California Supreme Court Draws Setoff Boundary
The California Supreme Court has refused to extend an earlier holding prohibiting a bank from setting off customer debts using funds in a deposit account from public benefits. In Miller v. Bank of America, NT and SA, the Court held that Bank of America could setoff overdraft fees and fees for insufficient funds "(NSF") charged to a checking account with funds in the account, regardless of whether those funds came from public benefits.
In Miller, plaintiff received Social Security Supplemental Security Income ("SSI") payments by direct deposit into a Bank of America checking account. In 1998, the Bank inadvertently credited his checking account, then reversed the credit to correct its error. The reversal of the credit caused plaintiff's account to have a negative balance, which depleted his SSI benefits payments for that month. Separately, plaintiff occasionally overdrew his account, and the Bank paid the overdraft and NSF charges, at least in part, with his SSI funds on deposit. Plaintiff filed a putative class action complaint against the Bank, alleging the Bank could not set off these charges with funds in his account from public benefits.
Continue Reading...Preemption by Federal Agencies to be Limited
Last month, the White House released a Memorandum for the Heads of Executive Departments and Agencies regarding federal preemption, with specific instructions about how and when federal agencies may assert preemption of state laws through agency regulations. The memo states a general policy that "preemption of State law by executive departments and agencies should be undertaken only with consideration of full prerogatives of the States and with a sufficient legal basis for preemption."
More specifically, the memo provides: (1) heads of federal departments and agencies should not include preemption provisions in regulatory preambles, unless preemption is also a provision in the codified regulations; (2) preemption provisions should only be included in codified regulations if justified under "legal principles governing preemption," including Executive Order 13132 (1999); and (3) heads of federal departments and agencies must undergo a review of regulations issued in the last 10 years to ensure compliance with these preemption principles, and amend any regulations not in compliance.
Tracking the Proposed Financial Regulatory Changes
Last week, President Obama announced sweeping proposed changes in federal financial regulation. U.S. Treasury Secretary Timothy Geithner and Director of the National Economic Council Lawrence Summers wrote an op-ed piece describing the new regulatory structure, called "A New Foundation: Rebuilding Financial Supervision and Regulation."
The Final Report of the proposed comprehensive plan has five stated goals: (1) to promote robust supervision and regulation of financial firms; (2) to establish comprehensive supervision of financial markets; (3) to protect consumers and investors from financial abuse; (4) to provide the government tools to manage the financial crisis; and (5) to raise international regulatory standards and to improve international cooperation.
Continue Reading...9th Circuit Revives Claim on TILA Rate Disclosures
The Ninth Circuit last week reversed and remanded the dismissal of a credit card rate increase disclosure case in Barrer v. Chase Bank USA, NA.
In Barrer, plaintiffs had a Chase credit card. In February 2005, plaintiffs received a Change in Terms Notice from Chase, amending the terms of the cardholder agreement, including significantly increasing the applicable interest rate. Plaintiffs continued to use the card and the applicable interest rate increased within two months. Plaintiffs filed a putative class action complaint alleging Chase violated the Truth in Lending Act, 15 U.S.C. §1601 et seq., and Regulation Z, 12 C.F.R. §226. Plaintiffs claimed that Chase failed to disclose that it would increase the APR on the account based on information obtained from their credit report. The district court granted Chase's motion to dismiss and entered judgment for Chase. Plaintiffs appealed.
Continue Reading..."Credit CARD Act" is Now Law
President Obama signed the "Credit Card Accountability, Responsibility, and Disclosure (CARD) Act" last week. The White House issued a fact sheet about the new law, previously known as the "Credit Cardholders' Bill of Rights."
The CARD Act includes significant amendments to Truth in Lending Act provisions related to interest rate increases, fees, and disclosures for credit card accounts. Highlights of specific provisions of the Act include the following provisions:
- Bans rate increases on existing balances due to "any time, any reason" or "universal default" and severely restricts retroactive rate increases due to late payment.
- Revises disclosure and duration of contract terms for the entirety of the first year: issuers may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and last at least 6 months.
- Requires issuers to give card holders at least 21 calendar days from time of mailing to pay a monthly bill.
- Requires issuers to apply excess payments to the highest interest balance first.
- Bans practice by which issuers use the balance in a previous month to calculate interest charges on the current month, so called "double-cycle" billing.
