Consumer Advertising Law Blog

No Cash? No Problem. Grab Your Phone and Charge It! Consumer Protections Included

Leave your ATM cards at home; forget the drive thru at the bank; heck, leave your whole wallet on the kitchen counter -- mobile banking is here and becoming all the rage. Well, maybe not all the rage just yet (like it is in Japan, but certainly, it is becoming easier, with the popularity of the I-Phone and similar devices with interactive capability.

For example, the office supply store, Staples, Inc. reported this month that more than one-fourth of small business owners report having a phone device capable of making mobile payments. About 24% use these devices to make purchases and 3% always do so. Those that do so shop on line frequently. In response to this trend, Staples has enhanced its mobile website.

Other press reports have noted that mobile banking is particularly popular with the young and the underbanked. Indeed, the market research firm Celent reported this month that the attraction of mobile banking lies in ease of access and portability. A lot of the underbanked may not have online access but do have a cell phone. As a result, prepaid card issuers, such as Green Dot are offering mobile account access and intend to upgrade their mobile device offerings.

Banks also are getting in the act, testing new technologies that will allow bank customers to access their accounts and make purchases through their smart phones.

In adopting new banking applications, however, it would be advisable for companies to understand consumers’ rights and the risks. Mobile payment applications are subject to the same banking rules as their technologically older counterparts. Thus, if a user links her phone to a credit card, the consumer protections afforded by federal law to credit cards would apply. These protections limit a consumer’s liability to $50 for unauthorized use (although many credit card issuers have a zero liability policy).

If a user links her phone to a debit card, the consumer protections afforded by federal law to debit cards would apply. These protections also limit a consumer liability for unauthorized use to $50 if the consumer notifies its institution of the unauthorized use within two business days. Otherwise, the liability can go as high as $500.

The protection afforded prepaid cards may differ, depending on the type of card. Payroll cards are given the same protection as debit cards, while other prepaid cards may not provide any protection against unauthorized use at all - they are the equivalent of cash and thus, if there is unauthorized use of the card, it is like your cash has been stolen.

A more insidious risk, however, is the risk that someone not just uses the phone for an unauthorized transaction, but actually hacks into the mobile applications or the merchant’s site, and access consumer account information - taking not just someone’s funds but also potentially their identity.

Consumers Union highlighted some of the these risks in a report issued on Tuesday. While the Consumers Union report focused on consumer risk, and called for possible changes in law, it would be wise for stores or other companies contemplating offering apps for mobile payments to consider data security and other risks, and plan accordingly. Users of mobile payments may want to carefully review the disclosures for the payment mechanism being linked to the phone to know what consumer protections apply to them.

- Beth DeSimone

FTC: Consumer Debt Dispute Resolution System Broken

As we’ve noted previously on the blog, both the FTC and state attorneys general are stepping up their scrutiny of debt collection firms in this slow economy. Continuing that trend, the FTC recently released a report on the nation’s system for resolving consumer debt disputes, which concludes that the existing mechanisms for adjudicating and arbitrating debt claims are badly in need of reform.

Reflecting concerns expressed during a series of public roundtable discussions with industry, consumer groups, and other stakeholders, the report highlights two primary problems identified by the FTC: (1) the high percentage of default judgments in consumer debt cases (according to the report, between 60 and 95%, depending on the jurisdiction) and (2) the fairness and transparency of arbitration proceedings. The report contains a number of recommendations for debt collectors, arbitration forums, states, and Congress. The report also indicates that the FTC will focus enforcement efforts on debt collectors who attempt to recover time-barred debt without disclosing to the consumer that the statute of limitations has run. Debt collectors also may not accept partial payment on time-barred debt without informing the consumer that this may toll the statute of limitations on the whole debt owed. The report makes clear that both of these practices run afoul of the federal Fair Debt Collection Practices Act.

The report also noted that the National Arbitration Forum (NAF), the leading arbitration forum for consumer debt disputes, recently settled a suit filed by the Minnesota Attorney General. The complaint had accused the NAF of holding itself out as a neutral forum when in fact it had financial ties to the debt collection industry. In the settlement, the NAF agreed to stop conducting consumer debt arbitrations. After the settlement, the American Arbitration Forum also ceased such arbitrations, and a number of large banks removed mandatory pre-dispute arbitration clauses from their credit card contracts. This chain of events led Commissioner Julie Brill to issue a concurring statement urging Congress to ban mandatory arbitration of consumer debt disputes “until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek.”

Some of the reforms advocated by the FTC and Commissioner Brill are actually already in the pipeline. The newly enacted financial regulatory reform legislation empowers the SEC and the new Consumer Financial Protection Bureau to limit mandatory arbitration provisions (see sections 921 and 1028), and several states have recently passed their own reforms. The report states that the FTC will continue to closely monitor consumer debt collection, but the choice of whether and how to implement the report’s recommendations is almost entirely out of the FTC’s hands. Those decisions rest largely with other federal agencies, Congress, state legislatures, arbitration forums, and industry, and only time will tell how these groups will respond. Hopefully whatever reforms are ultimately put in place will not raise the costs of legitimate debt collection practices, preventing collection and settlement firms from lowering interest rates and benefiting businesses and consumers. 

