Consumer Finance Law Blog : Consumer Finance Lawyer & Attorney : Kelley Drye & Warren Law Firm : Financial Privacy & Security

On January 20, the Consumer Financial Protection Bureau (CFPB) adopted a final rule regarding the disclosures that US consumers must receive when they transfer money to foreign countries. The rule generally requires that before a consumer makes an international transfer, companies offering remittance services in the regular course of business must disclose all associated fees, including the exchange rate, and the amount of money to be delivered to the recipient. In addition, after the transaction is completed, companies must tell the consumer which date the funds will arrive, and provide a receipt or proof of payment which contains the same information that appeared in the initial disclosure.

The new rule also gives consumers 30 minutes (sometimes more) to cancel a transaction, in which case consumers are entitled to a refund.

The rule applies not only to companies whose principal business is money transfer, but also to banks, thrifts, and credit unions which regularly offer money transfer services. The CFPB has issued a request for public comment on several aspects of the rule, including a proposal that an entity that makes no more than 25 remittance transfers in the prior year not be subject to the rule. Comments will be due 60 days after the request for public comment is published in the Federal Register.

The passage of the Dodd-Frank Act gave the CFPB authority to issue rules governing money transfer companies, debt collectors, payday lenders, and a host of other non-depository financial institutions that had previously been subject to more limited federal regulation. One can expect that the CFPB, with its recently appointed head, Richard Cordray, will continue to issue rules that cover these types of companies.

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President Obama has made a recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau ("CFPB"). The President had nominated Cordray as the Director in July, but Senate Republicans blocked Cordray's confirmation last month. Yesterday's recess appointment circumventing Senate approval has already triggered criticism from Republicans, who have claimed that the President "arrogantly circumvented the American people" and called the appointment an "extraordinary and entirely unprecedented power grab."

Now that the CFPB has a director, it can exercise authority under the Dodd-Frank Act to regulate financial institutions beyond the banking industry, such as payday lenders, nonbank mortgage lenders, and certain student loan providers. Without a director, CFPB only had authority to supervise banks. In a post on the CFPB's blog yesterday, Cordray noted that such nonbank entities "led a race to the bottom that pushed aside responsible businesses, including community banks and credit unions, and greatly harmed consumers." He stated that oversight of these entities is a "top priority" and that the CFPB will announce more information about its oversight program in the coming weeks. The CFPB also has several other deadlines in the next year, including issuing a proposed rule on information sharing with state regulators and supervisors by July 21, the anniversary of the CFPB's official start date.

Cordray most recently served as the CFPB's top enforcement official. Prior to that appointment, he was the Ohio Attorney General, was a litigator with the law firm Kirkland & Ellis for over ten years, and clerked for Supreme Court Justices Byron R. White and Anthony M. Kennedy. As Ohio Attorney General, he brought several lawsuits against global banks, mortgage servicers, credit rating agencies, subprime lenders, and other financial institutions.

The recess appointment could come under fire in a legal challenge. The President has authority to make a recess appointment when the Senate has been out of session for more than three days. Republicans and other opponents have argued that Cordray's appointment is unconstitutional because Congress has technically remained in session and not gone on a recess. Rather, the Senate has conducted pro forma non-business sessions that last about 30 seconds per day. Democrats first used this procedure to block President George W. Bush from using his recess appointment authority during his second term. The White House and Director Cordray, however, intend to move forward with full steam.
 

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The Consumer Financial Protection Bureau (CFPB) continues to flex its regulatory muscles under the Dodd-Frank Act. Last week the CFPB divested the Federal Trade Commission of its rulemaking authority from various consumer protection laws, as discussed here. Today, the CFPB issued three additional interim final rules transferring “consumer financial protection functions” previously granted to other Federal agencies. Again, these rules duplicate existing regulations, making only technical and non-substantive changes, and do not impose any new substantive obligations on regulated entities.

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On December 16, 2011, the Consumer Financial Protection Bureau (CFPB) issued three interim final rules modifying three separate consumer protection laws. This is the first of likely many waves of regulation in the exercise of the agency’s rulemaking authority granted at its inception on July 21, 2011, under the Dodd-Frank Act. The interim final rules published today transfer the rulemaking authority originally vested in the Federal Trade Commission to the CFPB and duplicate existing regulations, making only technical, formatting, and stylistic changes. None of the proposed regulations impose any new substantive obligations on regulated entities. The rules are briefly summarized below.

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Yesterday, 45 Republican senators blocked a confirmation vote for former Ohio Attorney General Richard Cordray to be the first director of the Consumer Financial Protection Bureau (CFPB). Raj Date replaced Elizabeth Warren as interim director on August 1, 2011, the same week that Mr. Cordray's nomination was announced. As anticipated, the Republicans were nearly united in their opposition to the nomination. “Their objections have nothing to do with Mr. Cordray’s qualifications, his politics, or his character,” said Senate Banking Committee Chairman Tim Johnson (D-S.D.). Rather, in a letter sent to President Obama last May, the opposing Republicans pledged to oppose any nominee unless the CFPB’s powers are curtailed.

Republicans understand that the CFPB is "hamstrung" without a director because it can't exercise its full authority in supervising non-bank financial institutions, such as payday lenders, credit-reporting agencies, and debt-collectors. In an effort to capitalize on this leverage, Republicans demand structural change. They seek stricter oversight measures and the replacement of the director by a five-member board. Republicans also want funding for the agency to be made by Congress rather than through the Federal Reserve.

This is the first time in Senate history a presidential nominee has been filibustered because a party opposed the agency. President Obama told the press yesterday that he would continue to exert pressure to install Cordray, including a potential recess appointment during the holiday break: “I will not take any options off the table when it comes to getting Richard Cordray in as director of the Consumer Financial Protection Bureau.”
 

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On December 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued a proposed policy statement addressing the public disclosure of certain credit card complaint data.

Since its launch in July, 2011, the CFPB has assumed the role of moderator between credit card consumers and their issuing banks. Consumers file complaints on the CFPB website, inputting their names and addresses, the issuing bank, the type of complaint, and the claimed loss. The CFPB then forwards these complaints to the respective credit card companies and "tracks" the investigations to ensure their proper resolution. Of the more than 5,000 credit card complaints filed with the CFPB since July, approximately 3,100 have been resolved in this fashion.

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Starting August 1, Raj Date will replace Elizabeth Warren to run the day-to-day operations at the Consumer Financial Protection Bureau ("CFPB") until a director is appointed.  Mr. Date currently serves as a top deputy to Ms. Warren as the Associate Director of Research, Markets, and Regulations, focusing on credit cards and mortgages. Most recently, the White House was reportedly considering nominating Mr. Date as the director of the new agency. The White House ended up nominating Richard Cordray, a former Ohio attorney general, last week. 

Prior to joining the CFPB, Mr. Date founded Cambridge Winter Associates, a research organization, and pushed for the creation of the CFPB as part of Dodd-Frank. He is also a former banker with Capital One Financial Corp. and Deutsche Bank AG. In his current role at the CFPB, earlier this month he testified before Congress regarding mortgage servicing standards.

The CFPB began formal operations on July 21, while Mr. Cordray awaits Senate confirmation, which could be an uphill battle. Many Republicans plan to block any nominee unless President Obama agrees to significant structural changes for the CFPB. In the meantime, Ms. Warren plans to return to her teaching position at Harvard Law School this fall.

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The CFPB released a “progress report” on Monday tracking its achievements over the past year and goals for the immediate future, all part of the lead-up to the transfer of its authority from other agencies on July 21. The full report is available here. Describing itself as a “21st century agency,” the report outlines current projects, such as simplifying mortgage disclosure forms, and pending activities, such as the initial “larger participant” rule. The report also highlights the CFPB’s efforts to engage the public and the financial sector, detailing Elizabeth Warren’s speaking schedule over the past year, and summarized the current organizational structure and key hires. Finally, the report describes several Memoranda of Understanding signed by CFPB with other federal agencies and non-government entities to permit sharing of information and cooperation. Followers of the CFPB’s development during this start-up time will find the report a helpful summary of its activities.

