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

This is an update to an earlier post regarding the Federal Reserve Board’s final rules implementing the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”). On July 27, 2010, H.R. 5502 was signed into law, extending the effective date of disclosure requirements under the CARD Act from August 22, 2010 to January 31, 2011, for qualifying gift cards produced prior to April 1, 2010. You may recall that the rules restrict fees and expiration dates on various types of gift certificates and cards, and require sellers and issuers to make specific disclosures.

Gift Certificates, Store Gift Cards, and General-Use Prepaid Cards

Generally, the rules restrict fees, expiration dates, and impose certain disclosure requirements for (A) gift certificates, (B) store gift cards, and (C) general-use prepaid cards, as these terms (collectively, “gift cards”) are defined in the CARD Act.

Definitions

(A) Gift Certificates – are defined in the CARD Act as a card, code, or other device that is: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount that may not be increased or reloaded; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(B) Store Gift Cards – these types of cards are commonly known as “closed-loop cards”, and are essentially the same as Gift Certificates, but are reloadable or may be increased in value. The CARD Act specifically defines these cards as electronic promises, plastic cards, or other payment codes or devices that are: (i) redeemable at a single merchant or an affiliated group of merchants that share the same name, mark, or logo; (ii) issued in a specified amount, whether or not that amount may be increased in value or reloaded at the request of the holder; (iii) purchased on a prepaid basis in exchange for payment; and (iv) honored upon presentation by such single merchant or affiliated group of merchants for goods or services.

(C) General-Use Prepaid Cards – commonly referred to as “open-loop cards”, are defined in the CARD Act as cards or other payment codes or devices issued by any person that are: (i) redeemable at multiple, unaffiliated merchants or service providers, or automated teller machines; (ii) issued in a requested amount, whether or not that amount may, at the option of the issuer, be increased in value or reloaded if requested by the holder; (iii) purchased or loaded on a prepaid basis; and (iv) honored, upon presentation, by merchants for goods or services or at automated teller machines.

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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. (Here is a comprehensive summary of the massive legislation.) 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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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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On May 15, 2010, the Governor of Minnesota signed into law the Minnesota S.A.F.E. Mortgage Licensing Act of 2010 (Minnesota S.A.F.E. Act), which requires that mortgage loan originators be licensed by July 31, 2010, the act’s effective date. In passing the law, Minnesota joins the other 49 states and the District of Columbia in enacting legislation that complies with the S.A.F.E. Act provisions of the Housing and Economic Recovery Act of 2008, passed on July 30, 2008.

The federal S.A.F.E. Act “encourages” states to establish minimum standards for uniform license applications and reporting requirements for state-licensed loan originators, in an effort to standardize and more efficiently regulate the nationwide practice of mortgage loan origination.  While it provides states with minimum standards, the federal S.A.F.E. Act does not preclude states from imposing tougher standards as long as those standards do not frustrate the purposes of the federal S.A.F.E. Act.

The Minnesota S.A.F.E. Act defines a “mortgage loan originator” (MLO) as “an individual who for compensation or gain or in the expectation of compensation or gain takes a residential mortgage loan application; or offers or negotiates terms of a residential mortgage loan.” Loan processors and underwriters are not considered MLOs, and are prohibited from advertising that they will do anything only an MLO is allowed to do. Applicants for a license must pass a written test and must submit to a background check by the Federal Bureau of Investigation (FBI). 

Disputes remain concerning how the federal government will determine whether states are complying with the federal S.A.F.E. Act, so we can expect further developments on this issue in the coming months.

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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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Businesses have until July 1, 2010 to comply with the new rules and guidelines under the Fair and Accurate Credit Transactions Act (“FACTA”), which amended the Fair Credit Reporting Act (“FCRA”), adopted by the Federal Trade Commission nearly a year ago relating to information provided to credit reporting agencies. Many know FACTA as the statute that allows consumers to request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies (Equifax, Experian, and TransUnion), or the Act that contains provisions to help reduce identity theft. These new guidelines are designed to increase the accuracy and integrity of the information that furnishers provide to credit reporting agencies. The rules, in turn, require furnishers to establish reasonable written policies and procedures that implement the guidelines. The policies and procedures that furnishers are required to establish will vary depending on the “nature, size, complexity, and scope of each furnisher’s activities.” 16 C.F.R. § 660.3(a).  