- Nancy Perkins and William Perdue

WEBINAR: Implications of the Consumer Financial Protection Bureau for Retailers and Other Nonbank Financial Services Providers

Does your company provide loans or some type of other financial service to the public? Have you been concerned that your products may be covered by the new Consumer Financial Protection Bureau (CFPB) contemplated by the financial reform legislation that is about to be passed by the Congress?

If so, you might want to tune into the event that our firm, Arnold & Porter LLP, is sponsoring on July 29, 2010, entitled, "Is This a Brave New World? Implications of the CFPB and the FTC for Nonbank Financial Services Providers".

This webinar will go over the proposed jurisdiction of the new CFPB, which is contemplated to be an independent bureau within the Federal Reserve. Importantly, the CFPB would be responsible for consumer protection over financial products and services offered by anyone (both banks and nonbanks) who offers to finance retail goods or services. While banks have been subject to comprehensive supervision for consumer compliance by their primary bank regulators for some time, nonbank entities have not. Thus, for those entities, the legislation will usher in a new supervisory regime that most likely will be different than that of the Federal Trade Commission (FTC), which now has jurisdiction over these entities

This event will highlight the FTC’s historical role over nonbank financial services providers, the expected changes for those entities that will be covered by the CFPB’s jurisdiction, and the anticipated cooperation between the FTC and the CFPB.

We are pleased to have at this event Joel Winston, the Associate Director of the Division of Financial Practices at the FTC’s Bureau of Consumer Protection. Also speaking are Beth DeSimone, Nancy Perkins, and Robert Clark, Arnold & Porter LLP attorneys who work in the consumer credit area.

The event will take place from 12:30 PM to 2:00 PM EDT on July 29, 2010. The event is being offered both in person at Arnold & Porter LLP's Washington DC office as well as via webinar. Lunch will be provided for those who come in person.

For a written analysis of this aspect of the legislation, click here.

UPDATE (8/3/2010): Click here for a link to audio and video recordings of the event.

Federal Reserve Limits Credit Card Fees in Final CARD Act Rules

On Tuesday, the Federal Reserve Board issued its final rules implementing the CARD Act. These rules, among other things, cover those portions of the CARD Act which require that any penalty fee or charge imposed in connection with a credit card agreement, including a late fee or a over-limit fee, be reasonable and proportional to the violation to which it relates.

Under these rules, a creditor cannot charge a cardholder more than $25 unless:

• One of the cardholder’s last six payment was late, in which case the fee can be up to $35; or
• The creditor can show that the costs it incurs as a result of late payments justify a higher fee.

These fee limits, which are described in the rule as a “safe harbor,” were not proposed in the initial rulemaking, and so came as somewhat of a surprise. Moreover, if these “safe harbor” fee limits are not used, the creditor must prove that the costs incurred as a result of the fee, such as costs of notifying customers of the late payment and resolving a delinquency, are proportional to the fee imposed. Higher loss rates and related costs (such as reserves) for particular violations cannot be included in these calculations. The cost analysis then must be updated annually.

In addition to these fee limits, the final rules stipulate that no late payment can be greater than a customer’s minimum payment. Thus, if a customer’s minimum payment is $20, the penalty cannot be more than $20 (despite the $25 fee limit described above). If a customer exceeds her or his credit limit by $5, the maximum fee that can be charged for that over-limit violation would be $5.

No inactivity fees can be charged to a customer if the customer does not continue to make purchases with the card. And only one fee can be charged per payment. Thus, if a cardholder is late, and also has an NSF, the creditor can only charge a late payment fee. A returned payment fee could not also be charged.

The rules also cover the CARD Act’s mandate that creditors must re-consider the APR charged on those credit card accounts where it previously increased a rate at least every six months for possible APR reductions. Creditors are required to both consider factors relating to the specific cardholder’s creditworthiness, as well as general market conditions.

These rules, which become effective on August 22, 2010, are the last of three rulemakings the Federal Reserve has made under the CARD Act. Earlier rulemakings dealt with credit and gift card disclosures. (See our previous blog posts here and here). These latest changes will almost certainly require yet another round of new disclosures and additional programming costs to implement. And the limits will almost certainly reduce issuer revenues further than previous rulemakings: the Federal Reserve noted in the preamble to the rules that late fees and over limit fees have been averaging about $39 - well more than the fee limits set in the rule.

Click here for a more extensive analysis of this development.

- Beth DeSimone

Tilting at Windmills: Is the “Unfair and Deceptive” Standard in the FTC Act Really “Unfair”?

On Wednesday, Senator Orrin Hatch (R-Utah)--the ranking minority member on the Senate’s antitrust subcommittee--voiced concern that the standard in Section 5 of the Federal Trade Commission Act for identifying “unfair or deceptive practices” is too vague. Senator Hatch voiced these concerns during a congressional hearing on antitrust enforcement where FTC Chairman Jon Leibowitz testified, detailing the agency’s recent work to promote competition and benefit consumers, such as ending “pay-for-delay” pharmaceutical agreements, preventing anticompetitive mergers, revising the guidelines that the FTC and the Justice Department use to assess horizontal mergers, and using its authority under Section 5 of the FTC Act to combat unfair methods of competition and protect consumers.

