Rule2024-30988
Consumer Financial Protection Circular 2024-07: Design, Marketing, and Administration of Credit Card Rewards Programs
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 30, 2024
Issuing agencies
Consumer Financial Protection Bureau
Abstract
The Consumer Financial Protection Bureau (Bureau or CFPB) has issued Consumer Financial Protection Circular 2024-07 titled, "Design, marketing, and administration of credit card rewards programs." In this circular, the CFPB responds to the question, "Can credit card issuers violate the law if they or their rewards partners devalue earned rewards or otherwise inhibit consumers from obtaining or redeeming promised rewards?"
Full Text
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<title>Federal Register, Volume 89 Issue 249 (Monday, December 30, 2024)</title>
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[Federal Register Volume 89, Number 249 (Monday, December 30, 2024)]
[Rules and Regulations]
[Pages 106277-106281]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-30988]
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CONSUMER FINANCIAL PROTECTION BUREAU
12 CFR Chapter X
Consumer Financial Protection Circular 2024-07: Design,
Marketing, and Administration of Credit Card Rewards Programs
AGENCY: Consumer Financial Protection Bureau.
ACTION: Consumer financial protection circular.
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SUMMARY: The Consumer Financial Protection Bureau (Bureau or CFPB) has
issued Consumer Financial Protection Circular 2024-07 titled, ``Design,
marketing, and administration of credit card rewards programs.'' In
this circular, the CFPB responds to the question, ``Can credit card
issuers violate the law if they or their rewards partners devalue
earned rewards or otherwise inhibit consumers from obtaining or
redeeming promised rewards?''
DATES: The CFPB released this circular on its website on December 18,
2024.
ADDRESSES: Enforcers, and the broader public, can provide feedback and
comments to <a href="/cdn-cgi/l/email-protection#47042e3524322b263534072421372569202831"><span class="__cf_email__" data-cfemail="ecaf859e8f99808d9e9fac8f8a9c8ec28b839a">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT: George Karithanom, Regulatory
Implementation & Guidance Program Analyst, Office of Regulations, at
202-435-7700 or at: <a href="https://reginquiries.consumerfinance.gov/">https://reginquiries.consumerfinance.gov/</a>. If you
require this document in an alternative electronic format, please
contact <a href="/cdn-cgi/l/email-protection#9ddedbcddfc2dcfefef8eeeef4fff4f1f4e9e4ddfefbedffb3faf2eb"><span class="__cf_email__" data-cfemail="e4a7a2b4a6bba587878197978d868d888d909da487829486ca838b92">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
Question Presented
Can credit card issuers violate the law if they or their rewards
partners devalue earned rewards or otherwise inhibit consumers from
obtaining or redeeming promised rewards?
Response
Yes. Covered persons that offer, provide, or operate credit card
rewards programs, and their service providers, may violate the
prohibition against unfair, deceptive, or abusive acts or practices in
a variety of circumstances, including instances where some of the
conduct in question may be attributable to a third party, such as a
merchant partner, and regardless of whether covered persons or service
providers are taking actions consistent with rewards program terms.
This circular provides some examples where covered persons that offer,
provide, or operate credit card rewards programs, and their service
providers, may violate the prohibition against unfair, deceptive, and
abusive acts or practices, where: (1) the redemption values of rewards
that consumers have already earned or purchased are devalued; (2)
consumers' receipt of rewards is revoked, canceled, or prevented based
on buried or vague conditions, such as criteria disclosed only in fine
print or up to the operator's discretion; or (3) consumers have reward
points deducted from their balance without receiving the corresponding
benefit of the rewards, including due to technical failures when
redeeming rewards points on merchant partners' systems.
Background on Credit Card Rewards Programs
Rewards programs are increasingly used to encourage consumers to
apply for and use specific credit cards.\1\ As of 2019, more than 90
percent of general purpose credit card spending occurred on rewards
cards, and by the end of 2022, 75 percent of general purpose credit
cards were rewards cards.\2\ While rewards cards are more common for
consumers with higher credit scores, the use of rewards cards is
growing fastest among deep subprime, subprime, and near-prime
consumers.\3\ The amount of money or value that consumers earn and
maintain in credit card rewards programs is also large and has
increased substantially in recent years. For example, in 2022,
consumers earned more than $40 billion in rewards from major general-
purpose credit cards, more than a 50 percent increase from 2019.\4\
Consumer rewards balances at the end of 2022 were more than $33
billion, up 40 percent relative to the fourth quarter of 2019.\5\ More
consumers are also using rewards to make payments, including for day-
to-day purchases and necessary expenses.\6\
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\1\ See CFPB, The Consumer Credit Card Market (Oct. 2023)
(hereinafter ``2023 Report'') at 98, <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf</a>. An industry survey found that rewards and
cash back programs were the top reason why consumers chose one card
over another, as well as the top reason consumers cited for
increasing spending on credit cards over the last six months. PYMNTS
and Elan, Credit Card Use During Economic Turbulence (Dec. 2023),
<a href="https://www.pymnts.com/wp-content/uploads/2023/05/PYMNTS-Credit-Card-Use-During-Economic-Turbulence-May-2023.pdf">https://www.pymnts.com/wp-content/uploads/2023/05/PYMNTS-Credit-Card-Use-During-Economic-Turbulence-May-2023.pdf</a>. See also Arielle
Feger, Cash-back rewards drive consumers to open new credit cards,
eMarketer (Mar. 26, 2024), <a href="https://www.emarketer.com/content/cash-back-rewards-drive-consumers-open-new-credit-cards">https://www.emarketer.com/content/cash-back-rewards-drive-consumers-open-new-credit-cards</a>; Drazen Prelec,
How credit cards activate the reward center of our brains and drive
spending, MIT Sloan (June 9, 2021), <a href="https://mitsloan.mit.edu/experts/how-credit-cards-activate-reward-center-our-brains-and-drive-spending">https://mitsloan.mit.edu/experts/how-credit-cards-activate-reward-center-our-brains-and-drive-spending</a>.
