CFPB Proposes Simplified Card Agreement
The Consumer Financial Protection Bureau this week proposed a sample simplified credit card agreement template. CFPB's stated goal is to make credit card agreements short, clear, consumer-friendly, and consistent. The proposed template contains references to key terms, defined in a separate list. CFPB seeks public comment on the proposed template, and refers the public to its card agreement database for a comparison of current card agreements. CFPB is testing the proposed template with the Pentagon Federal Credit Union.
The proposed template credit card agreement is part of CFPB’s Know Before You Owe campaign, which has also included proposed reforms related to disclosures for mortgages and student loans.
CFPB Releases Its First Consumer Response Report
The Consumer Financial Protection Bureau this week released its first Consumer Response Report, detailing consumer complaints regarding credit cards over the first three months of the CFPB's system for Consumer Response.
The Report makes three observations related to the initial credit card complaint data:
- "Consumer Confusion: Many complaints show consumers struggling to understand the terms of credit cards and associated products like debt protection services. These complaints show a mismatch between consumer expectations and the way the product functions.
- Third-Party Fraud: The complaints show some alleged fraudulent credit card charges made by third parties. The CFPB has helped to obtain redress for defrauded consumers in these instances. In some cases, the Bureau has consulted with the appropriate criminal authorities.
- Factual Disputes: There are a large volume of complaints presenting factual disputes between consumer and issuer. The Bureau has generally found that issuers have been willing to resolve these complaints."
The CFPB also released its Proposed Policy Statement on the Disclosure of Certain Credit Card Complaint Data.
9th Circuit Defines FACTA Scope for Electronic Receipts
In Simonoff v. Expedia, Inc. (9th Cir. May 24, 2010), the Ninth Circuit held that an “electronically printed” receipt under FACTA does not include an email receipt displayed on a computer screen.
Congress passed the Fair and Accurate Credit Transactions Act (FACTA) in 2003, as an amendment to the Fair Credit Reporting Act. FACTA restricts the electronic printing of more than the last five digits of a credit card number or card expiration dates, on receipts provided to the cardholder at the point of sale.
In Simonoff, plaintiff purchased travel arrangements online through Expedia’s website. Expedia subsequently emailed a receipt for the purchase to the plaintiff, which included the expiration date of plaintiff’s credit card. Plaintiff sued, claiming that the email receipt sent by Expedia violated FACTA. The district court dismissed plaintiff’s claims under Rule 12(b)(6). Plaintiff appealed.
CFPB Proposes Scope of Non-Bank Supervision
The new Consumer Financial Protection Bureau has issued a Notice and Request for Comment on the proposed scope of its Dodd-Frank supervisory authority for certain non-depository institutions. The CFPB's Notice outlines potential criteria for defining the scope of this supervisory authority and identifies six potential other markets that CFPB may supervise: (1) debt collection; (2) consumer reporting; (3) consumer credit and related activities; (4) money transmitting; (5) check cashing and related activities; (6) prepaid cards; and (7) debt relief services.
Section 1024 of Dodd-Frank grants supervisory authority to the CFPB for "covered persons" in the residential mortgage, private education lending, and payday lending markets. In other markets, CFPB would have supervisory authority only over a "larger participant." Dodd-Frank assigned CFPB the task of issuing a rule on or before July 21, 2012, to identify these other markets and to define "larger participant."
CFPB seeks public comment on the criteria and threshold to define a "larger participant" and on the data to be used in measuring these criteria. CFPB also seeks public comment on the consideration of whether the six "other markets" should be included in the initial rule and/or whether additional markets should be included.
Fed Finalizes Rules to Expand TILA Disclosures
The Federal Reserve has issued a final rule amending Regulation Z to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.
Among other things, the final rules expand TILA's credit disclosure requirements to credit transactions up to $50,000 (up from $25,000) and prohibit creditors from engaging in certain practices with respect to those loans. Private education loans and mortgages are subject to TILA regardless of the transaction amount.