Senator Hatch may be tilting at windmills in his quest for a more definitive “unfair and deceptive practices” standard. While the area has been cited as a broad and relatively untested province of antitrust law according to The National Law Journal’s January report, the FTC has long used the authority to rein in unfair trade practices, particularly those that affect consumers. Indeed, the FTC recently exercised its Section 5 authority in challenges involving the likes of Intel Inc., Voice Touch Inc., Ticketmaster Entertainment Inc., and U-Haul International Inc. The FTC has also used this authority recently to rein in pay day loan practices, debt rehabilitation and mortgage foreclosure prevention programs and other practices in the consumer financial area. (For those Supreme Court history buffs we note that way back in 1935 the Supreme Court struck down an attempt by Congress to set up “fair” codes for business competition as unconstitutional because the term was too undefined. It noted with approval, however, the use of the term “unfair” in the FTC Act.)

Furthermore, the FTC has issued policy statements on what is deemed to constitute unfairness and deception, yet Chairman Leibowitz correctly acknowledged that the courts ultimately say what the law is. Chairman Leibowitz attempted to further allay Senator Hatch’s concerns by insisting that he “ha[d] yet to meet a company that has been surprised” by FTC action against conduct it deemed in violation of the FTC Act. Despite the lack of a clear standard, he seemed to suggest, companies were effectively on notice

We note that these standards also are expected to be employed by the proposed Bureau of Consumer Financial Protection under the pending financial reform bill. The bill, as currently written, authorizes the new Bureau to not only prevent a provider from committing or engaging in an “unfair or deceptive act or practice” in connection with any transaction with a consumer for a financial product or service, but also abusive acts or practices. The bill also sets forth what appears to be the current standard used by the FTC for finding an act unfair or deceptive, namely, that (A) the act or practices causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

The bill also articulates a standard for what constitutes “abusive” practices: in order to declare an act or practice abusive, the Bureau must find either that it “materially interferes with the ability of a consumer to understand” terms or conditions, or that it “takes unreasonable advantage” of consumers in specified ways.

Thus, it appear that despite Senator Hatch’s views, use of the “unfair and deceptive” standards to rein in what is perceived as egregious practices against consumers is here to stay.

- Beth DeSimone & Caroline DeCell

FTC Delays Enforcement of "Red Flags" Rule a Fourth Time

The FTC announced on Friday that it would, for the fourth time, delay enforcement of the “Red Flags” Rule.  The deadline--previously set as today, June 1--has been extended to December 31, 2010, in order to allow for further congressional consideration of pending legislation that would limit the scope of covered entities. 

The rule requires “creditors,” as defined in the Fair Credit Reporting Act, to develop identity theft prevention programs that recognize and respond to “red flags.”  The FTC has adopted the position that “creditors” include “professionals, such as lawyers or health care providers, who bill their clients after services are rendered.”  FTC Extended Enforcement Policy (see note 2).  Accordingly, and unexpectedly, the rule currently requires legal, health care, and accounting practices to develop identity theft prevention programs and subjects them to penalties in the event of noncompliance.  Previous enforcement delays responded in part to a lack of awareness on the part of these professions, heavily regulated by other agencies, that they might be subject to the “Red Flags” Rule.

Recently, the American Bar Association (ABA) successfully challenged the FTC’s characterization of lawyers as “creditors” in the US District Court of the District of Columbia, where Judge Reggie Walton held that Congress unambiguously did not intend to grant the FTC authority over attorneys pursuant to FACTA.  See American Bar Association v. FTC.  On appeal to the D.C. Court of Appeals, that decision will likely implicate separate lawsuits brought by the American Medical Association (AMA) and American Institute of Certified Public Accountants (AICPA) seeking to invalidate the FTC’s characterization of physicians and accountants, respectively, as “creditors” on similar grounds.

The House of Representatives has already passed legislation that would narrow the definition of “creditors” to exclude, among certain other businesses, legal, health care, and accounting practices with fewer than twenty employees (H.R. 3763). Similar legislation was recently introduced with bipartisan support in the Senate (S. 3416).  The legislation’s exclusion of small practices might, however, imply the inclusion of larger practices, thereby undermining the ABA, AMA, and AICPA claims. 

FTC Chairman Jon Leibowitz implores Congress to act quickly, complaining that, “as an agency we’re charged with enforcing the law, and endless extensions delay enforcement.”  In the meantime, though, the FTC might avoid such “endless extensions” by responding to initial indications from both courts and Congress that it has overextended application of the “Red Flags” Rule.

For more perspective on this development, click here for an interview conducted a few days before the FTC announcement by Bloomberg Law's legal analyst Spencer Mazyck with Arnold & Porter attorney, Nancy Perkins.

- Nancy Perkins and Caroline DeCell

Provisions In Proposed Financial Reform Legislation Will Alter The Preemption Landscape

Passage by the US Senate last week of the Restoring American Financial Stability Act of 2010 containing new standards for consumer protection sets the stage for a significant change in the standards for federal preemption of state law governing the offering of financial services to consumers. With limited exceptions for “inconsistent” state laws, the new federal consumer protection requirements would not preempt state law.

