The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

• Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.

• Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.