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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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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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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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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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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Last week , the Federal Trade Commission, jointly with other federal agencies that regulate financial institutions, released "frequently asked questions" designed to provide additional assistance to companies required to comply with new identity theft rules pursuant to the Fair and Accurate Credit Transactions Act ("FACTA") . 

Those rules were issued in November 2007. Under the regulations, financial institutions are required to develop and implement written programs to detect and respond to possible identity theft as indicated by certain "red flags." These newly required programs were to be in place on or before November 1, 2008.

The FAQs are the latest step in a number of efforts by the FTC and others to assist companies in complying with the new FACTA rules. For instance, in July 2008, the FTC launched an outreach program to explain the rules in greater detail, to clarify the types of institutions to which the rules apply, and to offer guidance as to how these institutions can comply. That outreach effort included an alert providing information relating to definitions and terms used in the rules, including the definitions of “financial institution,” “creditor,” “transaction account,” and “covered account.” In addition, the alert addressed five categories of “red flag” activities.

Financial institutions should continue to monitor for guidance from the federal agencies, and/or consult with counsel, regarding their compliance with the new FACTA rules.

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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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