But at least as importantly for national banks and federal savings bank and their respective subsidiaries, both the House and Senate versions of this legislation would alter existing preemption standards by specifically outlining new “clarifying” standards for preemption of state law by the National Bank Act, and the Home Owners’ Loan Act. As is detailed in this advisory, these new standards would narrow the circumstances under which the NBA and HOLA could be deemed to preempt state law as applied to national banks, federal savings banks, and operating subsidiaries of those federally chartered banking institutions, thereby altering the regulatory and litigation landscape under which these institutions operate. If these new standards are included in the final legislation − which they almost certainly will − the circumstances under which national banks and federal savings banks may offer consumer products and services on a uniform, nationwide platform will be more limited and the costs of providing such services likely will increase. 

For national banks, the new standards will codify existing precedent (i.e., the standards that were articulated by Barnett Bank v. Nelson, 517 U.S. 25 (1996)), but significantly limit the possible interpretation and application of that precedent. For federal savings banks, the standards will be new to them, as federal savings banks have always operated pursuant to a broad federal mandate under HOLA and its implementing regulations “occupying the field” of regulation with respect to deposit-taking and lending activities. To adapt to these changes, federal savings banks as well as national banks will likely need to undertake a probing review of their policies and procedures in relation to state laws in the consumer area. In any event, regulatory and compliance costs will increase.

On the litigation front, all financial institutions subject to the legislation’s new consumer protection provisions, including but not limited to national banks and federal savings banks, likely will see an increase in plaintiffs’ activities and the advent of broader actions by state Attorneys General. Defending against these actions on grounds of federal preemption will be a new challenge and will require both a solid understanding of preexisting precedent and the analytical skill to demonstrate that the new tests for preemption can be met under these standards.

- Beth DeSimone and Nancy Perkins

FTC Privacy Form Wins ClearMark Award

As reported on our blog, last Thursday, the Center for Plain Language held its first ever awards ceremony for the best and worst use of plain language in government and business. One of the two federal government winners of the Center’s ClearMark award, which goes to best uses of plain language, was the Federal Trade Commission’s Model Privacy Form, linked here.

This form shows how a financial company may clearly disclose its use of consumer personal financial information. It presumably is designed to comply with the consumer privacy rules of the Gramm-Leach-Bliley Act.

We note that the form does not use the model language issued by the banking agencies regulations issued pursuant to the GLB Act. Under the current regulations, use of the model language, if accurate, is deemed compliance with the regulation. Thus, most financial companies use the model language (which is why so many privacy statements look and sound similar).

However, if financial companies could obtain some kind of informal clearance to use forms such as the FTC’s - and presumably the agencies would be open to that - we might see companies adopt these more easily to understand privacy and other forms.

- Beth DeSimone

Plain Language Consumer Financial Disclosures...Less Can Be More Clear

The Center for Plain Language, will hold its first ever awards ceremony on Thursday April 29 for the best and worst use of plain language in government and business. This nonprofit, which was reportedly started by a group of federal government employees who wanted the government to provide plain language forms to the public, is holding this ceremony at the most opportune time.

The last two years has seen a proliferation of new disclosure requirements being imposed on providers of financial products and services. Examples include:

• New mortgage loan disclosure requirements issued by the US Department of Housing and Urban Development (HUD) under the Real Estate Settlement Procedures Act (RESPA)
• New credit card and gift card disclosure requirements issued by the Federal Reserve under the CARD Act of 2009
• New overdraft program requirements on debit card and ATM transactions issued by the Federal Reserve under the Electronic Funds Transaction Act

Each of these new disclosure rules come with model forms. But some of these new rules and model forms are so complicated that pages of questions and answers have been released by the agencies to help providers set them up. (A good example is the new Good Faith Estimate form for mortgage loans, which is so complicated that HUD has had to even put on webinars to assist providers in filling out the form). 

The financial reform legislation being debated by Congress will undoubtedly engender more disclosure requirements. Indeed, one of the primary purposes of the proposed Consumer Financial Protection Bureau is to ensure that “consumers are provided with timely and understandable information to make responsible decisions about financial transactions.” [Senate Bill, Section 1021]. To that end, the Bill specifically gives the Bureau the authority to issue rules ensuring that “that the features of any consumer financial product or service both initially and over the term of the products or service are fully, accurately and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits and risks associated with the product or service.’ [Senate Bill, Section 1032]

The Center’s director, Annetta Cheek, is certainly aware that most consumer financial disclosures are hopelessly complicated. In interviews with the press publicizing the event, she used credit card disclosures and other financial disclosures as examples of the worst use of plain language (other press links can be found here and here). Hopefully, future efforts can be spent on not just the amount but also the quality of the disclosure. For some times, less rather than more can be better - and certainly clearer.

- Beth DeSimone

Federal Reserve Releases Consumer Friendly Information On New Gift Card Rules

Yesterday, the Federal Reserve Board released information on its web site that explain in simple terms its new gift card rules which go into effect on August 22, 2010. Called "What You Need to Know: New Rules for Gift Cards," this on-line information is the third in a series designed to explain Fed regulations to consumers in an easy-to-understand format. The first issuance explained the Federal Reserve’s new credit card rules that became effective in February, and the second explained the new overdraft rules that will apply to debit card and ATM transactions effective in June 2010.