California Supreme Court: ZIP Collection Violates Song-Beverly
In a decision with potentially far-reaching implications for merchants, in Pineda v. Williams Sonoma Stores, Inc., the California Supreme Court last week held that requesting and recording a credit cardholder's ZIP Code violates the Song-Beverly Credit Card Act of 1971 (Civ. Code 1747 et seq.)
In Pineda, plaintiff alleged that the defendant retailer asked for her postal ZIP code during a credit card purchase transaction. Plaintiff believed that this information was required to complete the transaction, but the retailer later used it to determine plaintiff's address, which it maintained in a database, ostensibly for marketing purposes. Plaintiff filed a putative class action alleging violation of Civil Code section 1747.08, which prohibits a merchant from collection and recording "personal identification information;" as well as violation of California Unfair Competition Law (Bus. and Prof. Code 17200 et seq.) and invasion of privacy.
The trial court granted defendant's demurrer without leave to amend and the Court of Appeal affirmed. The California Supreme Court granted review of the Song-Beverly issue, and reversed, concluding that a ZIP code constitutes “personal identification information” as that phrase is used in section 1747.08.
Here Comes the Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau has a new website, and is making significant personnel additions, creating its internal structure, and otherwise preparing for the commencement of its official authority in July. The CFPB is also blogging, tweeting, facebooking, youtubing, and hiring.
Among many other things, the CFPB's website defines the scope of its "Core Functions" as follows:
* Conduct rule-making, supervision, and enforcement for Federal consumer financial protection laws;
* Restrict unfair, deceptive, or abusive acts or practices;
* Create a center to take consumer complaints;
* Promote financial education;
* Research consumer behavior;
* Monitor financial markets for new risks to consumers; and
* Enforce laws that outlaw discrimination and other unfair treatment in consumer finance.
In December, the U.S. Treasury announced the creation of a new Consumer Inquiry and Complaint database, to be maintained by the CFPB, to track, collect, analyze, and refer consumer inquiries and complaints about consumer financial products and services, scheduled to take effect today. The CFPB has also announced the creation of a future Consumer Response Center to receive consumer complaints and inquiries related to consumer financial services.
Reg Z Does Not Require Disclosure on Default
The U.S. Supreme Court yesterday issued its opinion in Chase Bank USA, NA v. McCoy, reversing the 9th Circuit decision below, and holding a credit card issuer's retroactive rate increase after a delinquency or default does not require contemporaneous notice to the consumer under the Truth in Lending Act, 15 U.S.C. §§ 1601-1615 and Regulation Z, 12 C.F.R. §226.
In McCoy, plaintiff alleged that the credit card issuer 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.
The Ninth Circuit reversed in part, affirming only the dismissal of two of plaintiff's state law causes of action. On the disclosure issue, the Court analyzed the notice requirements in Regulation Z and held that specific contemporaneous notice was required for a rate increase triggered by a consumer default or delinquency. After the Ninth Circuit's opinion in this case, the First Circuit decided the same question in Chase's favor in Shaner v. Chase Bank USA, N.A. The Supreme Court granted certiorari to resolve the conflict between the circuits.
Proposed Fed Rules Expand TILA Disclosure Threshold
The Federal Reserve has issued proposed amendments to Regulation Z implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that would expand the coverage of consumer protection regulations to credit transactions and leases of higher dollar amounts.
Among other things, the proposed rules amending Regulation Z, Truth in Lending, expands TILA's credit disclosure requirements to credit transactions up to $50,000 (up from $25,000) and prohibits creditors from engaging in certain practices with respect to those loans. Private education loans and mortgages are subject to TILA regardless of the transaction amount. The comment period on the proposed rule expires February 1.
