In banking, disclosures matter, especially when it comes to credit cards. The rules, and they are not a few, are specifically spelled out in great detail. Where it can get a little fuzzy is when third parties enter the equation. This is especially true with third parties known as independent service organizations, or ISOs, as Mid America Bank & Trust Company, located in Missouri, found out late last year.
ISOs may purchase charged-off or past-due consumer debt from financial institutions, then issue the consumer a credit card with an offer to forgive a portion of the debt. In return, the consumer makes payments on the debt to qualify for the card, and transfers the remaining debt to the credit card. ISOs, however, cannot directly offer credit cards to consumers. To work around this issue, an ISO contracts with a financial institution to issue the card, and in exchange, the ISO pays the financial institution a monthly fee. This agreement generally works out well for everyone involved. The institution collects fees from the ISO, the ISO gets a new customer, and the consumer has the potential to settle debt while obtaining an extension of new credit.
The thing to remember, though, is that the financial institution that issues the card holds the consumer’s account. This means that the financial institution, and not the ISO, is held responsible for all advertising materials related to the credit cards issued.
Examiners found, in Mid America’s case, that the advertisements for these cards contained several false representations to consumers. For example, the advertisement for a particular card told consumers that making timely payments on their accounts would increase their available credit. However, the ad failed to disclose the fact that finance charges and fees would reduce the amount of new credit available to the consumer after making a payment. Consumers, therefore, could mistakenly believe that if they made their monthly payments on time, they would receive credit equal to the amount they paid.
As a result of these misrepresentations, the Federal Reserve Board ordered Mid America to pay $5 million in restitution payments to nearly 21,000 affected cardholders, as well as to thoroughly reevaluate and improve its compliance program.
The key takeaway here to keeping out of the regulator’s hot seat is to remember a relationship with a third party such as an ISO does not remove the compliance responsibilities from the financial institution. Be sure to review the advertisements generated for any ISO-related product for any potential compliances issues as though they were generated by your financial institution. Because when it comes time to face the enforcement music, that may not be something you can outsource to your ISO.
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