By Ray Birch
BIRMINGHAM, Ala.—The CFPB’s new rule banning the use of mandatory arbitration clauses in credit card and other financial contracts will mean more legal and compliance costs for issuers, who are expected to adjust pricing to get that money back.
Already, one analyst said, some credit unions have increased the amount of money they have reserved for legal expenses as the result of the potential new liability.
Card experts agree that the extra costs will be passed on to consumers, likely by banks first and then CUs down the road if issuers are hit with class-action lawsuits.
Financial services agreements typically ban banking consumers from seeking redress in a court of law, in favor of arbitration. This also prevents groups of consumers who allege they have been wronged from seeking class action status. Many credit unions have such clauses included in their own credit card contracts.
No Tampering With Rewards
The CFPB’s ruling would mandate an opt-out of mandatory arbitration. The rule takes effect 60 days from publication in the Federal Register and applies to agreements and contracts 180 days later. There is a potential, however, for House Republicans to force the rule to be overturned. Sen. Tom Cotton of Arkansas announced he has started the process of undoing rule through the Congressional Review Act, as CUToday.info reported.
Bill Hardekopf
Most card experts agree that in response issuers will not tamper in the short term with rates and rewards, with banks expected to turn to fees and possibly shorter introductory rates instead. Credit unions concerned over potential costs, analysts have indicated, will likely reduce dividends they pay to members, either directly in year-end givebacks or in share and loan rates, experts predicted.
“This is a costly decision for issuers,” said Bill Hardekopf, CEO of LowCards.com. “Banks are in the business of making money for their stockholders, and when they are forced to incur more costs, they will have to do something. Cutting card rewards or raising rates, I am not sure about that. But I do believe these things are being discussed right now in board rooms. Boards are focused on how money can be stored up for additional legal costs that could be incurred as a result of the new rule.”
Keeping Account Holders
But the central issue being talked about, asserts Hardekopf, is what is the best way to generate additional revenue through pricing changes and not lose customers in the process.
“I can see credit card rates eventually going up, well down the road maybe,” said Hardekopf, who added that today’s competitive rewards battles will likely keep those offers the same—but only if some big banks don’t make moves. If they move to lower rewards, he said, suddenly other issuers may follow.
“But what I see more near term from banks are fees going up,” forecast Hardekopf. “A lot of the fees people incur on cards go under t
Barney Moore
he radar, as consumers are really shopping for rate and rewards. I think we could see banks shorten introductory rate periods, as those promotions become costly.”
Analysts agree that if issuers move it will be the big card companies and major banks first, but credit unions will likely make adjustments, as well.
CU Tactics Different
Since credit unions are not for profit, Lou Grilli expects CUs may deal with unanticipated expenses differently than shareholder-controlled banks.
“If credit unions do incur legal fees beyond those anticipated, they will need to deal with the increased liabilities in the form of decreased share draft or share certificate rates, decreased partnership rewards, or other means of returning decreased dividends to their members,” said Grilli, director of payments strategy at CSCU in Tampa, Fla.
But what will happen during CU strategic planning sessions in 2017 remains uncertain, as the potential losses from the lawsuits is hard to determine, and there is simply a lot up in the air with the new CFPB rule, explained Grilli.
“There doesn’t seem to be consensus among credit unions that I’ve had the chance to talk to,” he said. “A few have increased the amount for legal expenses under the liability section of statement of financial position. There are just many unknowns—how soon will the potential onslaught of class-action lawsuits start, if at all; will credit unions be the targets or just banks; will the smaller credit unions be targeted or just larger ones; will class-action lawsuits that include banks spill over to including credit unions as being in the same ‘class.’” Many credit unions are still formulating their plan of action.”
Barney Moore,principal at PSCU’s Advisors Plus Consulting, St. Petersburg, Fla., does not believe credit unions will make any pricing changes as a result of the CFPB rule, at least in the near future. Moore is among those who think banks will move first.
Lou Grilli
“I would agree that any response that comes out of this will come from banks. Credit unions may follow suit to some extent in time, though I don’t see this as imminent. This rule remaining intact as promulgated by the CFPB remains a big ‘if,’” said Moore, noting Sen. Cotton’s action.
Reg Burden
If the rule is not blocked from taking effect, for those credit unions that have arbitration clauses, Moore said there may be costs associated with “amending their cardholder agreement language to the extent that it currently prohibits or prevents group or class actions.”
What Moore said he is most concerned about for credit union issuers is the increased regulatory burden, scrutiny and costs associated with compliance and the requirement for detailed reporting on claims and awards made in arbitration.
Joseph Lynyak III, partner at the international law firm Dorsey & Whitney, New York, summed up the compliance burden that lies ahead if the rule goes through as is.
"To summarize the bad news—the rule creates a new procedural and compliance nightmare. Commencing in the latter part of the first quarter of 2018, providers will be required to amend consumer disclosures on a go-forward basis. In regard to existing (i.e., pre-rule consumer agreements), providers will be required to monitor contracts to update arbitration provisions that become subject to the requirements of the rule. And finally, complex policies and procedures must be developed to identify and report arbitrations subject to the rule to the CFPB," Lynyak said.
Tim Kolk, TRK Advisors
No White Hat Defense
Card expert Tim Kolk, principal at TRK Advisors in Peterborough, N.H., said that despite credit unions wearing the white hats in the eyes of many consumers, they will face lawsuits from the new rule.
“Credit unions certainly endeavor to be fair and honest, but even so that’s no insulation against a suit,” said Kolk. “The first thing that comes to mind is credit unions that have not followed CARD Act card repricing requirements—and I discover those CUs with some regularity in my work. It could be because they changed a non-variable card to variable improperly, advertised an account as ‘fixed’ and then changed it, raised rates but did not regularly review them and bring them down if members’ qualified, or as a result of a merger did not follow repricing requirements. There are a number of other potholes. If those credit unions come to the attention of the wrong attorney it could be a bad day, week, month, or even year for credit unions.”