The latest issuance describes the types of gift cards that are covered under the Federal Reserve’s new gift card rules and those cards that are not covered. The issuance also highlights key consumer protections contained in the new rules, including limits on expiration dates, clear fee disclosure requirements, and certain fee restrictions.

The guidance makes clear that even if a card is not covered by these new gift card rules, consumers should be clearly informed of any expiration dates and fees that would apply to that card.

The Federal Reserve’s explanation of its new rules is very simple and clear. Hopefully, the issuance can be more widely disseminated beyond the Federal Reserve’s official web site, because it can be of real benefit to consumers - especially those that may not have access to computers or that do not regularly read government websites.

- Beth DeSimone

Common Sense Privacy Legislation Passed Last Week

In the midst of the high stakes political rhetoric swirling around the US Senate last week concerning financial reform legislation, the US House of Representatives quietly passed some common sense legislation in the area of privacy disclosure. The legislation, aptly called the “Eliminate Privacy Notice Confusion Act,” (H.R. 3506) would allow financial institutions that do not disclose nonpublic personal customer information to third parties (other than to service or market the institution’s own accounts and certain other exceptions) and have not changed their privacy policies during the previous calendar year to not have to send an annual privacy disclosure notice to their entire customer base.

Currently, all financial institutions must send a copy of their privacy policy to their entire consumer customer base on an annual basis (whether or not the policy has changed during the previous year), or give a customer an opportunity to opt out prior to disclosing nonpublic personal information to a third party. Press reports indicate that many customers are confused by the annual requirement, as it looks like their financial institution has changed their policy when it has not. It also is costly for institutions to send the notices. This burden seems unnecessary if the privacy policy has not changed.

The legislation would allow those institutions that (i) do not provide nonpublic person information to third parties in a manner that would require an “opt-out” notice to a customer and (ii) have not changed their privacy policy in the last year to not have to send those annual notices.

The legislation does not affect the requirement that an institution provides its privacy notice when a customer opens an account, nor does it affect those institutions that are required to send out notices to customers.

This is common sense reform. The legislation has not been referred to the Senate. Hopefully, in the midst of the Senate’s financial reform debate, the Senate will be able to slip this provision into the bill it is considering. Otherwise, it may be some time before this small, but good, change is made.

- Beth DeSimone

It Takes a Village: States and Feds Combine to Combat Mortgage Relief Fraud

The financial crisis, like any other upheaval, creates opportunities for scams.  Last week, as the Obama Administration was issuing changes to its loan modification program, California Attorney General Jerry Brown announced a stipulated court judgment against principals of a loan modification scam.  As a result, two foreclosure assistance companies, U.S. Foreclosure Relief Corp. and H.E. Servicing, Inc. were shut down, and their principals prohibited from working in the real estate industry.  The judgment also gives $1 million in restitution for persons that paid up front fees for between $1800 and $2800 for non-existent loan-modifications services.

The suit is a result of a joint investigation among California, Missouri and the Federal Trade Commission that commenced in March 2009.  The investigation found that the companies aggressively telemarketed that they could reduce distressed homeowners' principal payments and lower interest rates for a substantial up-front payment.  The investigation also found that the companies falsely claimed that they had successfully negotiated thousands of loan modifications.  The FTC's enforcement division will be responsible for monitoring the companies' compliance with the judgment.

States that have been hardest hit by the mortgage crisis, such as California, not surprisingly, have also been the epicenter of many of these scams and have aggressively trying to stop these practices.  In August 2009 the California Attorney General's office ordered over 386 foreclosure assistance companies to register with the state and post up to a $100,000 bond in order to continue to conduct business.  At the same time it ordered 27 other companies to substantiate their marketing claims.  The Florida Attorney General has engaged in similar efforts.

The Federal government also has tried to combat these scams, even as it moves to expand opportunities for loan modifications.  The Obama administration's "Making Home Affordable" website prominently displays information on steps to prevent being taken in by foreclosure rescue scams.  

Nevertheless, these scams are likely to continue, as a growing number of homeowners have problems making their payments.  The Administration's latest initiative that gives some jobless homeowners a three month break on payments and lenders more incentives to reduce principal on certain delinquent loans, starting June 1, may only encourage more unscrupulous persons to try to take advantage of desperate debtors.  Thus, a more aggressive educational effort, coupled with more state and federal enforcement, may be necessary to deter possible future heartache.

- Beth Desimone

FED to Credit Card Issuers: Explain Your Penalties to Customers!

As many parents will attest, it is important to explain the reasons for a punishment as it is being given. Using this principle, the Federal Reserve Board (“Board”) has released its third and final installment of proposed rules implementing The Credit Card Accountability, Responsibility and Disclosure Act (CARD Act). The proposed rules would require credit card issuers to notify customers of the reasons for a penalty related to a credit card account. The proposed rules also require that any penalty be reasonable and proportionate to the associated infraction.

As previously discussed, the Board has been issuing regulations that implement the CARD Act’s goals of creating new standards and disclosure requirements for open-end consumer credit plans. The latest proposal addresses the final two CARD Act provisions that are to become effective on August 22, 2010.

