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CFPB report reveals high credit card costs, growing debt, digital shift in 2022
On October 25, the CFPB released its biennial report on the credit card market pursuant to the Credit Card Act. The report found that credit card companies charged consumers more than $105 billion in interest and $25 billion in fees, with the bulk of the fees being late fees. According to the 175-page report, consumers are rolling balances month to month, and more consumers are falling into debt over time, while credit card companies’ profit margins remain high. The CFPB highlighted additional trends, including how: (i) the profits of major credit card companies have increased, surpassing pre-pandemic levels, which the CFPB suggests could indicate a lack of competition in the industry; (ii) annual Percentage Rates (APRs) for credit cards continue to rise; (iii) many cardholders with subprime credit scores paid a significant percentage of their average balance in interest and fees; (iv) late fees charged to cardholders have risen to pre-pandemic levels, and more consumers are delinquent; (v) credit card debt reached a record $1 trillion by the end of 2022, and annual spending on credit cards increased, returning to pre-pandemic levels; (vi) consumers who roll debt from month to month are paying a significant portion of interest and fees but earning only a small percentage of rewards. The report also notes a rise in digital communication—around 80 percent of cardholders, especially those under 65, use mobile apps for card management, which exhibits a shift in how consumers and financial institutions interact in the credit card industry.
7th Circuit: Court upholds dismissal of FDCPA lawsuit over debt information sharing
On October 23, the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of a consumer’s putative class action lawsuit alleging that a collection agency violated the FDCPA by sharing the consumer’s debt information with a third-party vendor. The court ruled that the consumer lacked standing because she did not sustain an injury from the sharing of her information.
To collect a defaulted credit-card debt, the defendant collection agency used a third-party vendor to print and mail a collection letter to the consumer. The consumer alleged that the collection agency violated the FDCPA by disclosing to the vendor the consumer’s personal information, and the disclosure was analogous to the tort of invasion of privacy. The appeals court disagreed, reasoning that the sharing of a debtor’s data with a third-party mail vendor to populate and send a form collection letter that caused no cognizable harm, legally speaking. The court also noted that the U.S. Courts of Appeal for the Tenth and Eleventh Circuits have reached similar conclusions. “The transmission of information to a single ministerial intermediary does not remotely resemble the publicity element of the only possibly relevant variant of the privacy tort.”
CFPB report reveals high credit card costs, growing debt, and digital shifts led to consumers’ revolving debts in 2022
On October 25, the CFPB released a report on credit card interest rates and fees in 2022 highlighting the impact of the cost to consumers. The report found that credit card companies charged consumers more than $105 billion in interest and $25 billion in fees, with the bulk of the fees being late fees.
According to the 175-page report, consumers are rolling balances month-to-month, falling into debt, while credit card companies’ profit margins remain high. The CFPB highlighted additional trends, including how (i) the profits of major credit card companies have increased, surpassing pre-pandemic levels, which could indicate a lack of competition in the industry, with a few dominant players; (ii) Annual Percentage Rates (APRs) for credit cards continue to rise above the cost of offering credit (meaning cardholders are paying more in interest); (iii) many cardholders with subprime credit scores paid a significant percentage of their average balance in interest and fees; (iv) late fees charged to cardholders have risen to pre-pandemic levels, and more consumers are delinquent; (v) credit card debt reached a record $1 trillion by the end of 2022, and annual spending on credit cards increased, returning to pre-pandemic levels; and (vi) consumers who roll debt from month to month are paying a significant portion of interest and fees but earning only a small percentage of rewards. The report also notes a rise in digital communication—around 80 percent of cardholders, especially those under 65, use mobile apps for card management, which exhibits a shift in how consumers and financial institutions interact in the credit card industry.
