The FDIC has stepped up its enforcement efforts of state-chartered institutions alleged to be engaged in unfair and deceptive practices in connection with credit card solicitations, recently announcing the issuance of two cease and desist orders - one against American Express Centurion Bank and the other against Advanta Bank Corp.
The order issued against American Express Centurion Bank alleged that the bank failed to provide timely notices to card-holders that their credit lines were being reduced at the same time that the bank sent the card holders convenience checks (the press release can be found here). Consequently, when consumers tried to use the checks, believing they had credit limit room, they were dishonored, resulting in the consumers incurring bounced check fees, which the FDIC alleged was an unfair practice under Section 5 of the FTC Act. The bank agreed to make restitution of $160 per dishonored check, or an aggregate of approximately $3 million, as well as to implement new procedures for reviewing credit limits and notifying consumers of changes to their limit. The bank also agreed to implement procedures whereby a customer could obtain preauthorization to use a convenience check for a specified dollar amount for a specified time period. In addition, the bank was ordered to pay a civil money penalty of $250,000.
The order issued against Advanta Bank Corp. (which ceased issuing cards in May 2009) alleged that the bank marketed a cash back reward feature on its business credit card accounts (the press release can be found here). Due to the tiered structure of the cash back payments, however, the FDIC alleged that the advertised percentage cash back was not available for all purchases, and indeed, the agency alleged that it was effectively impossible to earn the stated percentage of cash back reward payments. The FDIC thus concluded that the Bank's solicitations were likely to mislead a reasonable customer and that the representations were material and that therefore, the Bank engaged in a pattern of deceptive acts or practices in violation of Section 5 of the FTC Act.
The FDIC also alleged that the bank had substantially increased APRs on cardholders that had neither exceeded their credit limits nor were delinquent in making payments on their accounts. The FDIC alleged that these rate increases had been implemented in an unfair manner, and without adequate notice of the amount or the reason for the increase, or the procedures to opt-out of the rate increase. The bank agreed to pay restitution, of approximately $14 million to cardholders that used the cash back reward program and $21 million to account holders whose accounts were repriced. The bank also was order to pay a civil money penalty of $150,000.
These actions are the first since the FDIC’s action against CompuCredit in 2008, and indicate an intent by the agency to increase its standing in the consumer credit enforcement area. Given the large number of state chartered banks regulated by the FDIC, institutions should review their marketing practices in the consumer credit area in light of these actions and, if appropriate, make adjustments.