The rules also provide consumers an additional avenue to challenge the accuracy of information used to generate their credit rating. Historically, consumers were encouraged to deal with the credit reporting agency about the accuracy of such information. Under the new FACTA rules, furnishers are now required, in most cases, to investigate disputes that are submitted directly to them by consumers regarding the accuracy of information that furnishers provided to a credit reporting agency.

Click here to review the final inter-agency rules and guidelines.

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The Restoring American Financial Stability Act passed by the Senate on May 20 (discussed in an earlier post ) includes an amendment authored by Sen. Susan Collins (R-Maine), which would toughen the risk-and size-based capital standards facing financial institutions. Sen. Collins has stated that smaller financial institutions should no longer be subject to more lenient standards than large institutions because the “failure of larger institutions is much more likely to have a broad economic impact” and having different standards creates the incentive for banks to become “too big to fail.” The amendment would hold banks with assets above $250 billion to capital requirements at least as stringent as those applicable to smaller institutions.

Under U.S. rules, bank regulators look to the ratio of a financial institution’s Tier 1 capital to total risk-adjusted assets as a key indicator of financial health. Tier 1 capital, which includes common stock and some preferred stock, serves to cushion banks in the event of potential loss. The language in Senator Collins’ amendment apparently orders federal bank regulators to set minimum leverage and risk-based capital requirements for all banks, implies that trust-preferred securities will no longer be included within the definition of Tier 1 capital, and implies that all banks would need to comply with this new rule immediately. In an interview with the American Banker, however, Senator Collins said that what’s intended is that the new measure would apply only to “systemically important firms,” would be phased in over time, and that the language of the amendment will be changed before the bill is passed to reflect these intentions. 

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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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Recently, the Federal Reserve Board announced the final rules that amend Regulation E to implement the gift card provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”). The rules restrict fees and expiration dates on various types of gift certificates and cards, and require sellers and issuers to make specific disclosures. These restrictions and requirements will apply to qualifying gift cards sold on or after August 22, 2010.

Scope

Generally, the rules restrict fees, expiration dates, and impose certain disclosure requirements for (1) gift certificates, (2) store gift cards, and (3) general-use prepaid cards, as these terms (collectively, “gift cards”) are defined in the CARD Act. The rules state that the CARD Act’s scope is intended to extend to gift cards that are sold or issued to consumers primarily for personal, family, or household purposes. Gift cards which qualify under the rules as loyalty, award, or promotional gift cards are exempt from the fee and expiration date rules but must still follow strict disclosure requirements.   

Exclusions

The rules also provide specific exclusions, meaning none of its provisions apply to gift cards used solely for telephone services, cards that are reloadable and not marketed or labeled as a gift card or certificate, cards not marketed to the general public, cards issued in paper form only, or cards redeemable solely for admission to specific events or venues. Although the rules exclude several categories of gift cards, the exclusions should be interpreted narrowly to ensure that consumers receive the full protection contemplated by the CARD Act. 

Preemption

The lingering issue of how the CARD Act should be treated along with the patch-work of state gift card laws that regulate dormancy fees, inactivity charges or fees, service fees, expiration dates, or escheatment is addressed in the rules as well. State laws that provide greater protection for consumers than the CARD Act, are not preempted according to the rules. Because the question of what is meant by “greater protection” is still unclear, the rules provide a mechanism by which parties may request a preemption determination by the Board with respect to a particular state’s escheat law. Due to the ambiguity surrounding state gift card law preemption, gift card issuers and sellers should continue to track or consult legal counsel regarding current state gift card laws and pending legislation in all states. 

Information

Check back for future posts on the details of the rules, including posts specific to loyalty, award or promotional gift cards, fee and expiration date restrictions, disclosure requirements, and preemption analysis for state gift cards laws.

Kelley Drye Partner David Ervin contributed to this post. Click here for a post from the Kelley Drye Advertising Group's "Ad Law Access Blog" for further information regarding the Federal Reserve gift card rules.

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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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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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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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Major provisions of a new law related to credit and gift cards take effect today. The Credit CARD Act, which was signed by President Obama in May 2009, marked the culmination of several legislative efforts to reform certain practices of card issuers. The law provisions related to credit cards, discussed in this Kelley Drye client advisory, are comprehensive and include new restrictions and requirements related to, among other things, rates, fees, billing and payment practices, disclosures and marketing, as well as additional rules specific to young consumers and college students.

The Act directed the Federal Reserve to develop implementation guidance and requirements, which were finalized on January 12, 2010. While most credit card issuers have been working for several months to comply with the Act, the Fed rules provide further detailed guidance. For example, the rules outline factors issuers should consider when determining a consumer’s ability to repay.