CFPB holds hearing on medical billing and collections
On July 11, CFPB Director Rohit Chopra delivered prepared remarks at a public hearing on medical billing and collections. Chopra commented on the prevalence of medical debt in the country, which affects over 100 million Americans, while $433.2 billion of the national GDP is sourced from consumers’ out-of-pocket expenses. Specifically, the CFPB hearing addressed the effects of medical payment products, including special-purpose credit cards and installment loans used to cover the cost of medical treatment, which Chopra claimed can leave patients “worse off.” The Bureau highlighted the predatory nature of such medical credit cards, which typically have a higher interest rate than other cards and are often presented to consumers by their providers. According to Chopra, the Bureau recently launched a public inquiry (covered by InfoBytes here) to answer questions related to these products.
During the expert panel discussion, multiple panelists raised issues regarding the federal requirements for hospital financial assistance programs that exist in exchange for tax benefits. Panelists criticized the complicated processes patients must follow for such programs and compared it to the simple and fast online application process for medical credit cards. Panelists also highlighted the need to include stronger, clearer federal requirements for hospital financial assistance programs, such as setting standards on income and setting minimums or floors, so consumers can access such services more easily. Panelists commonly noted that state requirements for hospital financial assistance programs are more robust than the federal requirements. In response to Chopra’s question on what the panelists wish to see from the Bureau regarding regulation, one panelist asked for a ban on deferred interest, noting the “special regulatory authority” the Bureau has. Another panelist requested that the agency ban medical credit cards from being offered in a medical setting, citing her communication with clients who claim they feel “pressured” to sign the paperwork in that setting. Additionally, another panelist requested that the Bureau prohibit the reporting of medical debt on credit reports—mentioning Colorado’s headway in being the first state to ban such reporting and noting the Bureau’s potential to ban it at a federal level. The panelists each applauded the agency’s efforts to bolster regulations on medical payment products.
CFPB launches medical-debt inquiry with HHS and Treasury
On July 7, the CFPB, Department of Health and Human Services, and the Treasury Department announced they are looking into high-cost specialty financial products such as medical credit cards and installment loans used by patients to pay for health care. These products, the agencies explained, were once primarily used to pay for medical treatments not traditionally covered by health insurance but may now be more widely used even when medical care may be covered by insurance or financial assistance. The agencies released a request for information (RFI) seeking feedback on a range of topics, including costs associated with medical payment products, how prevalent the products are, health care providers’ incentives to offer these products to patients, and whether patients fully understand the risks and consequences associated with medical payment products.
Specifically, the agencies are soliciting comments “on whether these products may allow health care providers to operate outside of a broad range of patient and consumer protections.” Feedback is also requested on whether use of these products is contributing to health care cost inflation, displacing hospitals’ provision of financial assistance, causing patients to pay inaccurate or inflated medical bills, increasing the amount patients must pay due to financing costs, or otherwise contributing to consumer harm, including through downstream credit reporting and debt collection practices. The agencies also want to know if using these products is creating disparities across different demographic groups, as well as policy options to protect consumers from harm.
The agencies commented that the RFI will assist in their understanding of consumer harms and financial challenges caused by specialty medical payment products and will serve to guide next steps, including future Bureau actions focusing on credit origination, debt collection, and credit reporting practices of the financial companies that originate and service these products.
Comments on the RFI are due within 60 days of publication in the Federal Register.
Additionally, the Bureau is hosting a hearing on July 11 to address medical billing and collection concerns with a focus on medical payment products.
CFPB releases regulatory agenda
The Office of Information and Regulatory Affairs recently released the CFPB’s spring 2023 regulatory agenda. Key rulemaking initiatives that the agency expects to initiate or continue include:
- Overdraft fees. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation Z with respect to special rules for determining whether overdraft fees are considered finance charges.
- FCRA rulemaking. The Bureau is considering whether to engage in pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. In January, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). CFPB Director Rohit Chopra noted that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.” (Covered by InfoBytes here.)
- Insufficient funds fees. The Bureau is considering whether to engage in pre-rulemaking activity in November regarding non-sufficient fund (NSF) fees. The Bureau commented that while NSF fees have been a significant source of fee revenue for depository institutions, recently some institutions have voluntarily stopped charging such fees.