In the latest proposal, the Board would allow creditors to impose penalties upon customers only if the penalties are reasonable and proportionate to the particular infraction. In accordance with this requirement, creditors would also have to disclose to customers the reasons for a penalty rate increase at least 45 days before imposing the penalty. The disclosure would need to include “a statement of no more than four principal reasons” for the penalty rate increase listed in the order of their importance. The Board limited the number of disclosed principal reasons to four to “avoid information overload” to the customer. The Board would allow the disclosed principal reasons to be general in scope, because it believes that customers “may find more detailed information confusing, and that, accordingly, the benefit to consumers of such detailed information would not outweigh the operational burden associated with providing additional detail.”

The Board would apply this disclosure requirement to rate increases due to a customer’s delinquency, default, extension of over-the-limit credit, decline in creditworthiness, or violation of specified terms within the account agreement. The Board would also require this disclosure for rate changes due to market conditions. Thus, if these rules become finalized as proposed, customers will know how their actions may have triggered rate increases on their cards. Because the CARD Act also requires creditors to review past rate increases every six months and reduce rates, if warranted, these pre-punishment explanations may encourage customers to modify their behavior to avoid rate increases.

- Beth DeSimone and Brian Larkin

US Senate Proposals for CFPA Home Agency Rival Humor of Web Video Clip

Consumer groups have been putting on a full court press lobbying for the proposed Consumer Financial Protection Agency or CFPA to be included in the financial reform legislation now pending before Congress. The CFPA was proposed by the Obama Administration last year as an independent agency that would be responsible for rulemaking and enforcement over the terms of consumer lending and deposit products. As part of this proposal, rulemaking authority over consumer credit and deposit law primarily housed at the Federal Reserve would be transferred to the new agency. The agency in turn would be responsible for ensuring that the terms and the marketing of consumer financial products would be fair and clear to consumers.

The financial reform bill that passed the U.S. House of Representatives included the CFPA, but also exempted from its enforcement authority whole classes of players, including banks with assets below $10 billion, retailers, car dealers, tax preparers, investment advisors and others.

The proposal to establish the CFPA has been one of the major, if not the major point of contention in the Senate Banking Committee, as it has struggled to release a comprehensive financial reform bill that has broad support. Hence the full court lobbying campaign by consumer groups. As expected, traditional lobbying techniques are being used, including support pieces in the op ed pages in the New York Times, Washington Post and Wall Street Journal by such spokespersons as Elizabeth Warren, the Harvard University professor who has been generally credited with the idea for the agency, and Barney Frank, the head of the Financial Services Committee of the U.S. House of Representatives and a strong supporter of the CFPA.

However, more nonconventional means also are being employed. For example, last week a very funny skit was posted on funny or die, that was directed by Ron Howard, using stars from SNL, including Dan Ackroyd, Jim Carrey and Dana Carvey as past Presidents appearing to President Obama in a dream, urging him to push for a CFPA. Each of the past Presidents, from Jimmy Carter to George Bush, takes on at least some responsibility for allowing the regulatory environment that led to the financial crisis of 2008. Viewers are urged to contact their legislators to push for the CPFA.

Funny or Die's Presidential Reunion from Will Ferrell

Almost as entertaining from a detached viewpoint, however, has been various proposals floated by the Senate Banking Committee staff with respect to the CFPA. Unlike the House, the Senate has proposed the CFPA to be a division within an agency of the federal government. Proposals have ranged from housing it within the Treasury Department to the FDIC. The latest proposal is to house the agency as a division within the Federal Reserve, which ironically is where most of the rulemaking for consumer products currently is housed, which rulemaking has been criticized for being too lenient.

As of today, the location and the ultimate structure of the CFPA is not resolved. There is sure to be more plot twists before it is over. However, the hope is that, regardless of the techniques used to promote it, or the various proposals to structure it, serious thought will continue to be given to how to provide consumers that use financial products and services with clear and complete information on those products and services, and protect consumers from unfair and deceptive practices while preserving the innovative and wide variety of services available to meet various consumer needs.

- Beth DeSimone

States Target Debt Collectors' Deceptive Practices

As the FTC heightens its scrutiny of debt collection and debt settlement practices at the federal level, states throughout the country are also cracking down on debt settlement and collection firms.

With debt collection practices topping the list of consumer complaints to state attorneys general (AGs) in 2008 (the last year for which data is available), many state attorneys general have stepped up their fraud and deceptive business practices enforcement actions against debt collection and settlement companies, bringing lawsuits under state laws designed to safeguard consumers. Many of the suits allege that the targeted debt settlement firms have misled consumers, capitalizing on these consumers’ precarious economic positions while doing little or nothing to improve their financial standing.

For example, in Illinois, Attorney General Lisa Madigan recently filed suit against seven debt settlement firms and six of their executives under the Illinois Consumer Fraud and Deceptive Practices Business Act, contending that they had engaged in deceptive marketing and imposed excessive consumer fees for their services; the complaints seek to enjoin the accused from practicing in the state and impose restitution and associated fines on the parties. 