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After much speculation concerning who would be nominated to head the Consumer Financial Protection Bureau (CFPB), President Obama announced plans to nominate former Ohio Attorney General Richard Cordray for the post at a White House event tomorrow. Mr. Cordray, who is now the CFPB’s top enforcement official, previously clerked for Supreme Court Justices Byron R. White and Anthony M. Kennedy, and was a litigator with the law firm Kirkland & Ellis for over ten years. As Ohio Attorney General, he brought several lawsuits against global banks, mortgage servicers, credit rating agencies, subprime lenders, and other financial institutions.

In a statement, President Obama praised Mr. Cordray’s track record in “advocating for middle class families” and “looking out for ordinary people in our financial system.”

Professor Elizabeth Warren, who for a while had been the frontrunner for the nomination, also received praise from President Obama for devising the idea for the new agency and for getting it off the ground. More recently, President Obama had considered former banker Raj Date as a frontrunner for the position.

Mr. Cordray’s nomination still must clear the hurdle of Senate approval, and Senate Republicans have reiterated their opposition to any nominee so long as the agency’s structure is not modified. Thus, the White House’s plan to obtain Senate confirmation within the next two weeks, before the August 8 planned start of Senate recess, seems unlikely. Senate Republicans may also attempt to prevent the Senate from breaking for recess in the first place in order to preclude President Obama from making a recess appointment. In any event, the agency, which is scheduled to open for business on July 21, is likely to do so without a director and hence will probably be unable to exercise some of its powers.

Over the next few weeks, one can expect a dramatic showdown between President Obama and Senate Republicans, as they escalate the dispute over Mr. Cordray’s candidacy and the structure of the CFPB.

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Though still without a director, the Consumer Financial Protection Bureau ("CFPB") has published its first notice and request for comment in the Federal Register (76 Fed. Reg. 38,059 (June 29, 2011)). The CFPB seeks comment on development of a rule to define the “larger participants” who will be subject to supervision for compliance with federal consumer laws. The Frank-Dodd Act limits the scope of the CFPB’s oversight over non-depository covered person to “a larger participant of a market for other consumer financial products or services,” and directs the CFPB to define, by rule, what that means. CFPB rulemakings may progress under the Treasury Secretary’s 1066(b) authority even if a director is not named by the July 21, 2011 transfer date.

The CFPB seeks comment on two main issues: (1) the criteria to be used to define a “larger participant,” and (2) the categories of markets that should be covered in the initial rule. Criteria may be tailored by market and may be either absolute or relative. The CFPB is also considering using multiple criteria in combination. Among the markets currently being considered for inclusion in the initial rule are debt collection, consumer reporting, consumer credit and related activities, money transmission/check cashing, pre-paid cards, and debt relief services. These markets cover a wide range of companies and are in line with the enforcement priorities articulated by Elizabeth Warren in her March 17 testimony before the House Subcommittee on Financial Institutions and Consumer Credit Committee on Financial Services.

The CFPB is also considering the establishment of a registration program for some or all covered persons in accordance with the Consumer Protection Act §§ 1022(c)(7) and 1024(b)(7). Any such registration program could increase regulatory reporting burdens for entities that fall within the scope of the CFPB’s supervisory authority.

Obviously, the proposal could have far-reaching consequences for companies that are deemed “larger participants,” including exposure to periodic examinations and requirements to file compliance reports. Companies who wish to participate in the CFPB’s maiden rulemaking will have until August 15, 2011 to submit their written responses. The final rule must be issued by July 21, 2012.
 

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Earlier this week, the Eighth Circuit Court of Appeals affirmed a federal trial court decision denying TCF National Bank’s motion to preliminarily enjoin enforcement of the Durbin amendment to the Dodd-Frank financial reform legislation. As reported in an earlier post, in April a federal district court in South Dakota rebuffed TCF’s attempt to halt the implementation of the rule, which would limit large banks’ ability to charge debit fees to merchants. In its opinion, the Eighth Circuit expressed the view that TCF is ultimately unlikely to prevail in the suit, and that the Durbin Amendment, which distinguishes between large and small issuers of debit cards, bears a rational relationship to the government’s interest in protecting small financial institutions.

TCF continues its fight in the federal district court proceeding, and today the court will hold a scheduling conference to determine the applicable timetable.

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On June 8, the Senate fell six votes short of the 60 votes needed to postpone for one year the implementation of a ceiling on the debit fees which banks charge to merchants. The Durbin amendment to the Dodd-Frank financial reform legislation would cap these fees, and Senator Durbin notes that a final rule is expected to be unveiled within a matter of days. Merchants have encouraged passage of the rule, which could cut the average 44 cent fee down to the Fed’s proposed level of 12 cents.

As reported in an earlier post, the Durbin amendment has drawn an ongoing challenge in federal district court in South Dakota alleging that it violates small banks’ constitutional right to equal protection. Now that the Senate has declined to slow down the rollout of the rule, the federal court challenge is likely to become a higher-stakes battle accompanied by greater attention from industry participants.

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In a change of course, President Obama is considering Raj Date, rather than the current chief architect Elizabeth Warren, to head the newly-formed and soon to be empowered Consumer Financial Protection Bureau (CFPB). Mr. Date has over 10 years of experience as a banker and as a consultant to financial institutions. Since February he has been the CFPB’s Associate Director for Research, Markets & Regulations, heading up the agency’s efforts to develop a regulatory plan for products including credit cards and home mortgages. Mr. Date’s extensive industry experience could make him a more plausible candidate for the post than Ms. Warren, whose candidacy has been adamantly opposed by Senate Republicans.

However, many opponents are likely to remain. As discussed in a prior post, Republicans have led an effort to change the structure of the CFPB. In addition, 44 Republican Senators have vowed to oppose the nomination of any director so long as the structure of the CFPB remains intact. Even for a nominee who has walked in the shoes of banks for years, it would likely be a contentious fight along partisan lines.

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A Republican-led U.S. House of Representatives Financial Services subcommittee approved legislation yesterday in an attempt to limit the powers of the new Consumer Financial Protection Bureau (“CFPB”), which is scheduled to open for business on July 21. The legislation, which likely would never become law since it would need to be approved by the Democratic-run Senate and President Obama, would have the CFPB director position replaced by a five-member bipartisan commission and make it easier for the new Financial Stability Oversight Council to overturn CFPB-led regulations. The subcommittee also approved a proposal to prevent the CFPB from exercising certain authorities until a director is in place – a confirmation process that is shaping up to be lengthy and contentious. The Obama administration currently is considering director candidates with Elizabeth Warren, the architect of the CFPB, at the top of the list. Republicans have come out strongly in opposition to Ms. Warren’s nomination.

Some consumer advocates see the goal of these bills as an attempt to send a message to the CFPB to be less aggressive as it moves forward. Others view the legislation as an attempt to ensure that proper checks-and-balances are in place at the new Bureau. The full House committee plans to meet on May 12 to consider these bills.

We should expect lots of vigorous debate along political lines in the months leading up to the July grand opening of the CFPB.

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Earlier this week, Bloomberg reported that President Obama has created a short list of candidates to lead the Consumer Financial Protection Bureau (CFPB). The list includes Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB. According to Reuters, the list also includes Federal Reserve Governor Sarah Raskin and close associates of Ms. Warren.

The CFPB is scheduled to become fully operational on July 21. The White House could make a nomination in the next few weeks, which would likely draw a fierce confirmation battle led by Senate Republicans. Alternatively, the administration may wait until the Senate recess in August to make a recess appointment. A recess appointee could serve through the session of Congress which ends in 2012.

