Surveying Developments in Consumer Finance Regulation
A number of significant legislative changes occurred in 2009 related to consumer finance regulation.
The most significant potential change—the Consumer Financial Protection Agency Act—is still in flux as it moves through the U.S. Senate. However, the version of the CFPA passed by the U.S. House contains several provisions of which every practitioner should be aware. New regulations governing credit card products and overdraft fees will also significantly impact consumer finance practice.
See a summary of recent developments in consumer finance regulation.
A Closer Look: Arbitration Under House Version of CFPA
The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, passed by the U.S. House on December 11, 2009, contains provisions that could have a significant limiting effect on the enforcement of consumer arbitration provisions.
Section 4208 of the Act, entitled "Authority to Restrict Mandatory Predispute Arbitration," gives the Director of the proposed Consumer Financial Protection Agency the power to issue regulations to "prohibit or impose conditions or limitations on" a pre-dispute arbitration provision if the Director "finds that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers." This provision mirrors the arbitration limiting provisions of the Arbitration Fairness Act, and could effectively prohibit the enforcement of mandatory arbitration provisions in consumer finance agreements.
House Passes Consumer Financial Protection Agency Act
On December 11, 2009, the U.S. House of Representatives passed the “Wall Street Reform and Consumer Protection Act of 2009,” H.R. 4173. This sweeping legislation—a combination of several bills, including a modified version of the Consumer Financial Protection Agency Act, formerly HR 3126—includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.
Title IV of the Act (sections 4001 – 4901) provides for the creation of a Consumer Financial Protection Agency (section 4101 – 4703), a new, independent federal agency to oversee virtually every aspect of consumer financial services, including mortgages, credit cards, debit cards, car loans, gift cards, credit reporting agencies, debt collectors, and financial advisers. Certain merchants, such as auto dealers and pawnbrokers, would be exempted.
Continue Reading...Financial Regulatory Reform Moves Out of Committee
The House Financial Services Committee on Thursday voted to approve the Consumer Financial Protection Agency Act, HR 3126.
The legislation is changing in significant ways as it moves through the legislative process. Among the revisions from the administration's original plan, the Committee's approved version would vest authority over the proposed Consumer Financial Protection Agency in a single director, as opposed to a 5-member board. The approved version of the legislation also includes a compromise on federal preemption, which permits the federal regulator to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with a federally regulated bank or thrift’s exercise of its powers.
Powers of the Proposed Consumer Financial Protection Agency
Subpart F, sections 161 through 166, of the Consumer Financial Protection Agency Act of 2009 (HR 3126, July 8, 2009) provides for the transfer of broad areas of power to regulate consumer financial protection functions from a variety of federal agencies and the Federal Reserve to the proposed Consumer Financial Protection Agency.
In general, the CFPA would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws, including mortgages, credit cards, student loans, auto loans, payday loans, and more. The Act would transfer functions and personnel to the new CFPA and provide for interim powers for the Secretary of Treasury pending the establishment of the CFPA and the completion of the transfer of powers and people.
Financial Regulatory Reform Moving Forward
Legislation for federal financial regulatory reform, introduced by the Obama administration in June, is moving forward through the legislative process. Treasury Secretary Geithner testified before the House Financial Services Committee on September 23.
The proposed financial regulatory reform legislation in the U.S. House is the Consumer Financial Protection Agency Act of 2009 in the House (HR 3126). The Financial Services Committee has issued a section-by-section summary of the proposed legislation as well as a September 25 discussion draft.
Track the progress of the legislation at the administration's Financial Stability website.
"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.”
U.S. Supreme Court Decides Vaden v. Discover Bank
The U.S. Supreme Court this week decided Vaden v. Discover Bank, a closely-watched case which more clearly defines the limits of federal jurisdiction under Section 4 of the Federal Arbitration Act, 9 U.S.C. §1 et seq. ("FAA").
In Vaden, Discover Bank's servicing affiliate filed a Maryland state court action to collect an unpaid credit card balance, asserting only state law claims. Vaden counterclaimed, asserting Discover's finance charges, interest, and late fees violated Maryland law. Separately, Discover Bank filed a petition to compel arbitration in the U.S. District Court for the District of Maryland, asserting that Vaden's state-law counterclaims were completely preempted by federal law, specifically §27 of the Federal Deposit Insurance Act, 12 U.S.C. 1831d(a). The district court granted the petition to compel arbitration and stayed the state court action. Vaden appealed. The Fourth Circuit eventually affirmed, after remanding for a determination of federal question jurisdiction.
Continue Reading...One to Watch: Arbitration and Complete Preemption
On October 6, 2008, the U.S. Supreme Court heard oral argument in Vaden v. Discover Bank, an appeal from Discover Bank, Discover Financial Services v. Vaden, 489 F.3d 594 (4th Cir. 2007), which will have a significant impact on arbitration and the doctrine of complete preemption.
