The Board of Governors of the Federal Reserve System (Federal Reserve) recently exercised its authority to enforce laws prohibiting unfair or deceptive acts or practices committed by a financial institution under the Federal Reserve’s jurisdiction. On October 26, the Federal Reserve entered a consent order with Mid America Bank & Trust Co. (Mid America), which resolved allegations of deceptive acts or practices, in violation of the Federal Trade Commission Act (FTC Act), in connection with the marketing of balance transfer credit cards. Among other sanctions, the Federal Reserve ordered Mid America to pay $5 million in restitution to nearly 21,000 consumers.
Mid America offered its balance transfer credit card program through independent service organizations (ISOs). These ISOs purchased charged-off consumer debt and issued consumers credit cards with which to refinance that debt. The ISO would forgive a portion of the debt in exchange for issuing the credit card and transferring the remaining debt to the card. The consent order held Mid America accountable for the conduct of three ISOs in their various marketing activities relating to these balance transfer programs.
The Federal Reserve alleged that the ISOs’ marketing of one card promised that a consumer’s initial credit line would equal the amount of debt transferred to the card, and additional credit would become available to the consumer as they paid down the transferred balance. The Federal Reserve charged, however, that Mid America, through one of its ISOs, failed to disclose that finance charges and fees would reduce the amount of credit available to the customer even after making a payment.
The Federal Reserve alleged that one ISO marketed another credit card as a way for consumers to build credit records because their monthly payments would be reported to consumer reporting agencies. However, Mid America did not report the monthly payments to consumer reporting agencies because, under the terms of a consent order between the prior owner of the card portfolio and the FDIC, it was precluded from doing so.
For another credit card, the Federal Reserve alleged that Mid America’s ISO failed to disclose to consumers that participating in the balance transfer program could restart the statute of limitations for time-barred debt. (In most states, if a consumer makes partial payment on time-barred debt, the limitations period restarts.) Again, Mid America’s allegedly improper conduct involved the terms of a consent order between a prior owner of the card portfolio and the FDIC, discussed below.
Each of these representations, the Federal Reserve alleged, was a deceptive act or practice, within the meaning of § 5(a)(1) of the FTC Act, 15 U.S.C. § 45(a)(1). As a consequence, under §§ 8(b)(1), (2), (3), and (6) of the Federal Deposit Insurance Act (FDI Act), the Federal Reserve ordered Mid America to cease and desist this improper conduct, improve its compliance management and oversight of third party providers, and pay up to $5 million in restitution. However, the Federal Reserve did not cite its authority to take action against the Bank under the prohibition against deceptive (or unfair or abusive) acts or practices in the Consumer Financial Protection Act of 2010 (CFP Act), 12 U.S.C. § 5581(c) (authorizing the Federal Reserve to enforce compliance with federal consumer financial laws against a state member bank that is described in § 1026(a) of the CFP Act).
Longstanding UDAP Authority under the FTC Act and FDI Act
In a 2004, the Federal Reserve and FDIC affirmed the agencies’ authorities under § 8 of the FDI Act to take action when unfair or deceptive acts or practices are discovered (see FIL-26-2004 (Mar. 11, 2004)). The agencies’ joint action followed on the correspondence from the Federal Reserve Chairman Alan Greenspan to Congress, in May 2002, confirming that “. . . the general prohibition [against UDAP] in the FTC Act applies to banks . . . .” (In a coordinated action on the same day, the FDIC issued a Financial Institution Letter confirming that the FDIC would cite a state non-member bank and its institution-affiliated parties for violations of § 5 of the FTC Act (see FIL-57-2002 (May 30, 2002)). Yet the Federal Reserve has rarely publicly invoked these authorities—even while the CFP Act conferred on the agency authorities relating to the prohibition in that Act against unfair, deceptive, or abusive acts or practices (for a banking institution whose total assets are $10 billion or less). The FDIC and OCC have been considerably more active in enforcing UDAP laws.
We identified only four consent orders since 2012 where the Federal Reserve alleged violations of § 5 of the FTC Act, and three of them relate to the same conduct:
- American Express Co., FRB Docket Nos. 12-066-B-HC, 12-066-HCC (October 1, 2012) (concerning alleged deceptive marketing and debt collection practices; in conjunction with CFPB, FDIC, OCC, and Utah Dept. Fin. Inst.);
- Cole Taylor Bank of Chicago, FRB Docket Nos. 14-021-E-SMB, 14-021-CMP-SMB, 2014-DB-15 (June 26, 2014) (concerning Higher One’s alleged deceptive practices);
- Higher One, Inc., FRB Docket Nos. 15-026-E-I, 15-026-CMP-I (December 23, 2015) (concerning alleged deception related to financial aid disbursement service); and
- Customers Bank Phoenixville, FRB Docket Nos. 15-027-B-SM, 15-027-CMP-SM (December 2, 2016) (concerning Higher One’s alleged deceptive practices).
Might the Federal Reserve’s Consent Order Signal Its Elevated Enforcement of UDAP?
There are several special circumstances that suggest this was an exceptional case, and likely not a signal that the Federal Reserve has new interest in enforcing the FTC Act (or a new interest in enforcing the CFP Act).
First, the announcement of the consent order coincided with the Federal Reserve’s order to approve the acquisition of Mid America by Reliable Community Bancshares, Inc. In its order on the application for the acquisition, the Federal Reserve noted Mid America’s Community Reinvestment Act performance evaluation of “Needs to Improve.” That rating was primarily based on the Mid America’s substantive violations of the FTC Act. The Federal Reserve’s order states that its approval for the acquisition is conditioned on Mid America’s successor’s compliance with the Consent Order, indicating that several factors were bearing on the enforcement and ultimate resolution of the charges under the FTC Act.
Second, Mid America’s conduct allegedly involved (but did not violate) two other consent orders. In December 2010, the FDIC entered a consent order with WebBank in connection with the bank’s balance transfer credit cards and alleged violations of § 5 of the FTC Act. Among other terms, the consent order prohibited WebBank from reporting consumer defaults to consumer reporting agencies. When Mid America acquired a balance transfer card portfolio from WebBank, in an apparent effort to comply with the consent order, it did not report consumers’ credit histories. By abiding by the terms of the December 2010 consent order, Mid America belied its representations to consumers that its balance transfer card was a way to build a positive credit history.
Also in 2010, the FDIC entered a consent order with Monterey County Bank related to its balance transfer credit cards. There, the FDIC alleged violations of § 5 of the FTC Act and required the bank to disclose that transferred debt was time-barred. Although the Federal Reserve did not allege Mid America violated this consent order, it did allege that Mid America engaged in deceptive conduct by failing to disclose that participating in its balance transfer program could restart the statute of limitations period on time-barred debt.
Although the Federal Reserve did not allege that Mid America violated the terms of the WebBank or Monterey County Bank consent orders governing credit card debt it had purchased from those banks, it is apparent that balance transfer credit card programs were the subject of close scrutiny from regulators.
The prior history and apparent examinations relating to non-compliance of these programs, coupled with Mid America’s poor CRA performance, appear to have created an extraordinary circumstance for the Federal Reserve to pursue violations of the FTC Act.