Following months of public hearings and reports on credit card rewards programs, on December 18, 2024, the Consumer Financial Protection Bureau (CFPB) released a circular (Circular) to other law enforcement agencies alleging that credit card issuers and their partners may violate federal law through conduct that devalues earned rewards or otherwise inhibits consumers from obtaining or redeeming promised rewards. In conjunction with the Circular, the CFPB also released a new report, The High Cost of Retail Credit Cards (Report), in which the CFPB lays out its key findings regarding the retail private label and co-branded credit cards market. Increased regulatory scrutiny of credit card rewards programs may follow.
According to the Circular, (1) devaluation of earned rewards, (2) hidden conditions for earning or keeping rewards, or (3) failure to deliver promised benefits to consumers may constitute violations of the Consumer Financial Protection Act of 2010 (CFPA), which generally prohibits “covered persons” and their service providers from committing or engaging in unfair, deceptive, or abusive acts or practices (UDAAP) in connection with the offering of a consumer financial product or service. The Circular follows joint CFPB-DOJ public hearings on airline credit card rewards, as well as the CFPB’s continued criticism of credit card rewards devaluation, limitations on the redemption of credit card rewards, and allegedly hidden terms and conditions tied to credit card rewards.
The Circular notes that all three types of conduct, each of which are addressed below, could constitute a UDAAP in violation of the CFPA.
1. Devaluation of Rewards Already Earned or Purchased
The Circular notes that rewards operators that materially reduce the overall value of rewards that consumers have already earned or purchased could be in violation of the CFPA. The CFPB highlighted that the rewards associated with a credit card are often a key part of the consumer’s decision to open a credit card account and use that credit card. Materially reducing the value of these rewards without guardrails (e.g., clear explanations to consumers or sufficient implementation timelines) may constitute a UDAAP.
2. Hidden Conditions
According to the CFPB, revocation or cancellation of rewards based on “buried” or “vague” conditions may be a violation of the CFPA. The CFPB has received a number of consumer complaints related to rewards program terms and conditions, which indicate that consumers often do not understand how and when rewards may be lost or forfeited. In particular, the Circular highlights the following as examples of conduct that could violate the CFPA: revoking or canceling rewards based on vague catch-all language, revoking previously earned rewards based on policies that tie revocation to actions outside of a consumer’s control (e.g., an issuer closing an account), and putting forward promotional sign-up offers based on hidden conditions.
3. Inability to Redeem Rewards or Failure to Deliver Promised Benefits
Lastly, the CFPB highlighted potential UDAAP concerns when system failures result in consumers losing earned rewards during redemption, including if a technical failure on a merchant partner’s system results in consumers losing earned rewards.
Of note, the Circular indicates that co-brand or merchant partners operating a rewards program associated with a credit card may be liable for violations of the CFPB if they devalue rewards.
The CFPB’s Report foreshadows coming regulatory scrutiny over retail credit card programs offered in connection with a particular merchant or group of merchants. In particular, the Report highlights several of the CFPB’s findings, including the following:
- Retail credit cards are more expensive than general-purpose cards (e.g., the CFPB noted that 90% of retail cards have interest rates that exceed 30%).
- Relatively looser underwriting for retail credit cards creates increased risk of debt for consumers.
- Concentration of the retail credit card market with four banks and exclusive long-term contracts contribute to high costs, and the economic incentives (e.g., profit sharing) motivate retail partners to engage in marketing to increase consumer spending.
- Relatively aggressive sales and marketing tactics exist at the point of sale for retail credit card applications.
Ultimately, the CFPB’s Circular and Report indicate that increased regulatory scrutiny of credit cards rewards programs should be expected if the new administration does not change the CFPB’s regulatory priorities. The Circular’s application to both issuers of credit cards and their merchant partners also serves as a reminder that both financial institutions and non-bank entities can be subject to the CFPB’s supervision and regulation based on their conduct.
To learn more about this development and how it may affect your credit card rewards program or to discuss other aspects of your credit card program, please contact Crystal N. Kaldjob.
Crystal is a partner in Goodwin’s Financial Industry group whose practice focuses on advising financial services clients on a wide range of issues in regulatory and transactional contexts. Crystal provides practical, solution-oriented regulatory and transactional assistance to merchants, emerging companies, fintech companies, banks, and other financial institutions on strategic partnerships, including structuring and negotiating private label, co-brand credit card, and point-of-sale financing partnerships; asset purchases; and loan portfolio sales and acquisitions. Her regulatory experience involves advising fintechs, financial institutions, and merchants on compliance with consumer and retail banking laws, including laws related to the offering and operation of consumer credit, deposit, payments, and other financial products and services.
Goodwin’s Fintech group strategically leverages its regulatory, transactional, and litigation and enforcement practices to provide full-service support in every vertical of fintech and financial services, including lending, payments, alternative finance, deposits, brokerage and wealth management, digital currency and blockchain, insurance and insurtech, and transactions, including bank partnerships and deal due diligence.
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