Last week, the office of the New York Attorney General secured $275,000 in restitution for victims of a debt collection agency that employed scare tactics - including the impersonation of law enforcement officials - to intimidate consumers into settling their debts, despite the fact some of them owed no money at all. 

State legislatures have also begun to take action to tighten the regulatory grip on such companies.  Lawmakers in North Carolina, Maryland, Idaho, Colorado, New York, and Arkansas have recently enacted laws that restrict the permissible activities of debt collectors. Among the provisions currently under consideration in states such as Minnesota, New Jersey, and Massachusetts are laws that would bar agencies from collecting on long-delinquent debts by convincing consumers to make payments that effectively renew the default date, increase the amount of property that consumers can exempt from collection, and expand penalties against those found guilty of abusive collection practices.

In these difficult economic times, it is not surprising that states are making concerted efforts to delineate acceptable versus unacceptable consumer debt collection practices.  Indeed, the fraudulent and deceptive behaviors targeted in these actions and proposed laws appear to address egregious cases.  These actions hopefully will not also deter legitimate debt collection and debt settlement agencies and the benefits they provide to businesses and consumers. 

- Beth DeSimone and Lindsey Carson

New Credit Card Rules Spare Retailers from Extra Check-Out Counter Approval Burdens

Consumer retailers can breathe a sigh of relief. The Credit Card Accountability, Responsibility and Disclosure Act (“CARD Act”) will not be a major impediment to point-of-sale consumer credit approvals when its regulations become effective on February 22, 2010. 

The CARD Act was signed into law in May 2009 to create new standards and disclosure requirements for open-end consumer credit plans. The CARD Act amends the Truth in Lending Act (“TILA”), and most of the CARD Act’s provisions become effective on February 22, 2010 - at the same time as new regulations issued by the Federal Reserve Board (“Board”) implementing these new requirements. 

One provision of the CARD Act requires that a card issuer consider a consumer’s ability to pay before opening a consumer credit account, or increasing that consumer’s credit limit. In October 2009, the Federal Reserve Board (“Board”) proposed regulations that would have required that a consideration of a consumer’s ability to pay include a review of the consumer’s income or assets as well as current obligations. In undertaking that review, the Board proposed to permit a card issuer to rely on information provided by the consumer or information in a consumer’s credit report.  

These proposed requirements were of serious concern to retailers that issued point-of-sale consumer credit, such as through store brand credit cards that often are offered by retailers at the check-out counter because the requirements would have potentially required retailers to verify a consumer’s income or assets while the customer waited at the check-out counter. There was even concern that the customer would need to provide documentation such as tax forms or pay stubs. These proposals in many retailers view would have impeded or prevented a consumer from instantly obtaining even a small line of credit at the point-of-sale. The requirement could have also discouraged the consumer from completing the sale that led that consumer to the check-out counter - something retailers do not want to see happen. Fortunately for the retailers, the Board provided some clarity to its proposal when it finalized the CARD Act regulations in anticipation of the February 22, 2010 effective date. Under the Board’s final rule, card issuers must still review information about a consumer’s income, assets, or current obligations before issuing credit or increasing a credit limit. However, in undertaking this review, a card issuer may “consider information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer’s income or assets.” This clarification will allow retailers to continue to issue credit at the point-of-sale, without requiring the consumer to provide documentation of income, assets, or current obligations, as long as the retailer can verify a consumer’s ability to pay through a third party, such as a credit reporting agency. Assuming that checkout lanes have this capability, retailers can continue to offer credit cards at the point of sale without slowing those lines down -- welcome news to retailers and customers alike. 

 - Beth DeSimone and Brian Larkin

FTC Chairman Calls for Expanded Consumer Protection Powers over the Financial Services Industry

Last Thursday, February 4, 2010, at a hearing before the Senate Committee on Commerce, Science, and Transportation, Federal Trade Commission (FTC) Chairman Jon Leibowitz urged Congress to grant the FTC increased powers to safeguard consumers from unscrupulous providers of financial services and products. He also described his vision for the relationship between the FTC and the proposed Consumer Financial Protection Agency (CFPA). Given the continued controversy surrounding the establishment of the CFPA as an independent agency, granting the FTC enhanced powers in the consumer financial arena as Chairman Leibowitz suggests might satisfy some of the CFPA’s critics.  

Specifically Leibowitz identified three key measures that he contended would allow the FTC to better protect consumers facing the economic crisis: 

1. Streamlining the FTC’s rulemaking procedures, 
2. Giving the FTC the power to bring charges directly against aiders and abettors of financial fraud, and
3. Expanding the FTC’s remedial powers. 

Currently, the FTC Act requires the FTC to promulgate rules under the Magnuson-Moss Act, a process which has more burdensome procedural requirements than the Administrative Procedures Act (APA) notice and comment procedures used by most federal agencies. These heightened requirements for FTC rulemaking were originally imposed because of the FTC’s perceived broad jurisdiction over the economy and were designed to restrain the FTC’s scope of regulation. Referring to the Magnuson-Moss process as “medieval” and “draconian,” Leibowitz argued that the process prevents it from responding nimbly and effectively to new challenges and threats to consumers. He noted that other agencies with extensive authority over the economy, such as the Securities and Exchange Commission (SEC) and the Federal Reserve Board enact rules under the APA notice and comment process, and emphasized that, when it has been allowed to use the APA notice and comment process in specific circumstances, the FTC has been thorough and circumspect in its rulemaking activity. 