Vaden arises out of a dispute between credit cardholder and a card issuer. In 2003, Discover Financial Services, a servicing subsidiary of Discover Bank, filed suit against cardholder Vaden in Maryland state court to collect a $10,000 delinquent debt. Vaden filed a putative class action counterclaim in state court, alleging, among other state law causes of action, violation of Maryland's usury laws. Discover Financial Services and Discover Bank filed a free-standing petition to compel arbitration in the U.S. District Court of Maryland, pursuant to Section 4 of the Federal Arbitration Act ("FAA"). Discover asserted that Vaden's state law claims were completely preempted by the Federal Deposit Insurance Act, 12 U.S.C. §1811 et seq. ("FDIA"). The district court granted Discover's motion to compel arbitration. Vaden appealed.
Continue Reading...9th Circuit Remands Class Arbitration Waiver
The Ninth Circuit last week addressed choice of law considerations in the context of a class wide arbitration waiver. In Hoffman v. Citibank (South Dakota), N.A., the Ninth Circuit held that the district court's analysis of California choice of law was flawed, and remanded for the district court to re-analyze whether California or South Dakota law applies to the class arbitration waiver.
In Hoffman, Citibank issued a credit card to Hoffman in 1994 which contained a choice of law provision favoring South Dakota law. In a mailing in 2001, Citibank gave Hoffman notice of a change in the arbitration provision of the cardholder agreement, including a waiver of class arbitration. Hoffman did not object and continued to use the card.
Hoffman later sued Citibank, alleging that Citibank had improperly retroactively increased cardholders' interest rates, among other things. Citibank removed the case to federal court and moved to compel arbitration. The district court applied South Dakota law pursuant to the choice of law provision. Holding that the class arbitration waiver was not unconscionable under South Dakota law, the district court granted Citibank's motion to compel arbitration of plaintiff's claims on an individual basis. Hoffman moved to certify the ruling for immediate appeal. The district court granted the motion and the Ninth Circuit granted Hoffman's petition to be heard.
Continue Reading...Your Scorecard For New Laws and Regulations
California law
• Mortgages: new foreclosure procedures are now law in Civil Code §§2923.5, 2923.6 and 2929.3 and Code of Civil Procedure §1161b.
Federal law
• Credit Cards: the 2008 Credit and Debit Card Receipt Clarification Act, now law, clairifies the Fair and Accurate Credit Transactions Act of 2003;
• Credit Cards and Deposit Accounts: "unfair or deceptive acts or practices" are refined and redefined in revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z;
• Mortgages: Regulation X would get a makeover in HUD's proposed rule amending the Real Estate Settlement Procedures Act;
• Arbitration: the proposed "Arbitration Fairness Act of 2007" would slice and dice the Federal Arbitration Act; the "Automobile Arbitration Fairness Act of 2008," would eviscerate pre-dispute arbitration provisions in auto sales or lease contracts.
"Automobile Arbitration Fairness Act" Still Alive
The Automobile Arbitration bill provides that any "controversy arising out of a motor vehicle consumer sales or lease contract," entered after the effective date of the Act "may not be settled by arbitration unless, after such controversy arises, all the parties to such controversy agree in writing to settle such controversy by arbitration." The bill would also require any arbitration award to "include a brief, informal discussion of the factual and legal basis for the award."
"Arbitration Fairness Act" Still Looming
The Act 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." Specifically, in the context of a "consumer dispute," broadly defined, the Act would make a "predispute arbitration agreement" invalid and unenforceable. Continue Reading...
Issuance of Credit Card (Still) Not Subject to CLRA
In Ball, plaintiff sued FleetBoston (later Bank of America) for a violation of California's unfair competition law, Business and Professions Code § 17200 et seq., alleging that FleetBoston's cardholder agreement was procedurally and substantively unconscionable. She later filed an amended complaint adding additional allegations of substantive unconscionability. When Ball filed her complaint and first amended complaint, she did not have a credit card account with FleetBoston. After Proposition 64 and subsequent cases confirmed that a non-cardholder had no standing to sue under 17200, Ball opened a credit card account and sought leave to amend her complaint for a second time to allege her new customer status, to allege violations of the CLRA, and to seek declaratory relief. The Superior Court denied plaintiff's motion for leave to amend. Plaintiff appealed.
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Supreme Court's Term Included Arbitration Preemption Ruling
Preston involved a fee dispute between Alex Ferrer, more commonly known as TV's "Judge Alex," and Los Angeles entertainment attorney Arnold Preston. The fee contract contained a provision providing that the parties would arbitrate “any dispute ... relating to the terms of [the contract] or the breach, validity, or legality thereof ... in accordance with the rules [of the American Arbitration Association].” The Court held that this arbitration provision preempts California law to the extent that it placed primary jurisdiction for the dispute in the California Labor Commission.
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