\2\ 2023 Report at 99. One study also found that between 2021
and 2023, while total credit card applications decreased by 2
percent, applications for rewards cards and rewards cards with
tiered earnings grew by 5 percent and 8 percent, respectively.
Marketa Canayaz, Consumer Demand for Rich Rewards Rises, Comscore
(July 17, 2024), <a href="https://www.comscore.com/Insights/Blog/Consumer-Demand-for-Rich-Rewards-Rises">https://www.comscore.com/Insights/Blog/Consumer-Demand-for-Rich-Rewards-Rises</a>.
\3\ 2023 Report at 100. See also Electronic Payments Coalition,
New Study Shows LMI Households Rely on Credit Card Rewards,
Electronic Payments Coalition (Apr. 30, 2024), <a href="https://electronicpaymentscoalition.org/2024/04/30/new-study-data-shows-credit-card-rewards-are-a-lifeline-for-working-class-americans/">https://electronicpaymentscoalition.org/2024/04/30/new-study-data-shows-credit-card-rewards-are-a-lifeline-for-working-class-americans/</a>.
Despite the growth in the use of rewards cards among consumers with
lower credit scores, in many cases, these consumers do not benefit
from these rewards programs, and research has shown that consumers
with higher credit scores generally benefit from credit card rewards
programs at the expense of consumers with lower credit scores. See
Sumit Agarwal, et al., Who Pays for Your Rewards? Redistribution in
the Credit Card Market (Dec. 5, 2022), <a href="http://dx.doi.org/10.2139/ssrn.4126641">http://dx.doi.org/10.2139/ssrn.4126641</a>.
\4\ CFPB, Credit Card Rewards (May 2024) (hereinafter ``Credit
Card Rewards Issue Spotlight'') at 9, <a href="https://files.consumerfinance.gov/f/documents/cfpb_credit-card-rewards_issue-spotlight_2024-05.pdf">https://files.consumerfinance.gov/f/documents/cfpb_credit-card-rewards_issue-spotlight_2024-05.pdf</a>.
\5\ 2023 Report at 100. Notably, consumers also forfeit about
$500 million in rewards each year. Id. at 102.
\6\ See Rimma Kats, Survey Highlights Growing Consumer Appetite
for Paying with Points, Payments Journal (Jan. 3, 2024), <a href="https://www.paymentsjournal.com/survey-highlights-growing-consumer-appetite-for-paying-with-points/">https://www.paymentsjournal.com/survey-highlights-growing-consumer-appetite-for-paying-with-points/</a> (noting that a majority of consumers favor
redeeming their points at grocery stores, online retail outlets, and
at gas stations). See also Chase Survey Reveals How Credit Card
Rewards Are Enhancing The Holiday Season, Chase Media Center (Nov.
20, 2023), <a href="https://media.chase.com/news/chase-holiday-rewards-survey">https://media.chase.com/news/chase-holiday-rewards-survey</a>
(noting that during the holiday season, 33 percent of consumers
planned to use rewards to pay for gifts and 25 percent on groceries
for holiday meals). See, e.g., Bilt, How do I redeem points towards
a down payment?, <a href="https://support.biltrewards.com/hc/en-us/articles/10377953401869-How-do-I-redeem-points-towards-a-down-payment">https://support.biltrewards.com/hc/en-us/articles/10377953401869-How-do-I-redeem-points-towards-a-down-payment</a>.
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Credit card rewards programs are typically structured around
earning rewards ``currencies''--most commonly ``miles'' or other units
of value issued by a co-brand partner (such as an airline or
hospitality chain) or, alternatively, a credit card issuer's own
``points.'' \7\ Consumers typically earn miles or points through credit
card spending or by directly purchasing them in accordance with pre-
determined formulas, or ``earn rates.'' \8\ Many issuers also offer
promotional rewards through things like sign-up bonuses and
referrals.\9\
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\7\ See Agarwal supra note 4, at 8. In 2021, more than one in
three general purpose credit cards offered were co-branded. See 2023
Report at 25. In addition to rewards currencies and cash back,
rewards programs also increasingly offer other affiliated benefits
or lifestyle rewards, such as access to airport lounges and priority
boarding. Credit Card Rewards Issue Spotlight at 8.
\8\ See CFPB, The Consumer Credit Card Market at 212-13 (Dec.
2015), <a href="http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf">http://files.consumerfinance.gov/f/201512_cfpb_report-the-consumer-credit-card-market.pdf</a>.
\9\ See id. at 213.
