CFPB Regulates Sizzle, Ignores Steak

by Michael Misasi 0

Businessman explaining loan

The Consumer Financial Protection Bureau’s(CFPB) recent actions against Capital One and Discover shows theagency is committed to enforcing industry best practices withrespect to the marketing and sales of financial products. Theagency has not commented on the value that specific productsdeliver to consumers, which might offer some hope to financialinstitutions.

From Businessweek:

“We are signaling as clearly as we can thatother financial institutions should review their marketingpractices to ensure that they are not deceiving or misleadingconsumers into purchasing financial products or services,” saidRichard Cordray, director of the Consumer Financial ProtectionBureau, on September 24th.
Specifically, investigations of both issuers have placed a lot offocus on the marketing of credit card add-on products like debtprotection and credit monitoring. The CFPB’s decision to crack downon these products is potentially disheartening for U.S. issuers,many of which are looking for ways to increase non-interest incomeas cardholders continue to pay down balances.

The results of the two investigations are also surprisingconsidering a Government Accountability Office (GAO) report which found that in 2009 regulators onlyreceived complaints from one out of every 100,000 customersenrolled in a debt protection product. Issuers reported receiving asimilarly small number of complaints relating to these products.Furthermore, the GOA report concluded:

“Our review of the 24 bank examinations thathad addressed debt protection products did not find evidence thatissuers engaged in predatory practices with regard to theseproducts.”
The report did find, however, that costs for dept protectionproducts seemed high in relation to the proposed benefits, an areathat federal regulation has not explicitly addressed in the past.Consequently, the GAO recommended that the CFPB include thesecriteria in their examination process.

So far, the agency seems to be electing not to consider theconsumer value proposition of credit card account add-ons. Themagnitude of recent issuer penalties ($210 million for Capital Oneand $214 million for Discover) is large, but regulation of productdetails like cost and payout ratios would be even more detrimentalto issuers’ efforts to generate non-interest income from ancillaryproducts and services. Several issuers have already decided todiscontinue credit monitoring and debt protection products; but asthese banks continue to adjust credit product strategies, theCFPB’s focus on marketing and sales might be a silver lining to aworrisome regulatory environment.

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