Red Flag Rules Clarified
The Red Flag Program Clarification Act of 2010, passed in December, amends the Fair Credit Reporting Act with respect to the "Identity Theft Red Flags Rule," to define creditor to mean one that regularly and in the ordinary course of business:
"(1) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction;
(2) furnishes information to certain consumer reporting agencies in connection with a credit transaction; or
(3) advances funds to or on behalf of a person, based on the person's obligation to repay the funds or on repayment from specific property pledged by or on the person's behalf. Includes in the definition any other type of creditor as the federal agency (banking agency, National Credit Union Administration, or the Federal Trade Commission [FTC]) having authority over that creditor may determine appropriate, if the creditor offers or maintains accounts subject to a reasonably foreseeable risk of identity theft. Excludes from the definition of creditor, however, any creditor that advances funds on behalf of a person for expenses incidental to a service the creditor provides to that person."
Prior to this clarification, the definition of creditor was arguably broad enough to professional offices like doctors, accountants, and lawyers, which are now exempted.
Comment Period Closes on Fed's CARD Act Clarifications
The public comment period ended on Monday for proposed rules issued by the Federal Reserve to clarify certain regulatory provisions of the Credit CARD Act of 2009. The proposed rule includes several clarifying proposals:
- Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period. For example, a card issuer that offers to waive interest charges for six months would be prohibited from revoking the waiver and charging interest during the six-month period unless the account becomes more than 60 days delinquent.
- Application and similar fees that a consumer is required to pay before a credit card account is opened are covered by the same limitations as fees charged during the first year after the account is opened. Because the total amount of these fees cannot exceed 25 percent of the account's initial credit limit, a card issuer that, for example, charges a $75 fee to apply for a credit card with a $400 credit limit generally would not be permitted to charge more than $25 in additional fees during the first year after account opening.
- When evaluating a consumer's ability to make the required payments before opening a new credit card account or increasing the credit limit on an existing account, card issuers must consider information regarding the consumer's independent income, rather than his or her household income.
This final provision, the "independent income" rule, has drawn criticism for potentially restricting consumer credit for non-working spouses regardless of household income.
(Still) Tracking Financial Regulatory Reform
As the scope and content of the Dodd-Frank Wall Street Reform and Consumer Protection Act is shaped in the regulatory process, follow the latest developments on the Federal Reserve's website tracking financial regulatory reform. The Fed is publicly reporting on meetings will taking place between the Board and the public--representatives of bank organizations, consumer groups, trade associations, researchers and academics on regulatory reform issues, including systemic risk, derivatives trading, interchange fees, and consumer financial protection, and related proposals for comment.
The Fed is also reporting on current and future milestones in the regulatory process. Among other significant events, the Fed, OTS, Office of the Comptroller of the Currency, and FDIC will issue a joint report to Congress and the Inspectors General of the participating agencies on the agencies' plans to implement the transfer of OTS authorities by March 2011.
9th Circuit Considers "Fixed" Rates under TILA
In Rubio v. Capital One Bank, the 9th Circuit considered what constitutes a "fixed" credit card interest rate under TILA. Plaintiff Rubio received a direct mail solicitation reflecting a "fixed" rate for balance transfers, listing three conditions under which the rate might change (late payment, exceeding credit limit, and returned payment), and stating the terms of the cardholder agreement were subject to change at any time. Rubio's rate increased though none of the three identified conditions had occurred.
Rubio sued for breach of contract, violation of the Truth in Lending Act (TILA) and violation of California's Unfair Competition Law (UCL). The district court dismissed all three causes of action on motions to dismiss. Plaintiff appealed.
Continue Reading...One to Watch: Chase Bank USA, NA v. McCoy
The U.S. Supreme Court has granted certiorari in Chase Bank USA, NA v. McCoy, on appeal from the 9th Circuit opinion in which the Court 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 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..."Wall Street Reform and Consumer Protection Act" Is Now Law
President Obama today signed the "Wall Street Reform and Consumer Protection Act," which will bring comprehensive changes to consumer financial services, and to consumer finance litigation, including mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance. See details about the changes coming, as seen by the White House, and the President's signing remarks.