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Once earned or purchased by consumers, points can be redeemed for
rewards like ``cash back'' (statement
[[Page 106278]]
credits or direct deposits) or transfers to a co-brand or merchant
partner (e.g., miles or merchant-specific gift cards), and also for
other types of goods or services, like buying merchandise, donating to
charities, applying to purchases at check out, and others.\10\ However,
both credit card issuers and loyalty programs generally reserve, and
often assert a right to, unilaterally change the value of rewards,
including at the point of redemption.\11\ Reward points or miles
valuation changes can sometimes be tied to price changes in the
underlying product or service for which the reward is being redeemed
(e.g., changes in flight pricing), but program operators also adjust
rewards redemption rates distinct from underlying prices, apparently as
a means to ``preserve'' or ``maintain'' profit margins.\12\
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\10\ Credit Card Rewards Issue Spotlight, supra note 4, at 7.
Both quantitative and qualitative evidence indicate consumers spend
across months or years to earn sufficient points or miles for
infrequent large purchases. See, e.g., id. at 15; 2023 Report at
100.
\11\ See, e.g., American Express, Membership Rewards Program
Terms and Conditions, <a href="https://rewards.americanexpress.com/myca/loyalty/us/catalog/tandc">https://rewards.americanexpress.com/myca/loyalty/us/catalog/tandc</a> (last accessed Sept. 4, 2024); Citi, Citi
ThankYou Rewards Terms & Conditions, <a href="https://www.thankyou.com/cms/thankyou/tc.page?pageName=tc">https://www.thankyou.com/cms/thankyou/tc.page?pageName=tc</a> (last accessed Sept. 4, 2024); Chase,
Chase Sapphire Preferred[supreg] with Ultimate Rewards[supreg]
Program Agreement, <a href="https://www.chase.com/sapphire/rewardsagreement">https://www.chase.com/sapphire/rewardsagreement</a>
(last accessed Sept. 4, 2024); Wells Fargo, Wells Fargo
Rewards[supreg] Program Terms and Conditions and Addendum, <a href="https://consumercard.wellsfargorewards.com/#/tnc">https://consumercard.wellsfargorewards.com/#/tnc</a> (last accessed Sept. 4,
2024); Southwest, What are the Rapid Rewards Rules and Regulations,
<a href="https://support.southwest.com/helpcenter/s/article/rapid-rewards-rules-and-regulations">https://support.southwest.com/helpcenter/s/article/rapid-rewards-rules-and-regulations</a> (last accessed Sept. 4, 2024) Emily McNutt,
Delta is making it more expensive to earn elite status--here's how
you can bypass the new requirements, CNN (Aug. 28, 2023), <a href="https://www.cnn.com/cnn-underscored/travel/delta-airlines-status-requirements-update">https://www.cnn.com/cnn-underscored/travel/delta-airlines-status-requirements-update</a>; Sean Cudahy, Alaska Airlines raises lounge
membership prices, tightens access, The Points Guy (Nov. 9, 2023),
<a href="https://thepointsguy.com/news/alaska-lounge-restrictions/">https://thepointsguy.com/news/alaska-lounge-restrictions/</a>; Zach
Griff, Why United's increased status thresholds might not be as bad
as they seem, The Points Guy (Nov. 11, 2022), <a href="https://thepointsguy.com/news/united-premier-changes-not-so-bad/">https://thepointsguy.com/news/united-premier-changes-not-so-bad/</a>.
\12\ See, e.g., United Airlines, MileagePlus Investor
Presentation, at 23 (June 15, 2020) (MileagePlus program can
``adjust[ ] award pricing based on expected foregone revenue for
United''), <a href="https://ir.united.com/static-files/1c0f0c79-23ca-4fd2-80c1-cf975348bab9">https://ir.united.com/static-files/1c0f0c79-23ca-4fd2-80c1-cf975348bab9</a>; Delta Airlines, Delta Air Lines SkyMiles Investor
Presentation, at 17 (Sept. 14, 2020) (dynamic pricing model of
SkyMiles rewards program allows ``flexibility to control costs and
preserve margins''), <a href="https://www.sec.gov/Archives/edgar/data/27904/000119312520244688/d27099dex991.htm">https://www.sec.gov/Archives/edgar/data/27904/000119312520244688/d27099dex991.htm</a>; American Airlines, American
Airlines AAdvantage Investor Presentation, at 22, 35 (Mar. 2021)
(AAdvantage ``control[s] the `exchange rate' between miles and
dollars,'' which provides flexibility to ``manage costs'' and
``steer reward demand to optimal flights based on cash displacement
risk.''), <a href="https://www.sec.gov/Archives/edgar/data/6201/000000620121000022/aainvestorpresentation.htm">https://www.sec.gov/Archives/edgar/data/6201/000000620121000022/aainvestorpresentation.htm</a>.
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As the market for credit card rewards programs has grown, so too
has their complexity.\13\ Rewards program operators often assert their
ability to unilaterally modify credit card rewards programs, which has
caused at least one State to take action to provide consumers with
additional protections against such unilateral program
modifications.\14\ Additionally, the number of consumer complaints that
the CFPB receives about credit card rewards programs has also risen
dramatically in recent years.\15\ Many consumers' complaints describe
how the marketing or initial offering of a rewards program is
inconsistent with their actual, later experiences earning and redeeming
credit card rewards. For instance, consumers have complained to the
CFPB about companies devaluing their rewards relative to what they were
marketed, or increasing barriers to redeeming cash or cash-equivalent
rewards, such as eliminating the ability for consumers to redeem points
for a statement credit.\16\
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\13\ See Jamie Lauren Keiles, The Man Who Turned Credit-Card
Points Into an Empire, The New York Times (Jan. 5, 2021), <a href="https://www.nytimes.com/2021/01/05/magazine/points-guy-travel-rewards.html">https://www.nytimes.com/2021/01/05/magazine/points-guy-travel-rewards.html</a>
(how ``as rewards programs have multiplied, the earned point has
grown increasingly complex and fungible''); Credit Card Rewards
Issue Spotlight, supra note 4, at 6.