- Requires Opt-In to Over-Limit Fees: issuers will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
- Restricts fees on subprime, low-limit credit cards.
- Revises disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.
- Revises required disclosures of account terms to consumers before consumers open an account, and on statements of the activity on consumers’ accounts afterwards.
- Requires issuers to show “the consequences to consumers of their credit decisions.”
- Requires issuers to post contracts available on the Internet in a usable format.
- Requires regulators to report annually to the Congress on their enforcement of credit card protections
- Increases penalties on card issuers that violate these new restrictions.
- Requires card issuers and universities to disclose agreements with respect to the marketing or distribution of credit cards to students.
Mortgage Cramdown Fails in Senate
The hotly-contested mortgage cramdown legislation, passed in the House last month as HR 1106, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," has failed in the Senate.
Among other significant changes, the failed legislation would have permitted a Chapter 13 bankruptcy plan to: (1) modify the rights of claim holders with respect to a claim for a loan originated before the effective date of the Act and secured by a security interest in the debtor's principal residence that is the subject of a foreclosure notice; and (2) deny debtor liability for certain fees and charges incurred while the bankruptcy case is pending and arising from a debt secured by the debtor's principal residence, unless the claim holder observes specified requirements. The legislative summary detailed the bill's other proposed changes, including amendments to the HOPE for Homeowners plan.
"Credit Cardholders' Bill of Rights" is Back for 2009
The "Credit Cardholders' Bill of Rights" has been reintroduced for 2009 in the House as H.R. 627 (a similar bill has been introduced in the Senate as S.B. 235). The bill would make significant amendments to the Truth in Lending Act ("TILA") provisions governing issuance of consumer credit cards, including:
- requiring card issuers to give consumers 45 days notice of any interest rate increases;
- prohibiting card issuers from charging interest on debt that is paid during a grace period (so-called "double cycle billing);
- prohibiting card issuers from increasing rates retroactively on existing balances unrelated to a consumer's card account (so-called "universal default rate increase");
- requiring card issuers to mail billing statements 25 days before the due date and to consider timely any payment received before 5:00 p.m. on the due date;
- restricting terms that may be used in advertisements;
- requiring certain allocations of consumer payments; and
- limiting "over-the-limit" fees card issuers can charge consumers.
The House bill's sponsors note that recent Federal Reserve Rules would address many of the issues covered by the bill, but the Fed rules do not take effect until July 2010.
"Arbitration Fairness Act" Rises Again
The Arbitration Fairness Act of 2007 has been re-introduced as the Arbitration Fairness Act of 2009 (H.R. 1020). The 2009 version, the same text as the 2007 version, has been referred to the Subcommittee on Commercial and Administrative Law.
If passed in its current form, the bill would expressly invalidate arbitration agreements—retroactively—in employment, consumer, or franchise disputes and in any “dispute arising under any statute intended to protect civil rights or to regulate contracts or transactions between parties of unequal bargaining power.”
9th Circuit: Rate Increase After Default Requires Notice
In McCoy v. Chase Manhattan Bank, USA, N.A., the Ninth Circuit held that a credit card issuer's retroactive rate increase after a default requires contemporaneous notice to the consumer under the Truth in Lending Act, 15 U.S.C. §§ 1601-1615 ("TILA") and Regulation Z, 12 C.F.R. §226.
In McCoy, plaintiff alleged that credit card issuer Chase Manhattan Bank, USA, increased the interest rate on his card retroactively, without notice to him, after he made a late payment. Plaintiff sued Chase, alleging that the rate increase violated TILA and Delaware law. The district court dismissed plaintiff's claims with prejudice, holding Chase was not required to give notice because its cardholder agreement discloses the highest rate that could apply in the case of default. Plaintiff appealed.
Continue Reading...Treasury Unveils Plan for Toxic Mortgage Assets
The Treasury today unveiled specific details regarding its plan to create a public-private partnership to purchase toxic assets from financial institutions, named the Public Private Investment Program (PPIP) for Legacy Assets. Along with its press release, the Treasury also released a white paper on the program. Among other things, the program provides FDIC and Federal Reserve financing to spur private investors to price and finance purchases of real estate loans held directly on the books of banks ("legacy loans") and securities backed by loan portfolios ("legacy securities").
