CFPB warns lenders over controversial credit card offers

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The Consumer Financial Protection Bureau is redoubling its efforts to stamp out a controversial type of credit card that is available from some of the nation’s largest retailers.

The product, known as a deferred interest card, is used by many Americans to finance big-ticket purchases. But for unwary shoppers, it can prove quite costly.

Last week, CFPB Director Richard Cordray sent a letter to nine credit card issuers expressing concerns about the product. The letter alluded to the fact that retail giant Walmart recently stopped offering deferred interest credit cards before stating: “We commend this decision and want to bring it to your attention.”

The CFPB did not order the issuers that received the June 1 letter to take any action. But it suggested that deferred interest cards are often marketed in misleading ways. The letter is likely to be interpreted as a warning shot, given that the CFPB has the ability to punish banks that engage in deceptive or abusive practices.

“Successful implementation of deferred interest programs requires robust compliance management systems and third-party oversight measures that ensure customers are fully informed of the terms and true costs of promotional financing,” the letter stated.

Consumers who make purchases with deferred interest cards can avoid paying interest by paying off their entire balance within a specific period of time, often within six or 12 months.

But interest starts accruing when the purchase is made, and customers who owe a balance at the end of the promotional period get charged interest retroactively. By contrast, under 0% interest offers, interest is charged only at the end of the promotional period.

In a speech Thursday, Cordray encouraged companies to adopt 0% interest offers, calling them a more transparent alternative to deferred interest cards, and one that carries less risk for consumers.

Deferred interest programs have long been a bugaboo of the consumer agency.

In May 2015, the CFPB alleged that PayPal had abusively charged deferred interest to users of its PayPal Credit product. The San Jose, Calif., company agreed to pay a $10 million fine, and to refund an additional $15 million to consumers, to settle those and other charges.

In December 2015, the CFPB stated in a report that roughly three-quarters of balances on deferred interest cards were paid in full during the promotional period. But the agency also found a big disparity in outcomes based on creditworthiness — consumers with the best credit scores consistently paid off their balances in full at rates well above 80%, while borrowers with the worst credit scores were in the 50% range.

Notwithstanding the CFPB’s criticism, many of the country’s biggest retailers have continued to offer deferred interest cards.

A December 2016 report by WalletHub found that Home Depot, Sears, Best Buy, Amazon, Lowe’s, Apple and Pottery Barn were among the merchants offering the product. The report argued that retailers are typically less-than upfront about the potential costs to borrowers.

Most of the deferred interest cards analyzed by WalletHub were issued by just three banks, all of which specialize in store-brand cards: Synchrony Financial, Citigroup and Comenity Bank.

“I think the retailers have been taking an approach when it comes to lending that they have nothing to do with it,” Odysseas Papadimitriou, WalletHub’s CEO, said in an interview Thursday. “But at the end of the day, it’s their customers. And it’s their customers that are being taken advantage of.”

Last month, when Walmart announced that it would no longer offer a deferred interest card, the retail behemoth acknowledged the risks associated with the product.

“The issue is that, if you haven’t paid off the balance of your purchase by the time the grace period ends — let’s say that’s 12 months, for example — you may be stuck with a pile of interest that was building up during that time,” Daniel Eckert, a senior vice president at Walmart, wrote in a blog post.

“The reality is most people’s lives are anything but predictable, and paying off a purchase within a set period of time doesn’t always happen as planned.”

Walmart, of Bentonville, Ark., had issued its deferred interest credit card with Stamford, Conn.-based Synchrony, which continues to offer similar products in partnership with other retailers.

A Synchrony spokesman said Thursday that the company has received the CFPB’s letter. At the same time, he responded to critics of deferred interest credit cards.

“Consumers continue to embrace deferred interest products, which are an important and popular source of financing, enabling them to make bigger ticket purchases they need from the businesses where they want to shop. It is also very important to retailers, particularly small to medium sized business, to help them drive sales and compete with the big box stores,” Carlos Campos, Synchrony’s vice president of communications, said in an email.

“We are committed to ensuring that our deferred interest products are fair, transparent and easily understood by our consumers, and, importantly, that our consumers understand how to avoid paying interest. Based on our consumers’ feedback and our own data, we believe we have met this commitment.”

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