\14\ See Credit Card Rewards Issue Spotlight, supra note 4, at
11, 20; New York General Business Law Sec. 520-e (2023).
\15\ In 2023, there was a more than 70 percent increase in
complaints involving credit card rewards over pre-pandemic levels.
Credit Card Rewards Issue Spotlight, supra note 4, at 2.
\16\ See, e.g., id. at 15, 16.
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Consumers have also complained about being denied access to
promotional or other rewards because of terms or other requirements
hidden in their cardholder or rewards program agreements, including
instances of unexpectedly being found ineligible after applying for a
credit card \17\ or being forced to return a promotional offer because
they closed their account within a certain period.\18\ For many of
these types of complaints, companies and merchant partners justified
revoking, canceling, or preventing consumer access to rewards through
requirements and guidelines absent from their marketing materials and
only found buried in their cardholder or rewards program agreements.
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\17\ See, e.g., id. at 13.
\18\ See, e.g., id. at 15.
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Consumers have also repeatedly alerted the CFPB about difficulties
redeeming their rewards or inexplicably seeing their points disappear.
These reported challenges include issues with customer service,\19\
technical failures,\20\ and dispute resolution,\21\ all of which can be
further compounded when neither the issuer nor its merchant partner
accept responsibility and both refer consumers to the other.\22\
Because of these issues, some consumers have seen their rewards
disappear when being transferred or applied to a merchant partner, with
little recourse to resolve such problems.\23\
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\19\ See, e.g., id. at 17.
\20\ See, e.g., id. at 18.
\21\ See, e.g., id.
\22\ See, e.g., id.
\23\ See, e.g., id. at 19.
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Analysis
The CFPA prohibits any ``covered person'' or ``service provider''
from ``committing or engaging in an unfair, deceptive, or abusive act
or practice under Federal law in connection with . . . the offering of
a consumer financial product or service.'' \24\ An act or practice is
unfair when: (1) it causes or is likely to cause substantial injury to
consumers that is not reasonably avoidable by consumers and (2) such
injury is not outweighed by countervailing benefits to consumers or to
competition.\25\ Substantial injury includes monetary harm, and may be
based on likely rather than actual injury.\26\ In general, an injury is
not reasonably avoidable if consumers cannot reasonably anticipate the
injury, or when there is no way to avoid the injury even if it is
anticipated.\27\
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\24\ 12 U.S.C. 5531(a); see also 12 U.S.C. 5536(a)(1)(B).
\25\ 12 U.S.C. 5531(c)(1).
\26\ See, e.g., FTC v. Wyndham Worldwide Corp., 799 F.3d 236,
246 (3d Cir. 2015).
\27\ See FTC v. Neovi, Inc., 604 F.3d 1150, 1158 (9th Cir. 2010)
(interpreting whether consumer's injuries were reasonably avoidable
under the FTC Act); Orkin Exterminating Co. v. FTC, 849 F.2d 1354,
1365-66 (11th Cir. 1988) (same); Am. Fin. Servs. Ass'n v. FTC, 767
F.2d 957, 976 (D.C. Cir. 1985) (same).
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Under the CFPA, a representation, omission, or practice is
deceptive if it is likely to mislead a reasonable consumer and is
material.\28\ Representations, omissions, or practices are ``material''
if they ``involve[ ] information that is important to consumers and,
hence, likely to affect their choice of, or conduct regarding, a
product.'' \29\ In assessing the meaning of a communication, the CFPB
looks to its overall, net impression; in other words, the CFPB
considers the entire advertisement, transaction, or course of dealing
rather than evaluating
[[Page 106279]]
statements in isolation.\30\ A misrepresentation can be ``an express or
implied statement [that is] contrary to fact.'' \31\ It may also be
deceptive, for example, when a seller partially discloses information
about the nature of a product or service, but fails to disclose other
material information.\32\ Further, ``[w]ritten disclosures or fine
print may be insufficient to correct a misleading representation.''
\33\
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\28\ See CFPB v. Gordon, 819 F.3d 1179, 1192-93 (9th Cir. 2016).
\29\ Novartis Corp. v. FTC, 223 F.3d 783, 786 (D.C. Cir. 2000)
(quoting In re Cliffdale Assocs., Inc., 103 FTC 110, 165 (1984)).
\30\ See, e.g., CFPB v. Aria, 54 F.4th 1168, 1173 (9th Cir.
2022); Gordon, 819 F.3d at 1193; FTC v. E.M.A. Nationwide, Inc., 767
F.3d 611, 631 (6th Cir. 2014); Fanning v. FTC, 821 F.3d 164, 170
(1st Cir. 2016).
\31\ FTC, Policy Statement on Deception (Oct. 14, 1983).
\32\ See, e.g., Sterling Drug, Inc. v. FTC, 741 F.2d 1146, 1154
(9th Cir. 1984) (advertisements referring to ``unique formula'' were
deceptive because they could lead consumers to infer that pain
reliever's formulation was something other than ordinary aspirin);
see also FTC v. Bay Area Business Council, Inc., 423 F.3d 627, 635
(7th Cir. 2005) (``[T]the omission of a material fact, without an
affirmative misrepresentation, may give rise to an FTC Act
violation.'').