Notably, the Fed rules impact Regulation Z and, therefore, do not relate to debit card overdraft fees. Those fees fall under Regulation E, which is subject to a separate ongoing rulemaking process.

Nor do the portions of the CARD Act that take effect today relate to gift cards. Another Fed rulemaking to provide guidance related to gift cards is underway. Those Fed rules should be finalized soon, and together with the gift card provisions of the Act will take effect in August 2010. We will keep you posted on further developments.
 

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Recently, the United States Supreme Court, in its decision styled Andrew M. Cuomo v. The Clearing House Association, L.L.C., No. 08-453, reaffirmed that federal banking regulations do not pre-empt states from enforcing their own fair-lending laws against national banks.

This dispute arose following the New York State Attorney General’s attempt to investigate several banks’ residential real-estate lending practices in 2005. The Attorney General’s office had suspected discriminatory lending practices after reviewing reports that showed minority borrowers received a larger percentage of high-interest home loans than white borrowers. As part of that probe, the Attorney General sent letters to several national banks, in lieu of a subpoena, requesting that they provide certain non-public information regarding their mortgage lending practices. In response, the federal Office of the Comptroller of the Currency (“OCC,” the chartering authority and federal regulator of national banks) and the Clearing House Association (a banking trade group) sued to block the Attorney General’s investigation, claiming that an OCC regulation promulgated under the National Bank Act pre-empted any state regulation or enforcement against national banks.

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In order to avoid the substantial risks of class action litigation, many financial service providers – both traditional and non traditional – require that customer agreements contain an arbitration clause and a waiver of the customer’s right to bring a class action. However, recent court decisions and pending legislation suggest that certain types of these arbitration clauses may no longer be viable.

The overwhelming body of case law upholds the enforceability of such arbitration and class waiver provisions. See Adler v. Dell, Inc., No. 08-CV-13170, 2008 WL 5351042 (E.D. Mich. Dec. 18, 2008) (enforcing consumer arbitration provision with class waiver); Jenkins v. First Am. Cash Advance of Ga., LLC, 400 F.3d 868 (11th Cir. 2005) (class waiver in borrowers’ payday loan agreements did not render arbitration agreements unconscionable or unenforceable); and Snowden v. CheckPoint Check Cashing, 290 F.3d 631 (4th Cir. 2002) (rejecting argument that arbitration agreement was unenforceable as unconscionable due to class waiver).

However, recently some courts have taken issue with these provisions and deemed them unconscionable. A recent example of such a case is Homa v. American Express Co., No. 06-02985, 2009 WL 440912 (3rd Cir. Feb. 24, 2009).

In Homa, plaintiff brought a putative class action suit against American Express and its Centurion unit, alleging that they misrepresented the actual terms of the Blue Cash card rewards program and that defendants failed to award him the promised amount of cash back in violation of the New Jersey Consumer Fraud Act. However, the credit card member agreement that accompanied the Blue Cash card contained an arbitration and class waiver provision. Further, the agreement contained a choice-of-law provision indicating that any disputes arising out of the agreement would be governed by Utah law. Defendants argued that the plaintiff should be required to arbitrate his claims on an individual basis, because Utah law expressly allows arbitration and class waiver provisions in consumer credit agreements. On the other hand, the plaintiff argued that New Jersey law applied, because, as the application of Utah law would violate New Jersey’s public policy against certain class-arbitration waivers, New Jersey choice-of-law principles dictated that the agreement’s choice of Utah law was invalid. The district court sided with the defendants and dismissed plaintiff’s complaint.

The Third Circuit Court of Appeals reversed the trial court’s decision. In the opinion, the Third Circuit held that that the Federal Arbitration Act (“FAA”), 9 U.S.C. §§ 1-16, did not preclude the district court from applying New Jersey unconscionability principles to void the arbitration and class waiver clause, and therefore, plaintiff was entitled to pursue a class action against defendants in federal court in New Jersey. In so doing, the Court relied on the holding in a New Jersey state court decision styled Muhammad v. County Bank of Rehoboth Beach, Delaware, 912 A.2d 88 (N.J. 2006), that “‘[t]he public interest at stake in . . . consumers[’] [ability to effectively] pursue their statutory rights under [New Jersey’s] consumer protection laws’ constituted the ‘most important’ reason for holding a similar class-arbitration waiver unconscionable.” Further, the Third Circuit held that this interest “overrides” a defendant’s right to seek enforcement of a class-arbitration waiver in an agreement, particularly where the claims at issue are of such a low value as effectively to preclude relief if pursued individually. The case is now back in the district court.

