"Add-on" products come under scrutiny of the CFPB

Credit card issuers have been put on notice by the Consumer Financial Protection Bureau ("CFPB") that offering "add-on" products, such as debt protection, identity theft protection, credit score tracking, and other products, must comply with Federal consumer financial law. This compliance extends to the issuer's service provider as well. Of note in the CFPB's July 18, 2012, bulletin is the applicability of this compliance to those who offer similar products in connection with deposit services. The CFPB's bulletin was issued as a result of consumer complaints of being misled by the marketing and sales practices associated with credit card add-on products, including the failure by issuers to adequately disclose important product terms and conditions, and enrollment in programs without the consumer's affirmative consent, along with the payment of fees.

Federal financial laws implicated with these add-on programs include the Dodd-Frank Act prohibiting deceptive practices or acts. The CFPB considers the following factors in evaluating the effectiveness of disclosures at preventing consumers from being misled:

• Is the statement prominent enough for the consumer to notice?

• Is the information presented in an easy-to-understand format that does not contradict other information in the package and at a time when the consumer's attention is not distracted elsewhere?

• Is the information in a location where consumers can be expected to look or hear?

• Is the information in close proximity to the claim it qualifies?

• With respect to open credit, Regulation Z (Truth in Lending Act) contains rules on account-opening disclosures and periodic statements, and also sets forth special rules that apply to credit card transactions, treatment of payments and credit balances, procedures for resolving credit billing errors, annual percentage rate calculation, and advertising. Regulation Z also includes rules that apply to credit and charge card application and solicitation disclosures.

Under the Equal Credit Opportunity Act ("ECOA") and its implementing regulation, Regulation B, creditors may not discriminate against an applicant in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex, marital status, or age (provided the applicant has the capacity to contract). ECOA/Regulation B also provide that a creditor may not discriminate based on the fact that all or part of an applicant's income derives from a public assistance program.

The CFPB identifies at least the following steps to ensure that the marketing and sale of credit card add-on products limit the potential for statutory or regulatory violations and related consumer harm:

• Marketing materials, including direct mail promotions, telemarketing scripts, internet and print ads, radio recordings, and television commercials, reflect the actual terms and conditions of the product and are not deceptive or misleading to consumers;

• Employee incentive or compensation programs tied to the sale and marketing of add-on products require adherence to institution-specific program guidelines and do not create incentives for employees to provide inaccurate information about the products; and

• Scripts and manuals used by the institution's telemarketing and customer service centers direct representatives to accurately state the terms and condition of products; prohibit enrollment without clear affirmative consent by the consumer; provide clear guidance as to the wording and appropriate use of rebuttal language including the limits on the number of times that the representative may attempt to rebut the consumer's request for additional information or decline the product; make clear to the consumer that the purchase of add-on products is not required (unless there is such a requirement); and cancellation requests are handled in a manner that is consistent to the product's actual terms and conditions.

The CFPB also identifies several recommendations for a compliance management program, to include:

• Written policies and procedures governing add-on products designed to ensure compliance;

• Periodic quality assurance reviews as well as real-time monitoring and recording of customer service calls;

• Independent audits of add-on programs;

• Oversight of any affiliates or third-party service providers that perform marketing or other functions related to offering add-on products;

• Procedures for receiving, investigating and properly resolving consumer complaints; and

• Training programs for employees involved in the marketing, sale, and operation of add-on products.

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.