\33\ FTC, Policy Statement on Deception (Oct. 14, 1983).
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Rewards programs are a feature common to many credit cards, and
tend to both be prominently marketed by issuers and widely used by
consumers.\34\ Credit card rewards programs also play a major role in
consumer's choices on which cards to apply for and use for any given
transaction.\35\
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\34\ In 2022, rewards card spending was 90 percent of all
consumer spending on general purpose credit cards. CFPB, The
Consumer Credit Card Market, at 99 (Oct. 2023), <a href="https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf">https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2023.pdf</a>. See also Background on Credit Card Rewards
Programs, supra.
\35\ Id. at 98. Because credit card rewards programs are offered
or provided ``in connection'' with a consumer financial product or
service (the extension of credit to consumers), the ``covered
persons'' or ``service providers'' who offer, provide, or support
such programs (hereinafter ``rewards program operators'') must
comply with the CFPA, including its prohibitions against unfair,
deceptive or abusive acts or practices, as well as other applicable
consumer financial protection laws. In the typical case, a credit
card issuer providing the rewards program would be a ``covered
person,'' while ``service providers'' could include the partners or
vendors that provide material services on the rewards program in
connection with the credit card program, such as co-brand or
merchant partners that deliver applicable rewards, or vendors who
operate the key infrastructure or platforms for consumers to view,
manage, and use their rewards earnings. See 12 U.S.C. 5481(6),
5481(26)(A).
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The CFPB is issuing this circular to underscore that the CFPA's
prohibition on unfair or deceptive acts or practices applies to the
design, marketing, and administration of credit card rewards
programs.\36\ Rewards program operators may violate this prohibition in
a variety of circumstances regardless of whether they are taking
actions consistent with rewards program terms. In particular, rewards
program operators risk committing unfair or deceptive acts or practices
when (1) rewards that consumers have already earned are devalued; (2)
consumers' receipt of rewards is revoked, cancelled, or prevented based
on buried or vague conditions; and (3) rewards points are deducted
without consumers receiving the corresponding benefit of the rewards.
These examples are illustrative and non-exhaustive.
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\36\ While not specifically discussed in this circular, rewards
program operators must also comply with the CFPA's prohibition on
abusive acts or practices, 12 U.S.C. 5531(d), which provides that an
act or practice is abusive if it (1) materially interferes with a
consumer's ability to understand a term or condition of a consumer
financial product or service or (2) takes unreasonable advantage of
the consumer's (a) lack of understanding of the material risks,
costs, or conditions of the product or service; (b) inability to
protect their interests in selecting or using a consumer financial
product or service; or (c) reasonable reliance on a covered person
to act in the consumer's interests.
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As described further below, the CFPB emphasizes that covered
persons that offer, provide, or operate credit card rewards programs
may be liable for an unfair or deceptive act or practice where some of
the conduct in question may be attributable to a third party or service
provider, such as a merchant partner.\37\
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\37\ See, e.g., CFPB v. Ocwen Fin. Corp., No. 17-80495-CIV, 2019
WL 13203853 at *30 (S.D. Fla. Sept. 5, 2019) (finding that the CFPB
sufficiently alleged CFPA violations regarding add-on products even
where add-on vendor was responsible for enrolling borrowers to such
add-on products); see also, e.g., FTC v. Bay Area Bus. Council,
Inc., 423 F.3d at 630) (affirming district court ruling that
multiple interrelated corporate and individual defendants were
liable under section 5 of FTC Act for deceptive telemarketing
scheme); FTC v. Neovi, Inc., 604 F.3d 1150, 1155 (9th Cir. 2010)
(``a single violation of the [FTC] Act may have more than one
perpetrator'') (citing Bay Area).
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Devaluation of Rewards Already Earned or Purchased
Rewards program operators may commit an unfair or deceptive act or
practice when they materially reduce the overall value of rewards that
consumers have already earned or purchased. Consumers make decisions on
whether to open or use a credit card based on the explicit and implicit
representations about the value of card benefits and rewards. For
instance, consumers' reasonable expectations about the value of rewards
may be informed by advertisements at account opening, as well as by
redemption values of rewards communicated to consumers on or around the
time the consumer makes decisions to purchase goods with the card and
accrue rewards benefits. Furthermore, fine print disclaimers or
contract terms stating that rewards program operators have the right to
adjust rewards offerings often will not be sufficient to correct
consumers' net impression about the expected value of rewards.
When rewards operators influence consumers' expectations about the
value of rewards in their product or marketing efforts (e.g., to
support customer acquisition, retention, or increased purchase volume),
but later make decisions to deflate the overall value of accrued
rewards, they may have engaged in actions that resemble a traditional
``bait-and-switch'' scheme.\38\ These activities may constitute unfair
or deceptive acts or practices under the CFPA.\39\
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\38\ See 16 CFR 238 et seq., FTC Guides Against Bait
Advertising. Cf. Rossman v. Fleet Card (R.I.) Nat. Ass'n, 280 F.3d
384, 396-400 (3d Cir. 2002) (credit card issuer soliciting business
with no-annual-fee offer while intending to later impose fee
constitutes a bait-and-switch scheme).