At least two prospective candidates have publicly declined to be considered for the position. Former Michigan Governor Jennifer Granholm and former Ohio Governor Ted Strickland both announced that they do not want the position and that they believe Ms. Warren is the best candidate for the job.

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Earlier this week, Elizabeth Warren, on behalf of the Consumer Financial Protection Bureau (CFPB), announced a cooperative working agreement with a group of state attorneys general. Specifically, Ms. Warren introduced a Joint Statement of Principles adopted by the CFPB and the Presidential Initiative Working Group of the National Association of Attorneys General (NAAG). The Joint Statement is intended to increase the efficiency of state and federal regulators working together to protect consumers of financial products and services. The Joint Statement provides the following:

• Combined training and information sharing programs regarding developments in state and federal consumer protection laws applicable to consumer financial products and services.
• Sharing of market-based information and data related to practices in consumer financial products and services with an eye towards effective and efficient enforcement practices.
• Regular consultations to discuss enforcement practices and priorities and the development of frameworks to share investigatory and enforcement information.
• Enforcement support between states and federal agencies, as permitted by law, including joint investigations and enforcement actions.
• Pursuit of legal remedies to foster transparency, competition, and fairness in the consumer financial products and services markets across states and without regard to corporate forms or charters.
• Sharing of consumer complaints and complaint-tracking technology and information between CFPB and state attorneys general.

The Joint Statement Principles illustrates CFPB’s agenda to work closely with state regulators in enforcing financial laws.

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On April 4, the U.S. District Court for the District of South Dakota denied TCF National Bank’s motion to preliminarily enjoin enforcement of the Durbin amendment to the Dodd-Frank financial reform legislation, which would limit large banks’ ability to charge debit fees to merchants. The court held that since no regulations have been promulgated pursuant to the Durbin amendment, a preliminary injunction would be premature.

TCF National Bank has $18 billion in total assets and issues debit cards but not credit cards. In October 2010, the bank filed a complaint alleging that the legislation violates its constitutional right to equal protection for two main reasons:

1. it only applies to banks with over $10 billion in assets (which is true of roughly 1% of all banks); and
2. it imposes the most harm on debit card issuers who do not also issue credit cards, since those issuers cannot compensate for the impact of the amendment by assessing credit card fees.

The suit has drawn amicus briefs supporting both sides. For instance, a group of economists and scholars have filed a brief supporting TCF’s position, arguing that the legislation is not only a violation of the constitution, but that it is likely to harm consumers and competition, and hurt the banking system’s stability. On the other side, the Merchants Payments Coalition (“MPC”), a trade association of merchants, argued that the legislation will curb large banks’ ability to impose these fees, which RLC claims are often hidden and have escalated dramatically over time.

In the same hearing, the court said that it will take the defendants’ pending motion to dismiss the case under advisement.

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In a March 8 speech to the National Association of Attorneys General (NAAG), Richard Cordray, the top enforcement official for the new Consumer Financial Protection Bureau (CFPB), outlined his agenda for enforcement once the CFPB’s powers become effective on July 21, 2011. Prior to being appointed to his current position, Mr. Cordray served as attorney general of Ohio. In that capacity he brought lawsuits against many types of financial companies, including global banks, mortgage servicers, credit rating agencies, and subprime lenders.

The plan laid out in Cordray’s speech is consistent with his priorities as attorney general, and Cordray’s remarks signal an intent to work closely with state enforcers. He emphasized the need to police “unfair, deceptive or abusive” lending tactics by both banks and the “tens of thousands” of non-depository institutions not previously subject to federal agency supervision. While payday lenders are the only type of non-depository institution specifically mentioned in the speech, the CFPB will also have supervisory authority over several other types of non-depository entities who have never been supervised by federal agencies, including money transmitters, private educational lenders, and debt collectors.

Cordray also emphasized the “sloppy” underwriting practices once prevalent in the mortgage origination market, and stated that the CFPB will endeavor to learn from the experience of state attorneys general in policing such practices. His remarks suggest that before getting significantly involved with this issue, the CFPB may let state enforcers continue to resolve problems in their own backyards.

He also noted that in response to the CARD Act, which became effective in February 2010, credit card issuers have abandoned certain business practices which surprised consumers with fees they had no reasonable basis to expect. This sentiment echoed recent remarks by Elizabeth Warren, Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB.

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In anticipation of hearings on how the Dodd-Frank Act will impact small businesses, the a U.S. Chamber of Commerce-led coalition of business groups provided Treasury Secretary Timothy Geithner with recommendations regarding the formation of the Consumer Financial Protection Bureau (“CFPB”). The group is urging the creation of a CFPB that is “nimble, effective, transparent, and fair” while ensuring adequate access to affordable credit by consumers and small businesses alike. The group’s recommendations, as listed below, seek to empower consumers through the use of clear disclosures and to reduce regulatory duplicity by increasing coordination among federal and state agencies.

1. Develop an Effective and Efficient Structure to Facilitate Protection of Consumers and Promotion of Economic Growth. Avoid the mistakes of the past and promote effective and efficient oversight and enforcement without impacting competition.

2. Empower Consumers by Rationalizing Disclosure Requirements. Work with businesses to improve disclosure requirements.

3. Prevent Duplicative and Inconsistent Regulation of Main Street Businesses. Ensure strong coordination with the FTC and other federal agencies; exempt financial products service providers and limit further expansion of CFPB jurisdiction; provide guidance to state Attorneys General; and limit data collection requirements.

4. Preserve Small Business Access to Credit. Ensure that regulations do not impeded access to credit.

5. Ensure Coordination with Federal and State Prudential Regulators. Involve prudential regulators early and often.

6. Defer Rulemaking Until After Confirmation of a Director. Appointment of a CFPB director ensures proper congressional oversight.

In a speech yesterday before the Credit Union National Association, Elizabeth Warren touched on a number of the issues raised by the coalition. With regard to disclosures, Ms. Warren noted that additional clarity will serve both consumers and small businesses alike. She stated that the CFPB plans on “making … clarity up front … the norm for all financial service providers. When that’s the case, the effort you invest in creating a valued partnership with your members becomes a real competitive advantage.” On the importance of protecting small businesses, she went on to state that "I look forward to testifying about … how the consumer bureau's focus on transparency can make the markets work better for consumers and small providers alike. And I look forward to discussing how we have worked hard to make outreach to small institutions – credit unions and community banks – part of the new consumer bureau's DNA."

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In recent blog entries we have discussed the role being played by Elizabeth Warren in standing up the Consumer Financial Protection Bureau, including efforts to identify a Director for the newly-formed Bureau.  Those efforts have continued recently as Ms. Warren has been meeting with various State Attorneys General about the Bureau. Businessweek reported last week that Ms. Warren has met with attorneys general Tom Miller of Iowa, Lisa Madigan of Illinois, Roy Cooper of North Carolina and Martha Coakley of Massachusetts. While the article states that the implication is that the purpose of the meeting was to discuss the Director position with these individuals, the article also notes that the White House has stated it is not close to announcing a nominee.

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The Consumer Financial Protection Bureau has launched its website at ConsumerFinance.gov. The new website highlights the agency’s focus on the consumer, and provides individuals with multiple tools to share suggestions about the agency’s planned work. For example, it invites visitors to submit You Tube videos containing ideas for the agency.

In advance of its effort to launch a Consumer Response Center to receive consumer complaints, the site also provides “real stories” of issues raised to date by consumers regarding mortgages, credit cards, and overdraft fees. While the site promises to work with small financial service providers and create a more even playing field for such providers, all financial service providers should acquaint themselves with the site and follow how information, including consumer complaints, is collected and presented through the site. Finally, the site identifies some of the Bureau’s implementation team hired to date. A list of additional CFPB staff is available as part of a recent ABA publication that reviewed the set-up of the Bureau, its priorities, and the scope of some of its authorities.
 