- Amendments to FIRREA concerning automated valuation models. On June 1, the Bureau issued a joint notice of proposed rulemaking (NPRM) with the Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations to implement quality control standards mandated by the Dodd-Frank Act concerning automated valuation models used by mortgage originators and secondary market issuers. (Covered by InfoBytes here.) Previously, the Bureau released a Small Business Regulatory Enforcement Fairness Act (SBREFA) outline and report in February and May 2022 respectively. (Covered by InfoBytes here.)
- Section 1033 rulemaking. Section 1033 of Dodd-Frank provides that covered entities, such as banks, must make available to consumers, upon request, transaction data and other information concerning consumer financial products or services that the consumer obtains from the covered entity. Over the past several years, the Bureau has engaged in a series of rulemaking steps to prescribe standards for this requirement, including the release of a 71-page outline of proposals and alternatives in advance of convening a panel under the SBREFA and the issuance of a final report examining the impact of the Bureau’s proposals to address consumers’ personal financial data rights. (Covered by InfoBytes here.) Proposed rulemaking may be issued in October.
- Property Assessed Clean Energy (PACE) financing. The Bureau issued an NPRM last month to extend TILA’s ability-to-repay requirements to PACE transactions. (Covered by InfoBytes here.) The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement.
- Supervision of Larger Participants in Consumer Payment Markets. The Bureau is considering whether to engage in pre-rulemaking activity next month to define larger participants in consumer payment markets and further the scope of the agency’s nonbank supervision program.
- Nonbank registration. The Bureau announced its intention to identify repeat financial law offenders by establishing a database of enforcement actions taken against certain nonbank covered entities. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Terms and conditions registry for supervised nonbanks. At the beginning of the year, the Bureau issued an NPRM that would create a public registry of terms and conditions used in non-negotiable, “take it or leave it” nonbank form contracts that “claim to waive or limit consumer rights and protections.” Under the proposal, supervised nonbank companies would be required to report annually to the Bureau on their use of standard-form contract terms that “seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce or exercise their rights” and would appear in a publicly accessible registry. (Covered by InfoBytes here.) The Bureau anticipates issuing a final rule later this year.
- Credit card penalty fees. The Bureau issued an NPRM in February to solicit public feedback on proposed changes to credit card late fees and late payments and card issuers’ revenue and expenses. (Covered by InfoBytes here.) Under the CARD Act rules inherited by the Bureau from the Fed, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. A final rule may be issued later this year.
- LIBOR transition. In April, the Bureau issued an interim final rule, amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. Effective May 15, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. (Covered by InfoBytes here.)
Chopra testifies at congressional hearings
On June 13, CFPB Director Rohit Chopra testified before the Senate Banking Committee to discuss the Bureau’s most recent semi-annual report to Congress. Covering the period beginning April 1, 2022 and ending September 30, 2022, the semi-annual report addressed a wide range of issues, including the adoption of significant rules and orders, supervisory and enforcement actions, and actions taken by states relating to federal consumer financial law. The report also stated the Bureau received approximately 1.237 million consumer complaints, for which roughly 75 percent pertained to credit or consumer reporting. With respect to the Bureau’s mandated objectives, Chopra’s prepared statement highlighted rulemaking progress on several topics, including small business lending data collection and PACE lending. He also emphasized the agency’s heightened focus on supervising nonbank financial firms and reiterated that the Bureau will continue to shift its enforcement focus from small businesses to repeat offenders.
Committee Chair Sherrod Brown (D-OH) praised Chopra’s leadership in his opening statement, highlighting actions taken by the Bureau since Chopra’s last hearing appearance and disagreeing with the U.S. Court of Appeals for the Fifth Circuit’s decision that the agency’s funding authority violates the Constitution’s Appropriations Clause and the separation of powers. However, Ranking Member Tim Scott (R-SC) argued that Chopra “has created uncertainty in the marketplace by attempting to regulate through speeches and blog posts under the guise of ‘clarifying guidance,’” and continues to mislabel payment incentives as “junk fees” or “illegal fees.” Scott also took issue with the Bureau’s small business lending rule and asked why the agency should be trusted to collect a large amount of lending data when the agency itself experienced a data breach when an employee transferred sensitive consumer data to a personal email account without authorization.