Financial Regulatory Reform is (Almost) a Done Deal
The U.S. Senate voted 60-39 yesterday to pass the Wall Street Reform and Consumer Protection Act, which the White House says President Obama will sign into law next week. While consumer finance attorneys digest the massive changes coming with this comprehensive bill (in mortgages, credit cards, retail credit, debt collection, arbitration, preemption, and auto finance), the scope of the changes will likely depend on the implementing regulations, and how these regulations are interpreted by Courts.
A few things are clear now. First, the OTS is fading away. Second, consumer arbitration may be too. Third, federal preemption is likely to be more difficult to obtain in consumer finance litigation.
Conference Reaches Deal on Financial Regulatory Reform
The House-Senate Conference to reconcile financial regulatory reform reached a final agreement on the legislation on Friday. The "Dodd-Frank Wall Street Reform and Consumer Protection Act" calls for the creation of the Consumer Financial Protection Bureau, an independent agency to be housed at the Federal Reserve, with a broad mandate to regulate consumer financial services of virtually all types.
The Consumer Financial Protection Bureau will have an independent director appointed by the President and confirmed by the Senate, with an independent budget and independent rule writing, examination, and enforcement authority. The CFPB consolidates consumer protection responsibilities of the OCC, OTS, FDIC, Federal Reserve, NCUA, HUD, and the FTC. Among other things, the legislation also creates a new Office of Financial Literacy to disseminate information to consumers and a new consumer hotline for consumer questions.
Continue Reading...Fed Issues Final Credit Card Rules
The Federal Reserve yesterday announced its final rule amending Regulation Z regarding late payment fees, interest rate changes, and other penalty fees. The final rule makes a number of significant amendments to Reg Z, including:
- Prohibits credit card issuers from charging a penalty fee of more than $25 for paying late or otherwise violating the account's terms unless the consumer has engaged in repeated violations or the issuer can show that a higher fee represents a reasonable proportion of the costs it incurs as a result of violations.
- Prohibits credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation. For example, card issuers will no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee cannot exceed $20.
- Bans "inactivity" fees, such as fees based on the consumer's failure to use the account to make new purchases.
- Prevents issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Requires issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
The Fed now publishes an online credit card guide for consumers and has issued a new publication with details on the credit card changes effective August 22.
Tracking the Conference on Financial Regulatory Reform
The House-Senate Conference to reconcile financial regulatory reform legislation begins today. Track the conference with the House Financial Services Committee or the Senate Banking Committee. The hearing also will be broadcast live on C-SPAN and webcast live at the House Financial Services Committee site.
9th Circuit Defines Limits to FCBA Duties
The Ninth Circuit last week defined the limitations on a credit card issuer's duties to communicate with authorized card users regarding billing disputes. In Edwards v. Wells Fargo & Co., defendant Wells Fargo issued credit cards to Hamid and Saeid Maghamfar, two brothers, who were obligors on the account. The Maghamfars later added a third person, plaintiff Paul Edwards, as an authorized user of the account, and Wells Fargo issued a card to Edwards. Edwards had numerous disputes with vendors related to transactions on the card. Wells Fargo initially communicated with Edwards about the disputes, apparently believing he was an attorney for the Maghamfars. When Wells Fargo discovered that Edwards was not an attorney, just an authorized user, it stopped communicating with him, or responding to him, regarding the disputes.
Edwards sued Wells Fargo in district court in Nevada, alleging violations of the Fair Credit Billing Act ("FCBA"), part of the Truth in Lending Act, and violations of the Nevada Unfair Consumer Practices Act. The district court granted summary judgment for Wells Fargo. Plaintiff appealed.
Continue Reading...Senate Passes Financial Regulatory Bill
The U.S. Senate yesterday passed the financial regulatory bill, S.3217, the "Restoring American Financial Stability Act." The comprehensive bill 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.
Significantly, this Senate version of financial regulation calls for a new, quasi-independent Bureau of Consumer Financial Protection within the Federal Reserve. The House version of financial regulation, passed in December, would create an independent, free-standing Consumer Financial Protection Agency. Both the House and Senate bills would limit federal preemption of consumer finance laws in certain ways. The Senate bill includes a detailed preemption provision.