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Outgoing Ohio Attorney General, Richard Cordray, has been selected to lead the enforcement division of the new Consumer Financial Protection Bureau (“CFPB”).  While serving as the Attorney General, Cordray filed lawsuits against national financial institutions such as Wells Fargo, GMAC Mortgage, and AIG, that, according to Cordray's bio, resulted in more than $2.5 billion in settlements.  He, however, felt restricted by the federal laws limiting actions that states can take against nationally-chartered banks and has stated that, in his new post, “I’ll have a clearer field . . . right now, my focus will be big banks.”  That focus will likely include unfair mortgage, foreclosure, credit card, and debt collection practices.

The Wall Street Journal also recently reported that White House adviser Elizabeth Warren and her senior adviser have solicited input from business and consumer groups regarding possible candidates to head the CFPB.  Prior to appointing her as White House adviser, the Obama administration considered nominating Ms. Warren to head the agency, but reportedly had concerns that Republicans might have blocked her appointment during the Senate confirmation process.

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FTC Commissioner Julie Brill spoke about the new Consumer Financial Protection Bureau (“CFPB”) during a keynote address she delivered at the International Association of Privacy Professionals Second Annual Conference on December 7th. While describing how Congress enacted the Fair Credit Reporting Act (“FCRA”) to protect consumers’ personal information, Brill stated that the FTC and CFPB “need to make sure our current rules continue, in this technologically advanced age, to protect consumers’ rights under the FCRA.” Given that the FTC already has several staff members involved in setting up the CFPB, it is no surprise that the FTC plans to work in tandem with the CFPB to enforce existing consumer protection laws and to understand new uses of data in connection with such efforts.

During the address, Brill also outlined the major components of the FTC’s preliminary staff report on privacy, "Protecting Consumer Privacy in an Era of Rapid Change” which includes a proposal for a Do Not Track mechanism that would permit consumers to control their tracking preferences at every website they visit. For a more detailed discussion of the FTC’s Report, including the concepts behind Do Not Track, please click here to read the Kelley Drye client advisory.

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The Treasury Department has announced key leadership hires for the new Consumer Financial Protection Bureau (“CFPB”) implementation team. Steve Antonakes, the Commissioner of Banks for the Commonwealth of Massachusetts for the past seven years, will lead depository supervision and Peggy Twohig, formerly with the Federal Trade Commission and currently serving as the Treasury's Director of the Office of Consumer Protection and Policy Lead for the CFPB implementation team, will lead non-depository supervision.

In connection with today’s announcement, Elizabeth Warren indicated that “Peggy and Steve will play critical roles in building a CFPB that will level the playing field between bank and non-bank lenders. For the first time consumer credit is going to be regulated by product instead of by the kind of company selling it, and these two will be instrumental in developing this new approach.” In recent weeks, Deputy Secretary of the Treasury Neal S. Wolin described the CFPB implementation team as consisting of various “working groups focused on setting up key functions of the bureau such as research and supervision of financial institutions” with “[other] working groups … focused on building the CFPB's supporting infrastructure, from procurement and budgeting to human resources and legal services.”

As discussed in a previous post on this blog, the Secretary of the Treasury designated July 21, 2011 as the date on which the CFPB will assume existing authorities of seven federal agencies. Today’s announcement signals that the government is moving swiftly to maintain the CFPB implementation schedule contemplated by the Dodd-Frank legislation. Additionally, the appointment of leaders to undertake supervision of depository and non-depository institutions is an indication that we are one step closer to the CFPB prescribing rules under Dodd-Frank that will affect not only banks, but also nonbank financial institutions who will now be subject to a new layer of regulation and oversight previously unknown to such entities. It remains to be seen how institutions, of any nature, will handle the potential compliance costs of abiding by CFPB regulations and whether new regulations will change the landscape of products available to consumers.

Jeffrey Kauffman contributed to this post. 

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On the heels of her National Journal interview, Ms. Warren today posted an entry on the White House blog providing additional detail on how she is working with industry leaders to leverage new technology to empower consumers and regulatory agencies such as the Consumer Financial Protection Bureau.

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Elizabeth Warren, the person charged with establishing the new Consumer Financial Protection Bureau (“CFPB”), discussed new technology investigatory techniques in a recent interview with National Journal. Warren, on a Silicon Valley tour to further develop these new methods, described the use of “crowd-sourcing” and other real-time information gathering techniques to quickly identify issues impacting consumers. According to Warren, utilizing the ability to amass information quickly will result in faster and more efficient investigations within the CFPB and will require that banks and other covered institutions be more responsive to regulators and consumers.

Utilizing new technology in regulatory investigations certainly makes sense, but harnessing the information and resources necessary to use it in a meaningful manner will be a challenge. Only time will tell if Ms. Warren is successful in leveraging new technology. What is clear, however, is that Ms. Warren is crafting an agenda for the CFPB that will focus on swiftly identifying issues that impact consumers and putting regulatory and market pressures on businesses to ensure compliant practices.

Click here to read more about Ms. Warren and her appointment in the Kelley Drye client advisory.

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This post was written by Jeffrey Kauffman and Jennifer Kasman.

Elizabeth Warren spoke at the White House today during the kickoff event of the Tuesday Talks series, a weekly interactive video chat on the White House website. During the session, Elizabeth Warren addressed several questions regarding her role with the new Bureau of Consumer Financial Protection (“CFPB”). As part of her comments, Warren described the past few years as the “wild west of consumer credit,” a time when financial institutions took an “anything goes” approach to offering consumer financial products. She believes that these practices have resulted in financial struggles for families who cannot pay debts or obtain additional credit. She also reiterated her position regarding the need for reform to ensure that financial products are easy for consumers to read, understand, and compare. On multiple occasions, Warren firmly stated that consumer products with “tricks and traps” will not be tolerated and indicated that people who expect to make big profits off non-compliant offers will be aggressively pursued. She stated that the regulatory scrutiny will come from the CFPB, which will serve to integrate a previously fractured web of agencies, and by partnering with state attorneys general.

Warren also commented on institutions that attempt to offset lost revenue from implementation of new consumer-friendly regulations with other charges and fees to consumers (for example, charging consumers increased fees for checking accounts). She described a major (unnamed) financial institution that recently sent a letter to shareholders indicating that the new consumer protection laws cost the company $650 million dollars in quarterly earnings. Warren said that she believes that this was $650 million dollars that “stayed in the hands of American families….from merely banning a few bad practices.” Clearly, this is a sign that Warren and others within the CFPB will take an aggressive posture towards companies seeking to recoup on lost revenue. On that note, Warren was careful to state that the CFPB does not want to solely regulate violations after they occur, but proactively supervise companies in advance to ensure that consumer laws and rules are being followed.

Click here to read more about Ms. Warren and her appointment in the Kelley Drye client advisory.

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The FTC released a proposed policy statement with a call for public comments on October 4, 2010. The policy statement clarifies when the FTC will take action under the Fair Debt Collection Practices Act (FDCPA) and the FTC Act against companies collecting the debts of deceased consumers.

In general, the FDCPA permits collectors to contact the decedent’s spouse or the executor or administrator of the decedent’s estate. State probate laws have expanded the list of persons authorized to pay a decedent’s debts beyond the FDCPA categories. The proposed enforcement policy statement seeks to reconcile the FDCPA’s requirements with state probate law developments by stating that the FTC will not take enforcement action for violations of Section 805(b) of the FDCPA against collectors communicating with a person authorized to pay the debts from assets in the decedent’s estate.

