CFPB and DOT inquiry into credit card and airline rewards programs may present regulatory and class action risks

In a hearing on May 9, 2024, the US Department of Transportation (DOT) and the Consumer Financial Protection Bureau (CFPB) announced new inquiries focused on what was described as “numerous problems” with credit card and airline rewards programs. Transportation Secretary Pete Buttigieg and CFPB Director Rohit Chopra chaired the hearing, which included representatives from several airlines, financial institutions, and consumer protection groups.

That same day, CFPB issued a report analyzing several hundred consumer complaints relating to the administration of credit card rewards programs and identified four recurring themes: (1) unexpected promotional conditions, (2) devaluation, (3) redemption problems, and (4) revocation.  

The CFPB and DOT “have not reached any conclusions” on regulatory next steps, Secretary Buttigieg said. Even so, credit card issuers and airlines should keep a close eye on potential regulatory and class action litigation risks stemming from this new inquiry by the agencies.

Context

In the hearing, Secretary Buttigieg first emphasized the importance of airline mileage and credit card rewards programs to both issuers and consumers.    

For airlines operating in the US and internationally, mileage and rewards programs represent a key segment of their business.  An airline industry representative said that operating costs exceed passenger seat revenue at almost every major domestic airline in the US and that airlines reach profitability through credit card and mileage reward programs. Likewise, Director Chopra said that rewards programs are equally important to credit card issuers, which in 2022 alone collected a record $130 billion in interest and fees.  

These programs are in high demand with consumers, too.  Credit cards are the most common consumer lending product in America.  There are roughly 550 million credit cards in circulation among Americans, who owe over $1 trillion dollars in credit card debt. Credit card rewards amount to cost savings, and many consumers consider points saved with rewards programs as another part of their savings.  And airline mileage programs have evolved from selective rewards programs for loyal frequent fliers to massive secondary markets based on a currency of miles and points.  Fundamentally, these programs shape how consumers interact with airlines and credit card companies.    

Areas of focus 

The new inquiry will focus on several core issues that the agencies are focusing on based upon customer complaints.  

Point devaluation.  Secretary Buttigieg raised concerns with issuers whose point systems may vary depending on what the points are being used to redeem, point systems that can change without warning, and point systems that devalue points by making it more challenging to redeem them or by limiting inventory after signing up for the program.  These methods of assigning value to miles and points, Secretary Buttigieg believes, might be contained in “fine print” that consumers may not read or understand at signup. 

Bait-and-switch practices. The CFPB and DOT also emphasized their focus on what they called “bait and switch” practices, which they defined as issuers promising significant rewards after consumers sign up for rewards programs but then failing to follow through with providing any reward.  For example, Secretary Buttigieg noted that consumers may pay hefty annual fees for rewards credit cards but find that certain benefits are stripped away without a refund option associated with that fee.  And, while issuers must often give notice to consumers before revoking or altering rewards benefits, regulators believe that some of the notices can be opaque and ambiguous.  

In addition, the CFPB and DOT noted redemption issues with earned benefits, including customer service issues and technical glitches that may block or delay redemption and prevent transfers to third-party merchants.  And, when an account closes, issuers may revoke previously earned rewards including points, cash back, and miles.

Exclusive deals. The CFPB noted that smaller financial institutions often offer lower interest rates than their larger competitors, but that the largest financial institutions make massive payments to airlines in exchange for the airlines’ refusal to sell points and miles to other credit card issuers.  According to Director Chopra, these exclusive deals shut out smaller financial institutions from participating in the rewards markets and, in turn, hurt consumers.

Lack of competition on interest rates. According to the CFPB, financial institutions charge “dramatically” higher interest rates for their rewards cards compared to their non-rewards cards.  For consumers who carry a balance, Director Chopra stated that the higher interest rates wipe away all the benefits of the rewards.  In addition, the Director noted that issuers were not proactively informing their cardholders about opportunities to save money with their other cards that have lower interest rates.  Director Chopra also mentioned that hefty balance transfer fees can also impact competition.

Class action litigation risks

As evident in recent years across a wide variety of sectors, waves of consumer class action litigation often follow regulatory inquiries into industrywide practices.  

The same class action litigation risks may exist here.  Director Chopra stated his opinion that these practices – including point devaluation, bait-and-switch tactics, and redemption-of-value issues – are “at odds” with truth in advertising laws.  These practices, he said, “need to change,” and he emphasized that the CFPB will be looking for ways to protect people’s points, to stop bait-and-switch scams, and to promote a fair and competitive market for credit card rewards.

These remarks may be encouraging to plaintiffs’ firms seeking to challenge these practices, although they may be deterred by the fact that claims against airlines under state false advertising laws are generally preempted under the Airline Deregulation Act of 1978, which the Supreme Court held broadly preempts the enforcement of state laws impacting an airline’s routes, rates, and services.  

Consumer protection risks

Federal consumer protection laws, including the Consumer Financial Protection Act’s prohibition against unfair, deceptive, or abusive acts or practices (UDAAP), apply to rewards programs offered in connection with consumer financial products or services.  Regulators have taken prior enforcement actions against issuers that engaged in allegedly unfair, deceptive, or abusive acts or practices related to rewards.[1]     

For example, the CFPB found that a credit card issuer had engaged in deceptive practices in which qualified consumers were led to believe that they would receive $300 and bonus reward points for signing up for a particular credit card but never ended up receiving the promised rewards.[2]   

Issuers’ credit card rewards programs may begin to face heavy scrutiny from the CFPB with respect to potential UDAAP risks.  A recurring theme of the hearing was the impact the rewards programs had on a consumer’s ability to choose a credit card.  Many of the speakers noted that a credit card company’s rewards program is often what leads a consumer to a particular credit card.  Retroactively modifying the rewards program could affect the utility of the card for the consumer.  Accordingly, issuers must be cautious when modifying their rewards programs as such modifications raise red flags under unfairness and deception standards.  

Director Chopra mentioned that the CFPB will begin to look at the rules around terms and conditions that allow banks to change the rewards programs so suddenly.  Issuers can also expect a heightened focus on transparency surrounding the decisions that lead to valuing or devaluing point or miles in a certain way.

Next steps 

In light of these risks, airlines and credit card companies may consider the following actions to assess and mitigate any potential liabilities:

• Evaluating whether an arbitration provision or class action waiver should be added into rewards contracts, and, if existing, consider updating your provision given the risks of mass arbitration.
  
  
• Reviewing your reward program agreements, including your notice requirements for revoking or modifying benefits, and enhancing these provisions and addressing any language that can be viewed as ambiguous.
  
  
• For rewards account closures, ensuring this provision is conspicuously identified in your rewards contracts and notifying participants about any mileage or point losses prior to closure. 

For more information, please contact the authors.

[1] "CFPB Orders American Express to Pay $85 Million Refund to Consumers Harmed by Illegal Credit Card Practices;" "CFPB Takes Action Against Bank of America for Illegally Charging Junk Fees, Withholding Credit Card Rewards, and Opening Fake Accounts."

[2] Id.