CFPB filed a lawsuit against Citizens Bank over the handling of credit card disputes. While we are not close enough to the details to opine on the merits of the case or the defense, we note that disputes will represent 25 million items by 2022 as U.S. credit cards approach 70 billion transactions.
Growth is linear; it does not mean that disputes are running out of control. As cards continue to displace cash transactions, the industry will add high volume/low value transactions. This will add to the unit cost of dispute resolution.
Card issuers must have systemic controls to ensure their dispute processes work. With Mastercard and Visa’s recent overhaul of credit card dispute management, the networks streamlined the resolution path, and card players must follow the rigid rules.
The Citizens issue illustrates industry vulnerability, not because Citizens was out of control, but because the CFPB is not kidding when it watches out for transaction irrefutability.
According to Banking Exchange, the crux is:
The consumer-focused regulator has filed a suit at the district court in Providence, Rhode Island, claiming that Citizens “automatically denied consumers’ billing error notices and claims of unauthorized use in certain circumstances” and “failed to fully refund finance charges and fees when consumers asserted meritorious disputes or fraud claims.”
The bank also failed to send required acknowledgement letters and denial notices in response to billing errors, the suit alleges.
The failures amount to breaches of the Truth in Lending Act (TILA), according to the lawsuit, as well as amendments to the act contained in two other regulations covering credit cards: the Fair Credit Billing Act and the Credit Card Accountability Responsibility and Disclosure (CARD) Act.
In an announcement on its website, the CFPB said: “The bureau alleges that Citizens violated TILA and Regulation Z by failing to provide credit counseling referrals to consumers who called Citizens’ toll-free number designated for that purpose.
“These alleged violations of TILA… also constitute violations of the Consumer Financial Protection Act.”
Citizens’ position, according to Bank Innovation, is that these have long been resolved.
For its part, Citizens maintained that the complaint affected a “very small subset” of Citizens’ credit card customers a number of years ago and that bank will “vigorously challenge” the action.
“We are puzzled and disappointed by the CFPB’s stance with respect to these long-resolved issues,” Stephen Gannon, general counsel of Citizens, said in a statement. “The CFPB’s demands are wholly disproportionate to the issues at hand, and we strongly believe that the Bureau’s claims are unwarranted on both facts and the law.”
The Hill, a watchdog Capital Hill trade journal, also notes:
“Citizens will vigorously challenge the CFPB’s action, which is legally unwarranted and includes demands far out of line with actual customer impact,” the bank said in a Thursday statement.
Citizens Bank said that it “self-identified operational errors” that affected roughly 2 percent, or 25,000, of its roughly 1.2 million credit card customers. The bank said it reported that conduct to the CFPB and paid $750,000 to a broad subset of potentially affected customers, calling the CFPB’s demands “far out of line.”
“The CFPB’s filing against Citizens, nearly five years later, ignores the swift, corrective actions that Citizens took,” the bank said.
The CFPB asked the court to force Citizens Bank to pay an unspecified fine, along with restitution and damages to customers affected by the alleged violations.
As Mercator discussed in a report on disputes, the number of disputes will continue to rise as payments displace cash. Credit Card Dispute Management: Transactions in the Billions Bring Exceptions in the Millions discusses the risk, explains appropriate resolution strategies, and illustrates the importance of having reliable vendor support to navigate this regulatory hotspot.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group