The proposed statement also clarifies how a debt collector may locate the appropriate person with whom to discuss the decedent’s debt and emphasizes that misleading consumers about their personal obligation to pay a decedent’s debt is a violation of the FDCPA and Section 5 of the FTC Act. The statement notes that in order to avoid giving the misleading impression that the person is personally liable or could be required to pay the decedent’s debt with his own assets or jointly held assets, debt collectors may need to affirmatively disclose that this is not the case.

The FTC is accepting public comments on the proposed policy statement until November 8, 2010.

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Elizabeth Warren, the presumed head of the new Consumer Financial Protection Bureau ("CFPB"), addressed some of the nation's largest players in the financial industry last night at the annual meeting of the Financial Services Roundtable.  In her prepared speech, Ms. Warren acknowledged, "Some of you may have noticed that I have not kept my opinions to myself about where I think the financial industry has gone wrong. And I notice that some of you have not kept your opinions to yourself about me."  Nonetheless, she invited the industry to "set aside misconceptions and preconceptions" and work with her.

Ms. Warren noted that, since her appointment, she has spoken with representatives from financial institutions, trade associations, and consumer groups and members of Congress and promised to keep her door open.  She recognized the changes industry is already implementing to protect consumers.  When explaining her view of "good regulation," she stated, "A free market is one where consumers have the ability to make well-informed choices, where the choices are visible and the terms are clear, and where there are cops on the beat to make sure that everyone plays by the same rules."

Focusing on "the fine print" used in credit agreements, Ms. Warren stated, "Every surprise hidden in the fine print is a bad surprise."  Instead of using increasingly complex disclosures, she advocated short, understandable agreements with certain basic information such as interest rate, penalty terms, conditions of any free gifts or rewards that come with the card. 

Certainly removing the "surprises" from the fine print will be a top priority.  As industry members continue to learn about Ms. Warren's road map for the CFPB, they should consider how other agencies such as the Federal Trade Commission ("FTC") have defined clear and conspicuous disclosure and deceptive trade practices and should take advantage of the opportunity to knock on Ms. Warren's open door.

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In a previous post we discussed the probability that Elizabeth Warren would be chosen to lead the Consumer Financial Protection Bureau (CFPB).

On Friday, September 17, 2010, President Obama named Harvard Law Professor Elizabeth Warren as Assistant to the President & Special Adviser to the Secretary of the Treasury on the CFPB. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB will be established to regulate consumer financial products and services. Although the effect of Ms. Warren’s appointment is currently unclear, consumer advocates expect that the new position will give Ms. Warren considerable influence over the shape and direction of the new agency. Transfer of authority from the Treasury Department to the new agency is anticipated to occur in July 2011.

Click here to read more about Ms. Warren's appointment in the Kelley Drye client advisory.

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Recent posts on this blog have discussed questions as to the continued viability of arbitration clauses that require consumer agreements to contain an arbitration clause and a waiver of the customer’s right to bring a class action. Indeed, the United States Supreme Court is to decide in the upcoming term whether agreements barring class-wide arbitration can be invalidated under State law, and Congress may kill mandatory arbitration in consumer finance transactions. This judicial and legislative trend to limit, and even eliminate, the use of arbitrations has been continued by the U.S. Court of Appeals for the Second Circuit in its decision in Fensterstock v. Affiliated Computer Services, 09 CV 1562 (2d Cir. 7/12/10).

The Second Circuit struck down, under California law, the use of loan agreements that contain arbitration clauses and a waiver of the customer’s right to bring a class action. The Second Circuit held that a lawyer who sued a student loan company over alleged hidden fees in loan agreements cannot be forced into arbitration and can pursue a class action. The Second Circuit ruled that the loan agreement’s class action and class arbitration waiver clauses were unconscionable under California law because they are a “standard contract of adhesion drafted by a party that had superior bargaining power,” and, therefore, are unenforceable. “Such a clause presented to the weaker party on a take-it-or-leave-it basis without the opportunity for meaningful negotiation is, under California law, oppressive, and satisfied the requirement that there be at least a minimal showing of procedural unconscionability.” According to the Court, although the plaintiff was versed in complex financial transactions, there was nothing to suggest that he had any opportunity to negotiate that clause out of the contract. Further, applying the remainder of a three-part test under California law for determining whether a clause in a contract is unconscionable, the Court held that the disputes on the alleged damages “predictably involve small amounts of damages,” and the plaintiff alleged the two companies were “deliberately carrying out a scheme to cheat large numbers of borrowers out of individually small amounts of money.”

While the Second Circuit reiterated the Federal Arbitration Act’s and “Congress’ purpose in enacting the Federal Arbitration Act ‘to reverse the long standing judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts[,]’” judicial hostility, at least as applied under California law, appears to remain. The Second Circuit’s interpretation of contract principles under California law, leading to its determination that the contract clauses were procedurally and substantively unconscionable, trumped the Federal Arbitration Act’s purpose and principles, like many courts seemingly do today. 

Whether the Supreme Court or Congress will continue that trend remains to be seen. Thus, companies that have consumer or employment contracts that contain such clauses should continue to seek to enforce them in court; however, remember that their enforceability may be significantly limited. As noted previously in this blog, companies should continue to monitor developments at the federal and state level, and re-examine their consumer or employment agreement’s arbitration and class action clauses to seek the best choice of law and jurisdiction for enforcement of such clauses. Please also remember to check back here for further updates.

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President Obama will soon sign the final Wall Street Reform and Consumer Protection Act, which the Senate passed last week. However, in many ways, the battle over financial reform has just begun. While the law makes broad and comprehensive changes to the nation’s financial system regulatory structure, many more details will be added in the months and years ahead as the reorganized regulatory structure takes shape, the revamped regulatory processes established by the bill unfold, and the numerous studies mandated by the bill are conducted.

Many of the regulatory details expected will emanate from the newly created Consumer Financial Protection Bureau. The Bureau will have independent authority but will be housed within the Federal Reserve system. It will serve as the primary regulator of financial products that reach consumers. Time magazine lists six consumer financial issues the Bureau could address first, including student loans, credit scores, and certain mortgages. However, there will be strong differing opinions on how, when, and in what areas the Bureau should focus its attention.

But before the Bureau can even begin to act, it needs to be created, staffed, and organized. The individual chosen to lead the Bureau out of the gate will have the opportunity to vastly influence the organization, culture, direction, scope and strength of the new regulator. The Washington Post reported today, following similar earlier reports, that Elizabeth Warren has emerged as an early leading candidate for the position. Ms. Warren is a professor at Harvard Law School and chairs the oversight panel created by Congress to monitor the Troubled Asset Relief Program. Consumer protection groups already are strongly supporting her nomination. Others fear, however, that Ms. Warren does not have the organizational experience to lead the newly-created office. Among others with greater institutional experience purportedly being considered for the position are current Assistant Treasury Secretary Michael Barr, and Eugene Kimmelman, a deputy assistant attorney general in the Justice Department's Antitrust Division and former lobbyist for Consumers Union.

Appointment of any of these candidates would send a clear message from the Obama administration that it intends to fully pursue the goal of an active consumer protection regulator. Financial service providers will have an opportunity to voice their concerns and opposition through the Senate confirmation process.

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On June 29, a group of 49 individual airline ticket purchasers filed suit to enjoin the proposed merger between Continental Airlines, Inc. and United Air Lines Inc., alleging that the deal would harm competition in the airline industry. The suit claims that the companies’ CEOs held “secret and private meetings” at which they discussed potential increases in prices and fares, charging of fees for previously free services, eliminating or curtailing services, and reducing the frequency of flights and number of available seats. The complaint claims that the merger, which would combine the third and fourth largest domestic carriers, will create a monopoly in ten U.S. airports, leave just two competitors in 120 U.S. airports, and create more concentrated markets in Washington, D.C., San Diego, Seattle, and New Orleans.

