Ever wonder whether a credit card issuer's offer to you or treatment of your account is, in a legal sense, unfair or deceptive?
If it is, your lender could get a civil penalty ranging from $11,000 to more than $1 million per violation, per day. Whether you get reimbursed and by how much depends upon the regulator involved and state and federal rules.
The Federal Deposit Insurance Corp. has detailed how to detect unfair or deceptive credit card practices in a recent "Supervisory Insights" letter to banks.
Here, according to the FDIC, is a three-pronged test to assess whether a credit card representation, omission or practice is deceptive. All of the following conditions must be met:
- It must mislead or be likely to mislead the consumer. Example: The phrase "6% cash back" appears 13 times in a credit card solicitation, but the bank fails to prominently disclose that the actual cash-back bonus is tiered. Only purchases between $40,001 and $50,000 actually earn that 6% cash back. Plus, no reward is paid until the earned rewards for the year total $50. "The likelihood of a consumer being misled by an advertisement or direct solicitation increases with the repetitiveness of the unqualified representation," the FDIC warns.
- For a practice to be deceptive, the consumer's interpretation of credit card offers must be reasonable under the circumstances. The FDIC details one woman's "reasonable" interpretation of a solicitation from a bank offering 0% interest for 12 months on balance transfers. The problem: The bank never disclosed, either in its solicitation or in the credit card agreement, the actual date the promotional rate expired. Upon her own interpretation of that date, the woman, despite faithfully making minimum monthly payments, was zapped with a charge of $19.89 in interest. Reason: The bank posted her final payment at a later date than she had calculated. The FDIC says the woman's interpretation of when the promotional rate expired was reasonable, given conflicting representations or repeated omissions in the solicitation and the card member agreement. The FDIC also warns that in marketing materials to the elderly, students or the financially unsophisticated, the reasonableness of a consumer's interpretation must be judged from the vantage point of a reasonable member of the targeted group.
- The misleading representation, omission or practice must be material. Examples of material information: costs, benefits or restrictions on the use or availability of a product or service. For example, radio ads invite you to call for a free credit report, with no qualifications or conditions. If you apply for and obtain credit, you are then charged the cost of the credit report at closing. Problem: Nothing in the bank's records or promotions suggests consumers would be charged a fee for the credit report upon acceptance of a loan. This fee is "material" because it could influence your decision.
To determine that a credit-card practice is unfair, legally speaking, all three of the following conditions must be met:
- The act or practice must cause or be likely to cause substantial injury, which usually involves monetary harm, to consumers. Trivial or speculative harms are typically insufficient. Example: Your bank charges multiple rates but applies card payments so that the lower rates are paid off first. This leaves your higher-rate balances to accumulate more interest. Though one customer may not have been substantially impacted by this practice, the FDIC says it may judge injury caused to a group of consumers "substantial."
- Consumers must not reasonably be able to avoid the injury. Example: A check bounces only because the bank, unbeknownst to the customer, reduced the customer's credit limit after the customer had already issued the check. This unavoidable situation led to a host of possible fees.
- The injury must not be outweighed by offsetting benefits. Take the common practice mentioned above of charging multiple interest rates but applying card payments so that lower rates are paid off first. The substantial injury caused by this practice may be outweighed by the offer of low promotional rates for balance transfers. In that case, the practice may not be judged unfair.
The FDIC stresses that other regulations may also be cited in determining whether an act or practice is unfair.
This article was reported and written by Gail Liberman and Alan Lavine for MarketWatch.
Published March 4, 2009