Senate Banking Committee Unveils Financial Reform Plan
The Senate Banking Committee unveiled its version of financial regulatory reform yesterday, including issuing a summary of highlights of the bill as well as the proposed bill. The 1336-page bill differs in substantial respects from the House version passed in December.
Most significantly with regard to consumer finance regulation, the Senate version does not include an independent Consumer Financial Protection Agency, but would house that function at the Federal Reserve. Specifically, Title X of the Senate Version calls for the creation of a "Consumer Financial Protection Bureau" to operate independently within the Federal Reserve.
Fed Proposes New Interest Rate and Fee Rule
The Federal Reserve yesterday announced that it has issued a new proposed rule amending Regulation Z to change regulations regarding late payments and penalty fees charged by credit card issuers and to require card issuers to reconsider increases in interest rates. The new rule comes on the heels of the recent effective date of Regulation Z amendments implementing the Credit CARD Act.
Among other things, the proposed rule announced yesterday would:
- Prohibit credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer's violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
- Ban inactivity fees, such as fees based on the consumer's failure to use the account to make new purchases.
- Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
- Require credit card issuers to inform consumers of the reasons for increases in rates.
- Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.
The 30-day comment period for the proposed rule will begin when the proposed rule is published in the Federal Register.
Rules Implementing the Credit CARD Act Effective Today
Among other things, the final rules will:
- limit the application of increased rates to existing credit card balances.
- require credit card issuers to consider a consumer’s ability to make the required payments.
- establish special requirements for extensions of credit to consumers who are under the age of 21.
- limit the assessment of fees for exceeding the credit limit on a credit card account.
Last week, the Federal Reserve announced a Credit Card website to help consumers better understand the credit card rules that take effect today. Two interactive features on the site enable consumers to learn more about credit-card offers’ terms and fees and about the new features on monthly statements. The Fed has also posted a summary of the rule changes for consumers.
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.
Fed Issues Final Credit Card Rule
The Federal Reserve has issued its final rules amending Regulation Z, which implements the Truth in Lending Act, pursuant to the Credit CARD Act of 2009. Previous legislative efforts to expedite the effective date of the CARD Act resulted in no changes.
Among other things, the final rule, effective February 22, 2010, will:
• limit the application of increased rates to existing credit card balances;
• require credit card issuers to consider a consumer’s ability to make the required payments;
• establish special requirements for extensions of credit to consumers who are under the age of 21; and
• limit the assessment of fees for exceeding the credit limit on a credit card account.
The Fed has posted a summary of the rule changes for consumers.
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...Fed Launches Credit Card Education Campaign
As part of an effort to encourage consumer awareness about selecting and using credit card products, the Federal Reserve Board is engaging in a public information campaign designed to educate consumers about the appropriate use of credit cards. The Fed has launched a series of public service announcements, aimed at consumers, to be aired at movie theaters during the 2009 holiday season. The Fed has also launched a website with “Resources and Tools” to assist consumers to choose and to manage credit card accounts, and to inform consumers about the importance of credit ratings.
The Fed’s materials also include a credit card repayment calculator and a Consumer Handbook for Credit Protection Laws, summarizing the credit application process, consumer credit ratings, and consumer rights related to credit card products.
House Approves Accleration of CARD Act Effective Date
The U.S. House of Representatives yesterday voted 331-92 to pass H.R. 3639, the Expedited CARD Reform for Consumers Act of 2009, which would accelerate the effective date of the Credit CARD Act of 2009.
The provisions of the Credit CARD Act become effective in three stages: the first provisions took effect in August 2009; the remaining provisions take effect in February 2010 and August 2010. The Expedited CARD Act would make all provisions effective immediately on enactment, with the exception of small card issuers with fewer than 2 million cards and gift cards, which would be subject to the February 2010 effective date. The Expedited CARD Act also permits card issuers that adopt a moratorium on interest rate increases on current balances and new balances incurred before February 22, 2010, to be exempt from the earlier effective date for a provision that requires an issuer to apply customer payments to the highest rate balance.
