more transparent so consumers could compare different cards and make an informed decision about selecting a particular card product. Market research indicates, however, that consumers are more likely to select a card product based upon the rewards program offered in connection with the card rather than the card’s interest rate and fees. Unfortunately, many consumers also indicate they do not fully understand how their rewards are earned or redeemed, and this has led to heightened scrutiny of these programs by the CFPB.

Unlike interest and fees, there is virtually no existing federal regulation governing rewards program disclosures. As part of its 2013 CARD Act Report, the CFPB stated that it intends to use its ongoing consumer research and marketing monitoring activities to assess whether additional action is warranted to regulate rewards program disclosures.

Even without published rules, the CFPB may use the UDAAP standards of Section 5 of the FTC Act as a means to ensure that rewards programs are not unfair or deceptive. Other regulatory agencies are already taking this approach. In 2009, the FDIC issued a cease and desist order against Advanta Bank ordering Advanta to pay restitution of approximately $14 million and assessing a civil money penalty of $150,000. The FDIC believed Advanta had engaged in unfair and deceptive practices in connection with its “Cash Back Reward” program because it was nearly impossible for consumers to earn the cash back reward payments touted in Advanta’s marketing materials. Similarly, in 2013, the OCC found that RBS Citizens, N.A. had engaged in deceptive practices in connection with its checking rewards program because the bank failed to disclose the posting date requirements for transactions to be eligible for rebates under the program. Consequently, some consumers did not receive their anticipated rewards, and the bank was ordered to pay approximately $2.5 million in restitution.

Based on these example cases and the CFPB’s 2013 CARD Act Report, the following practices are likely to attract heightened scrutiny:

  • Programs that require consumers to take specific steps to earn a reward, if the steps are unreasonably burdensome or if few consumers actually complete the steps.
  • Redemption requirements that make it unreasonably difficult for consumers to redeem their rewards, such as reward minimums, blackout periods, and redemption fees.
  • Unilateral changes to the rewards program after enrollment that are detrimental to consumers.
  • Failure to adequately disclose all features of a rewards program, including when rewards may be forfeited or reinstated from other sources.
  • Failure to keep adequate records regarding rewards earned and redeemed by consumers.

Banks should carefully evaluate all rewards program materials and determine whether advertisements and disclosures are clear, accurate and create reasonably attainable expectations on the part of the consumer. Banks should also thoroughly review and monitor any rewards programs offered to bank customers by third party vendors, including any “add on” rewards programs offered in connection with credit or prepaid card programs, as these programs often draw regulatory scrutiny. The actual practices of the bank (or its vendor) in administering the rewards program must be consistent with the disclosures provided to consumers. Finally, banks should closely monitor all rewards-related complaints to assess whether any aspect of the program is consistently problematic for consumers. By taking these steps, banks should be able to effectively manage the UDAAP risk associated with rewards programs and will be prepared in the event the CFPB elects to take further action to regulate these programs.

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.DEHS.com.