The deal is currently under review by the U.S. Department of Justice Antitrust Division, which in May announced that “it would go over the merger with a fine-tooth comb to make sure it wouldn't hurt competition.” The deal has also drawn scrutiny from Congress. In June, the U.S. House of Representatives held hearings regarding the merger’s potential effect on competition. United States Representative James Oberstar (D. Minn.), chairman of the Transportation Committee, opined that the merger would harm competition, and noted that he would “explore legislation to stiffen regulation if the deal is approved.” The Consumer Travel Alliance testified that the merger would create a market with just three dominant airlines, which would be “a consumer nightmare.” In defense of the deal, the airlines’ CEOs expressed the view that the merger would not harm consumers because competition in the airline industry has heated up in recent years due in part to competition from new carriers such as Southwest Airlines, and since it has become easy for consumers to compare prices via online search portals like Expedia and Orbitz.

A case management conference has been set for October 14, 2010.

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After working through the night, the Congressional conference committee tasked with negotiating a final financial reform bill voted 27-16 to approve the bill and send it back to each chamber for a final vote on the conference report.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

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A conference committee comprised of members from both chambers of Congress has been meeting for the past two weeks to address differences between the House and Senate versions of financial reform legislation, with the Senate bill serving as the base text. Negotiators are trying to wrap up deliberations today in hopes of passing a final bill before the July 4 recess. This Reuters piece provides a summary of some of certain elements of the bill and how they are being addressed in conference. While some broad components have been resolved, several critical details regarding consumer financial protection remain unsettled.

Earlier this week the conferees reached agreement to accept the Senate bill’s proposal to place a new financial reform regulator within the Federal Reserve Board, as opposed to creating a new stand-alone Consumer Financial Protection Agency envisioned by the House bill. Many congressional leaders have been critical of the Fed’s role in consumer protection leading up to the financial crisis. The new regulator, however, would function independent of the Fed management.

While this agreement was a necessary first step in the negotiations, the scope of the consumer protection authority is still being defined. For example, no agreement has yet been reached on whether or not auto dealers should be exempt from the new regulator’s oversight. The bill passed by the House exempted auto dealers but the Senate bill did not. The Senate conferees were asked by their chamber to pursue an exemption in conference negotiations. In doing so, Senate representatives have suggested exempting auto dealers from direct supervision by the new consumer regulator, but allowing the Federal Reserve to oversee such auto dealers with regard to truth-in-lending laws. Auto dealers, like GMAC, that provide their own financing would remain under the supervision of the new consumer regulator.

The fate of other non-traditional consumer financial service providers also has yet to be decided. The Senate conferees, in rejecting House proposals, have offered language to subject pawnbrokers and employee benefit plans to consumer regulatory oversight, while excluding payday lenders and check cashing agencies.

Finally, negotiations continue regarding the power of the FTC. The House asked to remove existing requirements that the FTC provide notice to Congress and develop evidence in advance of proposing new rules governing unfair and deceptive trade practices. The House proposal would allow the FTC to operate under the standard Administrative Procedures Act processes that employ a notice and comment rulemaking. Senate negotiators rejected that House proposed language, which also would: 1) give the FTC authority to issue civil penalties for unfair and deceptive trade practices without involving the DOJ; and 2) allow the FTC to act against third parties found to be assisting in unfair practices. No final agreement had been reached as of this writing.

The conferees have addressed many other provisions of the bill. A full rundown of the offers and agreements by title is provided by the Senate Banking Committee.
 

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In 2007, Congress introduced legislation, entitled the Arbitration Fairness Act of 2007, to amend the Federal Arbitration Act (“FAA”) to render unenforceable predispute arbitration provisions in, among other things, agreements concerning consumer transactions. The legislation permitted parties to consumer transactions to agree to arbitrate disputes but only after the dispute arose and required courts to decide any dispute concerning the validity or enforceability of an arbitration agreement even when the arbitration agreement required submission of issues concerning arbitrability to the arbitrator. The Arbitration Fairness Act of 2007 died in committee, but in 2009 was re-introduced in both the House as H.R. 1020 and the Senate, S. 931, as the Arbitration Fairness Act of 2009. (See a previous post entitled “The End of the Arbitration Clause?” discussing recent court decisions and highlighting this pending legislation). To date, limited action has been taken on the respective bills.

While Congress has yet to act on broad amendments to the FAA, prohibition on mandatory arbitration clauses in connection with the provision of certain consumer financial products or services could be enacted as part of the sweeping Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173 (the “Wall Street Reform Act”). (See previous post on the Senate’s version of financial system regulatory reform legislation, the Restoring American Financial Stability Act). Among other things, the Wall Street Reform Act would create a Consumer Financial Protection Agency. The director of the proposed Agency will have authority to:

Prohibit or impose conditions or limitations on the use of any agreement between a covered person [defined, with limitations, as any person who engages directly or indirectly in a financial activity in connection with the provision of a consumer financial product or service, (H.R. 4173, at § 4111)] and a consumer for a consumer financial product or service providing for arbitration of any future dispute between the parties 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. H.R. 4173, at § 4208.  

This legislation has passed both Houses of Congress and has been submitted to a Joint Conference Committee to resolve differences between the House and Senate versions. Assuming the final legislation includes a new consumer protection entity with authority to promulgate rules regulating arbitration in disputes related to consumer financial products or services, federal oversight of mandatory predispute arbitration provisions in agreements related to consumer financial products or services will likely come to fruition. That said, the creation of a new federal regulator would likely be time consuming and the promulgation of rules prohibiting arbitration would require, among other things, notice and comment. Thus, while it appears that the use of mandatory predispute arbitration provisions in agreements related to consumer financial products or services is at least headed for federal oversight, absent revival of the Arbitration Fairness Act of 2009, it will likely take several years before that federal oversight is in place.

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This week, the Supreme Court granted the certiorari petition of AT&T Mobility LLC (“ATTM”) in AT&T Mobility LLC v. Concepcion, No. 09-893. ATTM’s petition asked the Court to determine whether the Federal Arbitration Act (“FAA”) preempts states from conditioning the enforcement of an arbitration agreement on the availability of particular procedures – here, class-wide arbitration – when those procedures are not necessary to ensure that the parties to the arbitration agreement are able to vindicate their claims. 

In this consumer class action, plaintiff alleged that ATTM’s offer of a “free” cellular phone with the purchase of a new service contract was fraudulent to the extent the company charged the new subscriber a substantial sales tax on the retail value of each free phone. ATTM moved to compel the consumers to participate in arbitration, as required by the service agreement. The district court denied ATTM’s motion, finding that the provision of the arbitration agreement barring class actions was unconscionable under California law and therefore was unenforceable. The district court further held that California unconscionability law was not preempted by the FAA, which provides that arbitration agreements are valid except where they can be revoked on grounds that could also apply to invalidate an entire contract. The Ninth Circuit affirmed.

In its cert petition, ATTM contended that the case presented an exceptionally important question, the resolution of which could lead to the invalidation of tens of millions of arbitration contracts under California law, if the Ninth Circuit’s opinion was upheld. ATTM argued that, even though its arbitration provision does not permit class arbitration, it gives consumers sufficient incentives to vindicate their claims on an individual basis and is therefore valid and not unconscionable. ATTM also argued that review was warranted because courts were divided on the issue and the decision below conflicted with the FAA and Supreme Court precedent. ATTM noted that the primary purpose of the FAA, as stated by the Supreme Court, is to ensure that private agreements to arbitrate are enforced according to their terms. ATTM also pointed to Supreme Court precedent holding that the FAA prohibits courts from imposing prerequisites to enforcement of arbitration agreements where those prerequisites are not applicable to contracts generally. Finally, ATTM argued that there is a liberal federal policy favoring arbitration agreements, notwithstanding state policies to the contrary.