\39\ Cf. 24. FR 9755 (Dec. 4, 1959) (noting that FTC enforcement
actions with respect to bait-and-switch schemes are brought under
the FTC Act's prohibition on ``unfair or deceptive acts or
practices''); 32 FR 15540 (Nov. 8, 1967) (similar); Synopsis of
Federal Trade Commission Decisions Concerning ``Bait and Switch''
Sales Practices (Sept. 23, 1975) (``The Federal Trade Commission has
determined that `bait and switch' practices are unfair or deceptive
trade practices and are unlawful under Section 5(a)(1) of Federal
Trade Commission Act.''), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/NOPO-Bait-and-Switch.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/NOPO-Bait-and-Switch.pdf</a>.
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Enforcers investigating potentially unfair or deceptive acts or
practice should consider a variety of different devaluation tactics by
rewards program operators. Unfair or deceptive devaluations are easier
to detect when the rewards program involves simple, fixed redemption
rates with one retailer or merchant partner. But such schemes may be
harder to detect where there are numerous potential rewards available
or rewards program operators implement more complex program changes.
For example, if a rewards program operator uses dynamic pricing for
rewards redemptions, enforcers can examine whether the firm is unfairly
or deceptively devaluing points over time by considering, for example,
whether the dynamic prices in points have increased, in aggregate,
relative to dynamic cash prices for the same products or services.
Similarly, if a rewards program includes redemption options from
multiple participating merchant partners, and the rewards program
operator loses a major merchant partner or a major partner materially
downgrades the service provided, enforcers can look to whether the
rewards program operator is taking reasonable measures to generally
maintain the value of rewards, such as by increasing points usable at
other merchant partners, allowing customers to cash out points,
replacing lost rewards with other rewards, or by other
[[Page 106280]]
means. Additionally, when two firms merge, resulting in a conversion of
one firm's customers into a new rewards program, enforcers can look at
whether the resulting firm took actions to convert customers' points to
the new system without a reduction in points value.\40\
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\40\ See, e.g., U.S. DOT, USDOT Requires Alaska and Hawaiian
Airlines to Preserve Rewards Value, Critical Flight Service as
Merger Moves Forward (Sept. 2024), <a href="https://www.transportation.gov/briefing-room/usdot-requires-alaska-and-hawaiian-airlines-preserve-rewards-value-critical-flight">https://www.transportation.gov/briefing-room/usdot-requires-alaska-and-hawaiian-airlines-preserve-rewards-value-critical-flight</a> (in connection with regulatory merger
approvals, Department of Transportation imposed ``rewards
protections against devaluation,'' including requiring each earned
loyalty program be converted to new program miles at 1:1 ratio and
prohibiting ``any actions that would devalue HawaiianMiles miles'').
The merger approval and requirements were based on ``[p]ublic
interest criteria [that] include preventing unfair, deceptive,
predatory or anticompetitive practices. . . .'' Id.
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In any investigation into whether a rewards program operator has
engaged in an unfair or deceptive devaluation scheme, enforcers are
encouraged to collect and consider accounting or other metrics
maintained by program operators or others regarding rewards values. For
example, many companies maintain internal figures on the dollar value
of outstanding rewards for accounting purposes, including an estimated
cost-per-point or weighted average redemption cost.\41\ If a firm's
cost-per-point or weighted average redemption cost decreases over time,
that could suggest a firm has engaged in a bait-and-switch or similar
unfair or deceptive act or practice.
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\41\ See, e.g., Capital One Financial Corporation, Annual Report
(Form 10-K) (Feb. 24, 2023) (``We use the weighted-average
redemption cost during the previous twelve months, adjusted as
appropriate for recent changes in redemption costs, . . . to
estimate future redemption costs.''). Similarly, informational
websites aimed at consumers may also estimate rewards point values.
See, e.g., The Points Guy, TPG launches new data-driven valuations
for 6 major US airlines--and updates methodology for credit card
currencies (Sept. 8, 2023), <a href="https://thepointsguy.com/news/new-data-driven-valuations/">https://thepointsguy.com/news/new-data-driven-valuations/</a>.
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The CFPB emphasizes that covered persons that offer, provide, or
operate credit card rewards programs may be liable for an unfair or
deceptive act or practice even when the material devaluation of rewards
could arguably be attributed to the actions of a third party. In other
words, if a covered person that offers, provides, or operates a credit
card rewards program makes explicit or implicit representations about,
and thereby induces consumer expectations regarding, the value of the
card benefits or rewards, and the value of those benefits or rewards is
subsequently materially reduced by actions that may be attributable to
the covered person's merchant partner, the covered person may be liable
for an unfair or deceptive act or practice.
Hidden Conditions
Rewards program operators also risk committing unfair or deceptive
acts or practices when they revoke or cancel rewards, or prevent the
award of rewards, based on buried or vague conditions.\42\ Rewards
programs have become increasingly complex, with lengthy terms and
unintuitive restrictions that consumers may not be aware of as they use
their credit cards day to day. These lengthy terms may use buried or
vague conditions set by rewards program operators that are non-
negotiable and may not be consistent with prominent promotional
language advertising the rewards that consumers can earn. As noted
above, consumer complaints received by the CFPB suggest that, despite
descriptions in the fine print of rewards program terms, consumers
often do not understand the basis of many rewards forfeitures or
denials.
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\42\ Additionally, rewards program terms that include unlawful
or unenforceable conditions may violate the CFPA's prohibition on
deceptive acts or practices. CFPB Circular 2024-03, Unlawful and
unenforceable contract terms and conditions (June 2024), <a href="https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/">https://www.consumerfinance.gov/compliance/circulars/consumer-financial-protection-circular-2024-03/</a>. For example, the recently enacted New
York statute referenced above may render certain terms in rewards
program deceptive with respect to New York residents.
