The Federal Reserve Board has issued a consent order against a Bank and Trust Company over the Bank’s practice of transferring credit card balances through third parties known as Independent Services Organizations.
During its inquiry, the Board alleged that since 2008 the Bank and Independent Services Organizations (“ISOs”) began to enter agreements to issue consumers credit cards that would allow the consumers to pay charged-off or past-due debt due to the ISOs through the consumer’s transfer of their current debts to a credit card offered through the Bank in exchange for part of the consumer’s debt being forgiven. The Bank would allegedly receive monthly fees on a per-account basis and a program review fee from the ISOs for their service of offering the credit cards and holding the consumers accounts.
The Bank and the ISOs also entered into Credit Marketing and Receivables Purchase Agreements, under which the Bank allegedly marketed various credit cards to consumers. In its Consent Order, the Board alleged that under the agreements, the Bank was marketing the various types of credit cards being offered to consumers with past-due or charged-off debt in a deceptive manner, which is a violation of the FTC Act.
The Board identified three different marketing schemes that were being deployed by the Bank, which were allegedly deceptive. First, the Bank allegedly made statements that if a consumer agreed to transfer their credit balance to the marketed credit cards, then as the balance of the card was paid off, new credit would become available for use. The Bank did not, however, inform the consumers that finance changes and fees would reduce the amount of new credit that would be available to the consumers after making payments on their existing debts. Second, the Bank allegedly marketed with representations that transferring the consumer’s credit balance to one of the credit cards would build positive payment records with credit reporting agencies, yet the Bank did not report credit histories to the credit reporting agencies. Third, the Bank allegedly stated in the marketing materials that one of the marketed credit cards would provide credit to consumers who had charged-off or past-due debts, without saying that consumers that participating in the card program could restart the statute of limitations for out-of-statute debts, and therefore open the consumers up to lawsuits for collection on those debts. Similar statements were also allegedly made in the credit card solicitation and welcome letters to consumers.
In lieu of a formal proceeding, the Federal Reserve Board ordered the Bank to pay restitution in the amount of $3,000,000, and to take significant measures to ensure that the allegedly deceptive practices would not occur again in the future. Some of the required actions include amending disclosures to display clearly and prominently all important information for consumers, creating effective board of directors and senior management oversight and compliance risk management plans, obtaining approval of the plans by the Federal Reserve Board before the Bank enters any new third-party agreements, and hiring a third-party auditor to ensure that restitution is paid to all appropriate consumers.
For more information, the consent order can be found here: https://www.federalreserve.gov/newsevents/pressreleases/files/enf20171026a1.pdf.