Furthermore, this issue may be resolved by pending federal legislation that seeks to ban certain types of arbitration provisions. The Arbitration Fairness Act of 2009 would ban provisions requiring arbitration of (1) an employment, consumer, or franchise dispute, or (2) a dispute arising under any statute intended to protect civil rights. See H.R. 1020   The bill, which was referred to the House Judiciary Committtee on Feb. 12, 2009, currently has 43 co-sponsors, including that Committee Chairman Conyers (D-MI). A recent Legal Times report noted the plaintiffs bar's efforts to push the arbitration legislation on Capitol Hill. If enacted, the Act could start a wave of litigation in the consumer financial services sector.

The bottom line is that businesses should re-examine their customer agreement’s arbitration and class waiver provisions, paying particular attention to any choice of law provisions, and monitor these legal developments on a state-by-state basis. Homa tells us that the same arbitration and class waiver provision, while being upheld in one state, could be rejected in another.

Stay tuned for future posts analyzing cases decided in the wake of Homa and reporting on further developments with the Arbitration Fairness Act of 2009.
 

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In yet another reminder to credit card providers that they need to continue monitoring government attempts to legislate and regulate credit card products, services and policies, two pieces of credit card legislation have been introduced that could significantly impact your business. The legislation follows recent action by the Federal Reserve Board, which on December 18, 2008, approved final regulations regarding credit card and other consumer banking practices that will take full effect by July 1, 2010. Those final rules virtually mirror the Fed’s May 2008 draft rules (summarized in this Kelley Drye Advisory). 

First, on January 22, 2009, Rep. Maloney (D-NY) re- introduced the Credit Card Holders’ Bill of Rights (H.R. 627), a prior version of which passed the House in 2008 but did not make it through the Senate. Then, on February 11, 2009, Chairman of the Senate Banking Committee Chris Dodd (D-CT), re-introduced The Credit Card Accountability, Responsibility and Disclosure Act (S. 414). That legislation likewise had a prior life, though it did not make it out the Senate Banking Committee during the 110th Congress.

The apparent purpose of the legislation is to attempt to fill perceived gaps in and to expedite implementation of the changes offered by the Fed rules. As a representative from the American Bankers Association testified during a recent Senate hearing regarding Senator Dodd’s bill, the legislation goes beyond the Fed rules in certain respects. For example, among other things, that bill would prohibit card companies from charging customers for paying their bill by phone, it would attempt to control charges for late payments or other violations of the cardholder agreement, and it would prohibit the issuance of cards to consumers under 21 years of age. These and other measures would significantly restrict institutions’ abilities to manage their business and offer choices to consumers. Further, in attempting to bring about reform more quickly, both pieces of legislation would shorten the implementation period needed by financial institutions to alter their business practices and comply with the new rules.

With so much government and public attention on financial services and given the consumer protection focus of the Obama Administration and Democrats on the Hill, credit card legislation may pick up substantial support and momentum in the current Congress. Whether lawmakers can agree on how to move forward, and whether they can do so before the Federal Reserve rules take effect, remains to be seen. In any event, credit card providers should stay tuned!

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Which among the following businesses are potentially subject to consumer financial services laws, rules, and regulations?

A. a retail clothing chain
B. a bank or mortgage company
C. an internet retailer
D. a fast food franchisor
E. all of the above

If you answered E, “All of the above,” you are CORRECT. However, many companies do not realize their businesses are subject to consumer financial services laws. Consequently, their businesses may not be compliant and may be subject to litigation risk.

The focus of the Consumer Finance Law Blog is to keep – all on one site – traditional and non-traditional financial service providers subject to consumer financial services laws abreast of recent developments in:

• State consumer protection statutes and regulations
• State privacy statutes
• Privacy and consumer protection litigation
• Card Association Rules
• Equal Credit Opportunity Act
• Electronic Funds Transfer Act
• Fair Credit Reporting Act
• Fair Credit Transactions Act
• Fair Debt Collection Practices Act
• Payment Card Industry Data Security Standard
• State Money Transmitter Statutes
• State Retail Installment Sales Act
• State and Federal Unfair and Deceptive Trade Practices Acts
• TILA, RESPA, and related federal and state consumer disclosure and notice requirements
• Insurance coverage issues
• Legislation that may impact company compliance or create new litigation risk.

We welcome you and hope that you find our posts interesting, educational, and thought provoking. We also welcome your feedback and invite you to suggest topics or recent decisions of interest that you would like us to address.

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