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The following are illustrative examples of potentially unfair
rewards program practices:
<bullet> Revoking or canceling rewards based on vague catch-all
language in program terms, such as ``gaming'' or ``abuse.'' This can be
especially problematic when those terms are also subject to the rewards
program operator's discretion.\43\
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\43\ See Credit Card Rewards Issue Spotlight, supra note 4, at
14.
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<bullet> Revoking previously earned rewards based on policies that
tie revocation to actions that are not within the consumer's control
and do not constitute fraud or misconduct by the consumer, like an
issuer unilaterally closing an account.\44\
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\44\ Id. at 20.
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<bullet> Promotional ``sign-up'' offers that are denied based on
hidden conditions that consumers were not reasonably aware of, such as
``churning'' conditions that restrict how frequently a consumer can
earn sign-up rewards, time periods to earn rewards that are effectively
shortened by the hidden and unavoidable period of time needed to
receive and activate a card, or promotional offers that are unavailable
for applicants through certain channels.
These sorts of dark patterns and fine print will often constitute
deceptive representations, omissions, or practices about material
concerns, and thus violate the prohibition on deceptive practices.\45\
In addition, denying or preventing rewards based on buried or vague
terms could cause a substantial monetary injury in the form of lost
rewards value and may be unfair.\46\ These injuries may not be
reasonably avoidable by consumers where conditions are buried or vague,
and accordingly hinder consumers' ability to make a ``free and informed
choice.'' \47\ Specifically, consumers cannot reasonably avoid injuries
where they are not ``adequately informed'' of key conditions or
presented such information in a confusing way.\48\ As noted above,
rewards program operators typically promote most prominently the
availability of rewards, even more so than other key credit card terms,
such as APR or annual fees, while putting conditions around rewards in
fine print.\49\ Consumers may not understand the restrictive
eligibility criteria buried in the fine print where program operators
send marketing materials that target rewards promotions to the specific
consumers.\50\ Similarly, a consumer may be confused by the way a
rewards program operator interprets vague catch-all language, such as
terms restricting rewards based on impermissible ``gaming'' or
``abuse,''
[[Page 106281]]
when those interpretations conflict with prominent promotional language
or other representations.\51\ There are no countervailing benefits that
outweigh the injury to consumers or competition of inducing consumers
to use credit cards with vague or fine-print conditions that consumers
cannot reasonably understand.\52\
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\45\ See FTC, Bringing Dark Patterns to Light, at 7 (Sept. 2022)
(``Some dark patterns operate by hiding or obscuring material
information from consumers, such as burying key limitations of the
product or service in dense Terms of Service documents that
consumers don't see before purchase.''), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/P214800%20Dark%20Patterns%20Report%209.14.2022%20-%20FINAL.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/P214800%20Dark%20Patterns%20Report%209.14.2022%20-%20FINAL.pdf</a>. Cf. FTC v. <a href="http://Amazon.com">Amazon.com</a>, 2024 WL 2723812 at *1 (W.D.
Wash. 2024) (denying motion to dismiss of claims brought under
Section 5 of the FTC Act and the Restore Online Shoppers' Confidence
Act based on defendants ``trick[ing], coerc[ing], and manipulat[ing]
consumers . . . by failing to disclose the material terms of the
subscription clearly and conspicuously and by failing to obtain
consumers' informed consent before enrolling them''); FTC v.
Publishers Clearing House LLC, No. 23-CV-4735 (E.D.N.Y. June 6,
2023) (complaint) (alleging defendant ``employs dark patterns
throughout the consumer's experience by, among other things . . .
placing disclosures in small and light font and in places where a
consumer is unlikely to see them'').
\46\ CFPB research suggests consumers lose hundreds of millions
of dollars in earned rewards each year. 2023 Report, at 102.
\47\ See FTC v. Neovi, 604 F.3d at 1158; Am. Fin. Servs. Ass'n
v. FTC, 767 F.2d at 976.
\48\ See, e.g., FTC v. Commerce Planet, Inc., 878 F. Supp. 2d
1048, 1079 (C.D. Cal. 2012) (consumers could not reasonably avoid
injury where sign-up pages did not adequately disclose negative
option plan by burying in separate fine print disclosures).
\49\ Credit Card Rewards Issue Spotlight, supra note 4, at 4,
11.
\50\ Id. at 12-13.
\51\ For instance, consumer complaints indicate rewards program
operators may interpret as impermissible ``gaming'' or ``churning''
consumer card usage behaviors that are otherwise permissible under
cardholder agreements and satisfy objective sign-up promotion
criteria, such as closing an account after spending the required
amount for a promotional rewards bonus. See id. at 14.
\52\ Notably, as with devaluation, the rewards program operators
have already benefitted from the consumer spending on the relevant
card by the time they deny the rewards benefits.