During the hearing, Chopra addressed concerns accusing him of bypassing regulatory review by issuing policy changes through agency guidance and press announcements. “The things we hear from small firms is they really want to know how existing law applies,” Chopra said. “We have so many changes in technology, and these small firms don’t have the ability to hire so many lawyers[,] [s]o I’ve actually continued a practice of my predecessor, Director Kraninger to issue these advisory opinions and other guidance documents. They do not create any new obligations. They simply restate what the existing laws are.”
Chopra also answered questions relating to the Bureau’s proposal to limit credit card late fees and, among other things, adjust the safe harbor dollar amount for late fees to $8 for any missed payment (issuers are currently able to charge late fees of up to $41). (Covered by InfoBytes here.) Chopra explained that the proposed rule still allows recovery of costs but said the agency is trying to make the process “more rigorous and make sure it reflects market realities.” “[I]ssuers tell us is that they don’t want to profit off of late fees,” Chopra added. “That's exactly the goal here, because the law says those penalty fees are supposed to be reasonable and proportional. We’re trying to make it more clear about the way we can do that, while also making the market more competitive.”
Republican senators expressed concerns with the proposal during the hearing, with Scott commenting that no one wants to pay the late fee, but that “the truth of the matter is that fee is going to be paid just in a different form. . . .whether it’s through increased interest rates or increased cost of products, it doesn’t go away.” Senator Elizabeth Warren (D-MA) countered that “if there’s an $8 cap on credit card late fees, unless the banks can show that their costs are higher, in which case they can charge more, all that will happen, as best I can tell is that the banks will have slightly lower profit margins.”
Chopra faced similar question during a hearing held the next day before the House Financial Services Committee. Among the topics, committee members raised questions relating to technology risks presented by artificial intelligence and how existing law applies to machine learning. Chopra was also accused of overseeing an unconstitutional agency and flouting the notice-and-comment rulemaking process. Also discussed during the hearing was a recently introduced joint resolution to nullify the Bureau’s small business lending rule. (Covered by InfoBytes here.) Representative Roger Williams (R-TX) stressed that community banks are “concerned that the complicated reporting requirements will tie up loan officers and increase compliance costs plus compliance officers, which will be passed down to the consumer.”
7th Circuit: Time and money in responding to second verification request confers standing under FDCPA
On June 7, the U.S. Court of Appeals for the Seventh Circuit held that spending time and money to send a second verification request is enough to confer standing under the FDCPA. Plaintiff’s defaulted credit card debt was purchased by one of the defendants and placed with a collection agency. A letter providing details about the debt, including the original creditor, current creditor, and a validation notice, was sent to the plaintiff. Within the required 30-day timeframe, plaintiff sent a letter to the collection agency requesting validation of the debt. However, instead of receiving a response from the agency, plaintiff received another letter from one of the defendants that provided information on the debt and informed her that it had initiated a review of the inquiry it had received. The second letter also included a validation notice, which confused the plaintiff and resulted in her spending time and money ($3.95) to request validation again. Plaintiff filed suit accusing the defendants of violating the FDCPA and asserting that the second letter would lead a consumer to believe that they must re-dispute the debt. According to the plaintiff, the letter, among other things, used false, deceptive, misleading, and unfair or unconscionable means to collect or attempt to collect a debt. The defendants moved to dismiss for lack of standing, arguing that while the letter may have confused and alarmed the plaintiff, it did not cause her to initiate “any action to her detriment on account of her confusion.” The district court granted defendants’ motion to dismiss, ruling that the time and money spent on sending the second validation request did not rise to the level of detriment required for standing under the FDCPA, and that, moreover, it provided plaintiff with another opportunity to dispute the debt if she failed to properly do so the first time.