How this issue is resolved could have a wide spread effect on companies sued in consumer class actions. For instance, a decision in favor of ATTM could be interpreted broadly to allow companies to limit their exposure to class actions simply by including a class action waiver in their arbitration agreements.  On the other hand, a ruling in favor of plaintiffs could result in many arbitral class action provisions being invalidated.

Stay tuned.

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The Senate last night passed its long-awaited version of financial system regulatory reform legislation, the Restoring American Financial Stability Act. In the coming weeks, each congressional chamber will select a group of lawmakers to negotiate a final bill. That bill will then need to be voted on again in both chambers before going to the President for his signature or veto. The process is expected to take at least a month.

The following are a handful of the more significant amendments considered by the Senate.

• Federal Preemption – As written, the bill would have allowed states to enact consumer protection laws more strict than their federal counterparts. By amendment, the Senate preserved federal preemption of state consumer financial protection laws, with preemption standards being determined by the Office of the Comptroller of the Currency and reported to Congress. Also per this amendment, state attorneys general would be permitted to file civil lawsuits against state-charted institutions to enforce consumer financial protections.

• Definitions of Non-bank Institutions – The Senate passed an amendment without opposition that revises important definitions of non-bank financial institutions. This amendment seeks to limit the reach of the new consumer protection regulator with regard to non-bank financial companies to those companies that are “predominantly engaged” in providing financial services. In contrast, the underlying bill included broad language that would have allowed for regulation of nearly any company engaged in financial activities. In the Senate version, the new consumer regulator would only have authority over non-bank firms that receive at least 85 percent of their revenue from financial activities.

• ATM Fee Cap – The proposed amendment to limit the fees banks could charge on ATM transactions (discussed in an earlier post) did not receive a vote and therefore is not included in the final Senate bill.

• Interchange Fee Cap – The Senate adopted an amendment to allow the Federal Reserve to set limits on the fees charged to retailers by credit card companies for the processing of credit card transactions. The specific language, if included in a final bill, would allow the Federal Reserve to set “reasonable and proportionate” interchange charges – a threshold sure to provoke additional future battles. Institutions with less than $10 billion in assets would be exempt from such limits.

• Auto-dealer Exemption – An amendment proposed to exempt auto-dealers from the jurisdiction of the Senate’s proposed Consumer Financial Protection Bureau, strongly opposed by the Senate Banking Committee Chairman Chris Dodd and the White House did not receive a vote before adoption of the bill.

• FTC Authority Preservation – The Senate passed without opposition the proposed amendment to revise the Consumer Protection Bureau provisions to allow the FTC to retain its existing rulemaking authority, carving it out of the new consumer protection regulator.

• Derivatives – The proposed provisions in the underlying bill that would require banks to spin off their derivative operations, strongly opposed by banks and the FDIC, was not taken up.

• Mortgage underwriting – This amendment, which would bar mortgage brokers and loan originators from receiving payments based on the terms of the loans they sell, was added to the bill. Under this amendment, lenders would be required to verify a borrower’s ability to repay the loan from income and assets other than the home’s value. Assessment of the ability to repay would have to be based on the maximum interest rate allowed in the first five years of the loan.

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On April 29, 2010, Colorado Governor Bill Ritter signed a consumer protection bill which requires gift card issuers to redeem the card, upon request, if the remaining value is $5 or less. In addition, it bans retailers, restaurants and others from selling gift cards that have any type of fee, including a service fee, a dormancy fee, an inactivity fee or a maintenance fee. This new law will apply to gift cards issued on or after August 11, 2010.

Under this law, “gift card” is defined as a prefunded tangible or electronic record of a specific monetary value evidencing an issuer’s agreement to provide goods, services, credit, money, or anything of value. A gift card includes a tangible card, electronic card, stored-value card, or certificate or similar instrument, card, or tangible record, all of which contain a microprocessor chip, magnetic chip, or other means for the storage of information and for which the value is decremented upon each use.

A gift card does not include a prefunded tangible or electronic record issued by, or on behalf of, any government agency, a gift certificate that is issued only on paper, a prepaid telecommunications or technology card, or a card that is donated or sold below face value at a volume discount to an employer or charitable organization for fundraising purposes. Likewise, a card or certificate issued to a consumer pursuant to an awards, loyalty, or promotional program for which no money or other item of monetary value was exchanged is expressly excluded from the definition of a gift card.

In addition, this new law does not apply to gift cards that are usable with multiple sellers of goods or services, but expressly applies to a gift card usable only with affiliated sellers of goods or services.

A violation of this new law will be deemed a violation of Colorado’s deceptive trade practice law.

Once the law is effective, Colorado will join a handful of other states with laws requiring redemption of gift cards with less than a certain cash value. Under California law, as just one example, any gift certificate with a cash value of less than $10 is redeemable in cash for its cash value.

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If your company has suffered property damage or lost business as a result of recent catastrophic events – the extended closure of airspace due to volcanic ash from Iceland, the flooding of Nashville, Tennessee and surrounding areas, and the oil spill in the Gulf of Mexico – help may be on the way. While some insurance companies are already taking the position that coverage is not available for these losses, recovery for some companies is in fact likely, under the business interruption coverage often found in a property insurance policy. Whether coverage exists may depend on the business interruption language contained in your policy.

Physical damage to a business, such as water damage to a store in Nashville, may not be the only type of loss your property insurance covers. Insurance often also covers loss of business income. For example, if a business was forced to close or stop production because of physical damage to property, the inability to access property, or in response to an evacuation or curfew order, business interruption insurance may help. Business interruption insurance may also cover losses resulting from the closure of an insured company’s key supplier or customer, if that closure caused the insured company to stop or slow production. And that may be true even if the insured company is hundreds of miles away from the physical damage.

For further information about business interruption coverage for losses suffered as a result of the recent volcanic ash, flooding, or oil spill, and tips on how to maximize the chances of insurance recovery, please see the recent advisory prepared by Kelley Drye's Insurance Recovery attorneys.

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The Senate is expected to soon consider placing a fifty-cent per transaction cap on ATM fees, as an amendment to the financial reform bill. The proposed amendment, introduced last week by Senator Tom Harkin (D-Iowa) and co-sponsored by Senators Charles Schumer (D-New York) and Bernie Sanders (I-Vermont), is an effort to regulate ATM fees by “ensur[ing] that fees charged to consumers at ATMs bear a reasonable relation to the cost of processing the transaction.” By Senator Harkin’s calculations, each ATM transaction today costs only about 36 cents, yet on average, consumers pay an average of over $2.50 to use ATMs.

Whether there should be a cap on ATM fees has been a topic of debate for years. For a recent discussion of these opposing views, see the article Senators Push for a Cap of 50 Cents on ATM Fees, printed by AOL Daily Finance. On the one hand, consumer groups have lobbied for the elimination of ATM fees, arguing that it is unfair to charge consumers to access their own money. In addition, proponents of the amendment contend that banks and ATM operators are charging far above the amount of their operating and maintenance costs. 

On the other hand, critics of the amendment question whether banks are being unfairly targeted as a result of the current economic climate and wonder whether the proposed amendment would serve consumers’ bests interests. Capping fees could lead to independent ATM operator companies going out of business, the elimination of ATMs in less-traveled areas, the slowing of technological updates to ATMs, a ban on non-bank customers from using their ATMs, or increased charges for other bank services to offset bank losses.

Previous attempts by states to eliminate or limit ATM fees have been blocked by federal court rulings that local bans could not be imposed on banks with national charters.

We will keep you posted as the amendment makes its way through the Senate.

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Recently, Federal Trade Commission Chairman Jon Leibowitz released the FTC’s 2010 Annual Report, which focused largely on the FTC’s endeavors to defend financially distressed consumers and to spur competition during these tough economic times.