CARD Reform Acceleration Moves Forward
Efforts to move up the effective date of the Credit CARD Act of 2009, to December 1, 2009 from February and July 2010 are moving forward, approved by the House Committee on Financial Services. In a unanimous vote, the Committee approved HR 3639, the Expedited CARD Reform for Consumers Act of 2009. Under the version approved by the Committee last week, prepaid gift cards would retain the February 2010 effective date, as would credit card issuers with fewer than 2 million accounts.
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.
Push Is On to Accelerate CARD Reform
The U.S. House Committee on Financial Services is considering recently-introduced legislation, called the Expedited CARD Reform for Consumers Act of 2009, to accelerate the effective date of the Credit CARD Act of 2009. Certain provisions of the CARD Act became effective in August 2009. The Expedited CARD legislation would amend the effective date of the remaining provisions of the CARD Act to December 1, 2009 from February and July 2010.
The Expedited CARD legislation also identifies specific CARD Act provisions to accelerate, including: reviews of past interest rate increases under Section 148(d) of the Truth in Lending Act (15 U.S.C. 1665c(d)); the requirement that penalty fees be reasonable and proportional to the violation, Section 149(b) of the Truth in Lending Act (15 U.S.C. 1665d(b)); and gift card consumer protection provisions.
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.
Portions of Credit CARD Act Go Live
Although most provisions of the Credit CARD Act of 2009 become effective in February and July 2010, pursuant to an interim final rule announced by the Fed to amend Regulation Z as phase one of the Act's three implementation periods, certain provisions of the Act are effective today:
* Creditors must provide written notice to consumers 45 days before the creditor increases an annual percentage rate on a credit card account or makes a significant change to the terms of a credit card account;
* Creditors must inform consumers in the same notice of their right to cancel the credit card account before the increase or change goes into effect. If a consumer does so, the creditor is generally prohibited from applying the increase or change to the account; and
* Creditors generally must mail or deliver periodic statements for credit cards and other open-end consumer credit accounts at least 21 days before payment is due.
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.
"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.
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...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...9th Circuit Details Corporate Citizenship Tests
In a significant case for credit card issuers and retailers, the Ninth Circuit has detailed the application of its tests of corporate citizenship for purposes of federal jurisdiction. In Davis v. HSBC Bank Nevada, N.A., et al., the Court held that retailer Best Buy is not a citizen of California merely because it has more presence in this state than in any other state.
In Davis, plaintiff sued credit card issuer HSBC and retailer Best Buy, asserting claims for violation of California's unfair competition statute, §17200, and false advertising statute, §17500, alleging the companies defrauded consumers by failing to adequately disclose the credit card's annual fee. Defendants removed the case to federal court based on the Class Action Fairness Act of 2005 ("CAFA"). Plaintiff moved to remand based on the local controversy exception to federal jurisdiction, 28 U.S.C. §1332(d)(4), which bars federal jurisdiction where, among other things, at least one defendant is a citizen of the original forum state. The district court granted plaintiff's motion to remand. Defendants appealed.
Continue Reading...California Holiday Statutes Preempted by OCC Regs
In Miller v. Bank of America, N.A. (USA), the Third District California Court of Appeal has held that California's holiday statutes, which extend the time to perform an act if the performance would fall on a holiday, does not extend the time for a credit card payment, because the holiday statutes are preempted by federal law.
In Miller, a putative class action, plaintiffs were credit card customers of Bank of America, a national bank. Plaintiffs alleged that so-called holiday statutes in California and Arizona prohibited Bank of America from charging late fees or interest on payments posted after a holiday, where the payment would not have been late absent the holiday. Plaintiffs alleged three violations of California Business and Professions Code §17200, one violation for each holiday statute at issue: California Civil Code §§9 and 11; and Arizona revised statutes §1-303. The trial court sustained Bank of America's demurrer without leave to amend, holding the holiday statutes are preempted by federal law. Plaintiffs appealed.