Disagreeing with the dismissal, the 7th Circuit wrote that the second postage fee (albeit modest in size) is the type of harm that Congress intended to protect consumers from when it enacted the FDCPA. “Money damages caused by misleading communications from the debt collector are certainly included in the sphere of interests that Congress sought to protect,” the appellate court stated, explaining that the second letter caused the plaintiff “to suffer a concrete detriment to her debt-management choices in the form of the expenditure of additional money to preserve rights she had already preserved.”
7th Circuit: Time and money spent responding to second verification request is sufficient for standing
On June 7, the U.S. Court of Appeals for the Seventh Circuit held that spending time and money to send a second verification request is enough to confer standing under the FDCPA. Plaintiff’s defaulted credit card debt was purchased by one of the defendants and placed with a collection agency. A letter providing details about the debt, including the original creditor, current creditor, and a validation notice, was sent to the plaintiff. Within the required 30-day timeframe, plaintiff sent a letter to the collection agency requesting validation of the debt. However, instead of receiving a response from the agency, plaintiff received another letter from one of the defendants that provided information on the debt and informed her that it had initiated a review of the inquiry it had received. The second letter also included a validation notice, which confused the plaintiff and resulted in her spending time and money ($3.95) to request validation again. Plaintiff filed suit accusing the defendants of violating the FDCPA and asserting that the second letter would lead a consumer to believe that they must re-dispute the debt. According to the plaintiff, the letter, among other things, used false, deceptive, misleading, and unfair or unconscionable means to collect or attempt to collect a debt. The defendants moved to dismiss for lack of standing, arguing that while the letter may have confused and alarmed the plaintiff, it did not cause her to initiate “any action to her detriment on account of her confusion.” The district court granted defendants’ motion to dismiss, ruling that the time and money spent on sending the second validation request did not rise to the level of detriment required for standing under the FDCPA, and that, moreover, it provided plaintiff with another opportunity to dispute the debt if she failed to properly do so the first time.
Disagreeing with the dismissal, the 7th Circuit wrote that the second postage fee (albeit modest in size) is the type of harm that Congress intended to protect consumers from when it enacted the FDCPA. “Money damages caused by misleading communications from the debt collector are certainly included in the sphere of interests that Congress sought to protect,” the appellate court stated, explaining that the second letter caused the plaintiff “to suffer a concrete detriment to her debt-management choices in the form of the expenditure of additional money to preserve rights she had already preserved.”
CFPB announces $9 million settlement with bank on credit card servicing
On May 23, the CFPB announced a settlement to resolve allegations that a national bank violated TILA and its implementing Regulation Z, along with the Consumer Financial Protection Act. The Bureau sued the bank in 2020 (covered by InfoBytes here) claiming that, among other things, when servicing credit card accounts, the bank did not properly manage consumer billing disputes for unauthorized card use and billing errors, and did not properly credit refunds to consumer accounts resulting from such disputes. At the time, the bank issued a response stating that it self-identified the issues to the Bureau five years ago while simultaneously correcting any flawed processes.
The bank neither admitted nor denied the allegations but agreed under the terms of the stipulated final judgment and order filed in the U.S. District Court for the District of Rhode Island to pay a $9 million civil penalty. In addition to amending its credit card practices, the bank is prohibited from automatically denying billing error notices and claims of unauthorized use of cards should the customer fail to provide a fraud affidavit signed under penalty of perjury. The bank must also (i) credit reimbursable fees and finance charges to a customer’s account when unauthorized use and billing errors occur; (ii) provide required acknowledgement and denial notices to customers upon receipt or resolution of billion error notices; and (iii) provide customers who call its credit counseling hotline with at least three credit counseling referrals within the caller’s state. The bank must also maintain procedures to ensure customers are properly refunded any fees or finance charges identified by valid error notices and unauthorized use claims. The bank issued a statement following the announcement saying that while it “continues to disagree with the CFPB’s stance with respect to these long-resolved issues, which were self-identified and voluntarily addressed years ago,” it is pleased to resolve the matter.