For example, the FTC, among other things, emphasized that while the past year’s economic downturn prompted companies to offer new services targeted towards those most in need, some of these companies failed to deliver on these services. The FTC obtained preliminary or temporary relief in all twenty-two federal lawsuits filed against operators who allegedly falsely asserted they would obtain a loan modification or halt a foreclosure on consumers’ behalf. Typically, the operator allegedly was paid a high initial fee by the consumer, and then did little or nothing to help to modify the loan or halt foreclosure.

In order to maximize its efforts, the FTC indicated that it has renewed its efforts to partner with state and local enforcement agencies. The FTC secured relief through its participation in ten mortgage fraud task forces all over the nation. For example, the FTC entered into an $8.5 million settlement with a foreclosure “rescue” company, which precludes the company from making representations about the likelihood that it could stop a foreclosure. The FTC had alleged that the company collected high fees from consumers often exceeding $1,000, but did not endeavor to help them to avoid foreclosure.

The FTC also announced that in settling five Federal Credit Reporting Act suits (four of which were against users of credit reports and one of which was against a Credit Reporting Agency), the FTC obtained $447,000 in civil penalties and $157,000 in suspended penalties. In two of these actions, the FTC alleged that the users made adverse employment decisions predicated on background checks without notifying them of their rights under the FCRA.
 

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The Senate, after spending last week engaged in procedural battles, will enter full scale debate this week on that chamber’s version of a financial reform package. This morning Congress Daily provided a brief preview of the debate. Several amendments affecting consumer protection are expected, including relating to the proposed new bureau to oversee consumer finance issues. As just one example, an effort to preserve federal preemption of state authority is certain to be renewed. To read one take on the consumer protection aspects of the bill, including as it relates to credit card reform and the role of the new consumer finance agency, check out a recent article from Forbes Magazine, which quotes Kelley Drye attorney and co-editor of this blog John McGuinness. As Mr. McGuinness notes, there is still significant ambiguity in the language and purpose of the consumer protection provisions that could lead to significant regulatory and litigation risk for consumer financial service providers.
 

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Yesterday, the Supreme Court issued a decision in Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA (“Jerman”) (Docket 08-1200) that resolves a circuit split regarding the scope of the Fair Debt Collection Practices Act’s bona fide error defense and disposes of a key defense to FDCPA liability for debt collector defendants.

The FDCPA’s “bona fide error” defense allows a debt collector defendant to avoid liability for FDCPA violations if it “shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error.” 15 U.S.C. §1692k(c). While the majority view has been that this defense is available for clerical and factual errors only, a number of circuits, including the Sixth Circuit, have held that it also applies to mistakes of law so long as the debt collector had reasonable procedures in place to avoid such mistakes, such as ongoing FDCPA training, procuring the most recent case law, and/or having lawyers dedicated to ensuring FDCPA compliance.

In 2006, Jerman brought a class action complaint against the defendant debt collector, a law firm, alleging that the firm’s debt validation notice violated the FDCPA by misinforming debtors that any dispute of a debt must be made in writing. The firm moved to dismiss, arguing that debt disputes do need to be in writing and that the notice was therefore accurate. The district court, while acknowledging some divergence of authority on the issue, held that the FDCPA does not require disputes to be in writing and that the notice was deceptive in violation of the Act. The firm then moved for summary judgment, arguing that its violation was the result of an honest mistake of law and thus a bona fide error. The firm provided evidence of procedures reasonably adapted to avoid such mistakes, including a firm lawyer dedicated to ensuring FDCPA compliance, regular attendance of debt collection CLE’s, and subscriptions to relevant legal periodicals. The district court entered summary judgment in the firm’s favor, and the Sixth Circuit affirmed, holding that a mistake of law can qualify as a bona fide error under the FDCPA.

The Supreme Court’s decision in Jerman reverses the Sixth Circuit, holding that a mistake of law, no matter how genuine, can never qualify as a bona fide error. The Court cited the long recognized legal maxim that that “ignorance of the law will not excuse any person, either civilly or criminally.”

The decision should be a warning to all debt collectors and law firms regularly engaged in debt collection. As Justice Kennedy noted in his dissenting opinion, “[a]fter [yesterday’s] ruling, attorneys can be punished for advocacy reasonably deemed to be in compliance with the law or even required by it.” No matter what procedures such firms have in place to ensure accurate FDCPA compliance, mistakes of law will not be excused. Debt collectors and lawyers for debt collectors should take special care to keep abreast of FDCPA case law and legal developments, and where there are splits of authority, err on the side of caution.
 

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Last month, two subsidiaries of American International Group (“AIG”) agreed to pay $7.1 million to settle claims by the United States Department of Justice (“DOJ”) that the companies unlawfully charged African American borrowers higher mortgage fees over a period of three years as compared to white borrowers. In United States of America v. AIG Federal Savings Bank, 99-mc-09999 (D. Del.), DOJ alleged that from 2003 to 2006, AIG Federal Savings Bank (“AIG FSB”) and Wilmington Finance, Inc. (“WFI”) failed to cap the fees which affiliated brokers could charge to borrowers, and failed to monitor the fee amounts charged. DOJ further alleged that during this time, African American borrowers were charged fees on average 20 basis points higher than total broker fees paid by similarly situated white borrowers. In some metropolitan areas, DOJ alleged the discrepancy rose to the level of 75 basis points.

The consent order requires AIG FSB and WFI to pay $6.1 million to compensate roughly 2,500 African American borrowers who were overcharged, and to contribute at least $1 million towards programs designed to provide financial education to consumers. AIG FSB and WFI also represented that they have exited the wholesale-lending business and agreed that if they seek to return, they must notify the government and change their business practices.

 The AIG settlement is the largest monetary settlement ever obtained by DOJ for the compensation of victims of lending discrimination. Thomas Perez, the DOJ assistant attorney general for civil rights, stated that this is the first time DOJ has held a lender accountable for allegedly discriminatory conduct by its affiliated brokers, and warned that if need be, this will not be the last time. He further remarked that the prior administration made no meaningful effort to crack down on racially discriminatory lending, which contributed to the current national housing and economic crisis. Mr. Perez announced that there are 45 pending cases along the same lines, and that "lenders who ignored the discriminatory practices of brokers must be held accountable."

Other federal and state regulators are expected to take similar steps. For example, Robb Adkins, executive director of the Obama Administration's Financial Fraud Enforcement Task Force (FFETF), stated that the settlement should be seen as a "warning shot" to those who would engage in fraud or discrimination, and that the FFETF, comprised of representatives from a variety of federal and state regulatory and law enforcement bodies, is redoubling its efforts to prosecute similar conduct.

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Today, Senate Banking Committee Chairman Chris Dodd (D-CT) released a revised financial regulatory reform bill, which would create the Bureau of Consumer Financial Protection. The Bureau would be housed in the Federal Reserve, however, it would have a separate budget and an autonomous governance structure.

Consumer protection has been a major sticking point since the reform debate kicked off last year. While the House passed a bill that would achieve the Obama administration’s original goal of setting up a stand alone Consumer Financial Protection Agency, the prospects for such an agency in the Senate bill were never quite as good. From the start Republican members of the Banking Committee strongly opposed creating a new agency. Despite agreement on several other key principles, some of which are included in the bill released today, the two sides could not settle on an agreement regarding the structure and scope of the consumer protection agency.

For weeks different stories were reported about how and where the consumer protection organization would be housed. However, the authorities and responsibilities granted to the Bureau received much less attention. With the bill now out, financial service providers can begin to understand how the Senate bill could impact them. For example, with regard to consumer protection, the bill grants the Bureau broad rulemaking and enforcement authority and transfers to it most of the existing consumer protection functions of existing regulators. It also preserves state rights to enact more stringent consumer protection laws.  Finally, the bill proposes a rulemaking process to establish the definition of nondepository institutions covered by the Bureau's authority.

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