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Inability To Redeem Rewards
Rewards program operators can also commit unfair or deceptive acts
or practices when their customers lose their points because redemption
procedures do not function properly. In offering rewards programs,
operators make representations to consumers about how rewards can be
redeemed, often developing online interfaces for consumers to use to
redeem rewards. A rewards program operator is accordingly responsible
for administering the rewards program it offers, including coordinating
with its merchant partners or vendors, so that consumers can redeem the
rewards that they have earned and selected in accordance with the
rewards program.\53\
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\53\ Cf. In re UniRush and Mastercard Int'l Inc., No. 2017-CFPB-
0010 (Feb. 1, 2017) (consent order) (finding that failures to
adequately test and administer prepaid card program conversion were
unfair acts or practices), <a href="https://files.consumerfinance.gov/f/documents/201702_cfpb_UniRush-Mastercard-consent-order.pdf">https://files.consumerfinance.gov/f/documents/201702_cfpb_UniRush-Mastercard-consent-order.pdf</a>. See also
CFPB v. Ocwen Financial Corp., No. 17-80495-CIV, 2019 WL 13203853 at
*30 (S.D. Fla. Sept. 5, 2019) (finding that the CFPB sufficiently
alleged CFPA violations regarding add-on products even where add-on
vendor was responsible for enrolling borrowers to such add-on
products); see also, e.g., FTC v. Bay Area Bus. Council, Inc., 423
F.3d at 630 (affirming district court ruling that multiple
interrelated corporate and individual defendants were liable under
section 5 of FTC Act for deceptive telemarketing scheme); FTC v.
Neovi, 604 F.3d at 1155 (``a single violation of the [FTC] Act may
have more than one perpetrator'') (citing Bay Area).
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If systems failures result in consumers losing points when
attempting to redeem, it may result in a deceptive practice because
consumers would typically have a basis to reasonably believe they were
purchasing products or services with their points, which would be false
as a result of the failure. It would likely also be unfair because
consumers would incur injury as a result of the loss of rewards, with
no ability to avoid the harm and no countervailing benefits that
outweigh the injury. Even if a rewards program operator ultimately
refunds unredeemed points to a consumer, the consumer may be harmed by
the consumer's inability to redeem points in the interim,\54\ and often
consumers end up expending significant time and resources trying to
obtain the refund.\55\ Consumers cannot reasonably avoid these harms as
they do not have control over operators' rewards program
administration, including procedures for redeeming points or converting
them for use with co-brand or merchant partners.
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\54\ See Credit Card Rewards Issue Spotlight, supra note 4, at
19 (``the ultimate value to consumers [of converting rewards points
to miles or hotel points] depends on a quick and accurate
conversion'').
\55\ See id. at 17 (complaints received by CFPB indicate
consumers spend time trying to resolve rewards issues through
``repeated calls, hours on hold, and thorough documentation of the
problem at hand'').
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Again, the CFPB emphasizes that covered persons that offer,
provide, or operate credit card rewards programs may commit an unfair
or deceptive act or practice when the loss of points due to failures of
redemption procedures could arguably be attributed to a merchant
partner or service provider. For instance, a covered person may be
liable for an unfair or deceptive act or practice when a consumer
attempts to transfer rewards points from the online portal of such
covered person to the points portal of a merchant partner (e.g.,
requests a ``conversion'' of credit card rewards points to points at a
travel partner), but technical failures on the merchant partner's
system result in the consumer losing the points.
About Consumer Financial Protection Circulars
Consumer Financial Protection Circulars are issued to all parties
with authority to enforce Federal consumer financial law. The CFPB is
the principal Federal regulator responsible for administering Federal
consumer financial law, see 12 U.S.C. 5511, including the Consumer
Financial Protection Act's prohibition on unfair, deceptive, and
abusive acts or practices, 12 U.S.C. 5536(a)(1)(B), and 18 other
``enumerated consumer laws,'' 12 U.S.C. 5481(12). However, these laws
are also enforced by State attorneys general and State regulators, 12
U.S.C. 5552, and prudential regulators including the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the National
Credit Union Administration. See, e.g., 12 U.S.C. 5516(d), 5581(c)(2)
(exclusive enforcement authority for banks and credit unions with $10
billion or less in assets). Some Federal consumer financial laws are
also enforceable by other Federal agencies, including the Department of
Justice and the Federal Trade Commission, the Farm Credit
Administration, the Department of Transportation, and the Department of
Agriculture. In addition, some of these laws provide for private
enforcement.
Consumer Financial Protection Circulars are intended to promote
consistency in approach across the various enforcement agencies and
parties, pursuant to the CFPB's statutory objective to ensure Federal
consumer financial law is enforced consistently. 12 U.S.C. 5511(b)(4).
Consumer Financial Protection Circulars are also intended to
provide transparency to partner agencies regarding the CFPB's intended
approach when cooperating in enforcement actions. See, e.g., 12 U.S.C.
5552(b) (consultation with CFPB by State attorneys general and
regulators); 12 U.S.C. 5562(a) (joint investigatory work between CFPB
and other agencies).
Consumer Financial Protection Circulars are general statements of
policy under the Administrative Procedure Act. 5 U.S.C. 553(b). They
provide background information about applicable law, articulate
considerations relevant to the Bureau's exercise of its authorities,
and, in the interest of maintaining consistency, advise other parties
with authority to enforce Federal consumer financial law. They do not
restrict the Bureau's exercise of its authorities, impose any legal
requirements on external parties, or create or confer any rights on
external parties that could be enforceable in any administrative or
civil proceeding. The CFPB Director is instructing CFPB staff as
described herein, and the CFPB will then make final decisions on
individual matters based on an assessment of the factual record,
applicable law, and factors relevant to prosecutorial discretion.
Rohit Chopra,
Director, Consumer Financial Protection Bureau.
[FR Doc. 2024-30988 Filed 12-27-24; 8:45 am]
BILLING CODE 4810-AM-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.