Continue Reading...Fed Issues Final New Credit Card Rules
The Federal Reserve yesterday issued a press release and highlights detailing its final rules revising regulation AA, revising regulation DD, and revising regulation Z. The new rules significantly alter the current regulations governing card issuers' payment billing cycles, allocation of payments, interest rate increases, security deposits and fees, credit card holds, and firm offers of credit. The new rules also make significant changes to overdraft protection linked to deposit accounts, including imposing an opt-out provision, eliminating overdraft charges resulting from debit holds, and changing required overdraft fee disclosures.
The revised regulation AA and regulation Z take effect on July 1, 2010. The revised regulation DD takes effect on January 1, 2010. Separately, the Fed seeks public comment on proposed amendments to Regulation E governing electronic funds transfers.
The Office of Thrift Supervision also announced and detailed the similar new rules for its regulated entities, as did the National Credit Union Administration.
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...Comment Period Closes on Credit Card and Overdraft Rules
The comment period has closed for the Federal Reserve's sweeping proposed rule changes for credit cards and overdrafts. The proposed revisions to Regulation AA, revisions to Regulation DD, and revisions to Regulation Z seek to redefine "unfair or deceptive acts or practices" in connection with credit card accounts and overdraft protection services.
The Federal Reserve reports receiving an unprecedented number of comments on these proposed regulations. The Fed received nearly 50,000 comments on the proposed revisions to Regulation AA alone. On a parallel track, the "Credit Cardholders Bill of Rights Act of 2008" (H.R. 5244), which would amend Truth in Lending Act to include new restrictions on billing and practices related to credit cards, is moving to the floor of the House.
"Credit Cardholders Bill of Rights" Passes Committee
The "Credit Cardholders Bill of Rights Act of 2008" (H.R. 5244), which would amend Truth in Lending Act to include new restrictions on billing and practices related to credit cards, has cleared the U.S. House Financial Services Committee and will move to the floor of the House.
As detailed in the summary, the bill's provisions would make significant amendments to existing law, 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.
These proposed changes follow the Fed's proposed rule changes for credit card and overdraft regulations.
Fed Issues Revised Consumer Compliance Handbook
ID on Merchandise Return Not a Violation of Song-Beverly
In Absher, plaintiff used a credit card to purchase a locking gas cap from Autozone and immediately tried to return it after he discovered in the store's parking lot that it was the wrong size for his car. Autozone's cashier swiped plaintiff's credit card and asked him to fill out a form with personal identification information, including his name, address, telephone number and signature. Plaintiff filled out the form, and two weeks later sued Autozone in a class action, alleging that Autozone violated Civil Code §1747.08(a)(3) by utilizing a form with spaces for his personal identification information. The trial court granted Autozone's motion for summary judgment. Plaintiff appealed.
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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.
9th Circuit Addresses FDCPA "Bona Fide Error" Defense
In Reichert, plaintiff debtor sued National Credit Systems ("NCS") in connection with its collection activities for debtor's former landlord. The debt that NCS attempted to collect included a $225 charge by the landlord's attorney for writing a letter to the debtor. The debtor alleged, among other things, that the inclusion of this charge, which was not specifically provided in the lease, violated FDCPA provision 15 U.S.C. §1692f(1). The district court granted summary judgment for the debtor. NCS appealed. 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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Fed's Credit Card and Overdraft Rules in Comment Period
The proposed changes would significantly alter the current regulations governing card issuers' payment billing cycles, allocation of payments, interest rate increases, security deposits and fees, credit card holds, and firm offers of credit. The revised rules would also make significant changes to overdraft protection linked to deposit accounts, including imposing an opt-out provision, eliminating overdraft charges resulting from debit holds, and changing required overdraft fee disclosures.
The American Bankers Association issued a public comment on the proposed rule changes on May 2, 2008, citing its concerns about a resulting "reduction in credit availability at the very time the Fed is working to increase access to credit in the marketplace."
Are You a "Debt Collector" Under California's FDCPA?
No Identity Theft Claim Against Bank That Sold Account
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