Consumer Finance Law Blog : Washington D.C. Consumer Finance Lawyer & Attorney : Kelley Drye & Warren Law Firm : Financial Privacy & Security

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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