Leibowitz also encouraged Congress to “provide explicit authority for the FTC to take law enforcement action against those who provide substantial assistance to another while knowing, or consciously avoiding knowing, that the person is engaged in unfair or deceptive practices.” While the FTC has been able to bring charges against such aiders and abettors under alternative legal theories of culpability, Leibowitz maintained that direct and express authority would facilitate such actions.

Thirdly, Leibowitz urged Congress to expand the FTC’s law enforcement powers to include independent litigating authority as well as the ability to seek civil penalties for FTC Act violations. Under current law, the FTC must refer to the Department of Justice (DOJ) all cases in which it seeks civil penalties, and Leibowitz contended that the 45 days that the DOJ then has to decide whether to take the case or refer it back to the FTC creates undue delay in bringing actions against alleged violators of the FTC Act. In addition, while the FTC is currently empowered to seek civil penalties for violations of specific laws, Leibowitz asked Congress to grant it the authority to bring such suits for unfair and deceptive practices in general, arguing that such power would deter more effectively financial and other types of fraud. 

Finally, Leibowitz addressed the Obama Administration’s proposal to establish the CFPA. Under the provisions of the financial reform bill that passed the U.S. House of Representatives, H.R. 4173, the CFPA would have authority to regulate and in certain circumstances examine and enforce standards in the offering of financial products and services to consumers. Leibowitz stressed that while the FTC supports the increased focus on consumer protection which has, in his words been treated as the “orphaned stepchild” by the federal banking authorities, he noted that Congress will need to define carefully and explicitly the jurisdictional boundaries between the CFPA and the FTC in enforcing consumer protection in this area in order to prevent confusion and inefficiency. 

As the Senate takes up financial reform in the next few months, including increasing consumer protection, Leibowitz has made his intentions clear that he would like the FTC to be at the forefront of these efforts. The Senate may give him his wish, especially if the establishment of a separate CFPA is abandoned in favor of increased protection at the existing agencies. 

 - Beth DeSimone

Cuomo to Citi: Extend Free Checking Promo

Banks who have been contemplating imposing fees on “free” checking account to make up for the expected loss in income from the Federal Reserve’s new regulations, effective July 1, 2010 (that will restrict banks and thrifts from imposing overdraft fees on ATM or one-time debit card transactions without the opt-in consent of a consumer) may want to reconsider. (See an analysis of the overdraft fee rules here)

On February 1, 2010, New York Attorney General Andrew Cuomo announced that his office had entered into an agreement with Citibank, N.A. to delay its plan to impose monthly fees on checking accounts that had been advertised as “free” for one year. This agreement was the result of an investigation commenced by the New York Attorney General’s office in response to Citibank’s plan to impose a $9.50 monthly fee for the bank’s “EZ Checking” and “Access” deposit accounts, unless depositors maintained a $1,500 average balance in Citibank accounts. Until November 2,2009, Citibank advertised that these accounts were eligible for "free checking" with direct deposit or twice-monthly online bill payment. (click here for the agreement) According to the Attorney General’s press release, these “free checking” advertisements never disclosed that this service could be terminated at Citibank’s discretion.

The agreement delays the imposition of the monthly fee through December 31, 2011 for customers both in New York and throughout the United States who have EZ Checking and Access checking accounts which were opened between January 1, 2009 and November 5, 2009 . Per check fees are also waived for qualifying customers through January 31, 2011. The agreement also requires Citibank to provide additional notices to owners of these accounts starting in February 2010, and also to post notice on its website advising that fees will be imposed on these accounts commencing in January 2011 if customers do not meet the minimum balance requirements.

While the agreement only applies to Citibank, Attorney General Cuomo stated in announcing the settlement that “we will continue to scrutinize fees that banks are charging customers.” Other attorney generals also may commence their own investigations. In addition, accounts advertised as “free” or “totally free” or “forever free” could be at risk for false and deceptive advertising claims under either Section 5 of the Federal Trade Commission Act or state deceptive practices laws if the institution offering such products decides to change the terms of such accounts to impose monthly or other fees.(See also the FTC Guide concerning the use of the word, "free" here)

- Beth DeSimone

FHA Uses New Standards and Enforcement Tools to Avoid being Called “the Next Subprime”

The Federal Housing Administration (“FHA”) has announced two initiatives in the last two weeks to avoid being the cause of the next subprime crisis. These initiatives aim to punish lenders who may have fraudulently marketed and sold FHA-backed loans to consumers, while also reducing the riskiest consumers’ access to FHA-backed loans. The FHA is a government mortgage insurer, and a division of the Department of Housing and Urban Development (“HUD”). If a mortgage meets FHA’s criteria, then the agency will insure the lender of the mortgage against losses caused by a homeowner’s default.

After the collapse of the subprime mortgage market in 2007, the volume of FHA-backed mortgages increased exponentially, as it remains one of the few mortgage products that lenders could market as a low downpayment option. The potential for fraud and other losses on these high volume loans have prompted the FHA to announce new standards and seek enforcement measures.

The new policies create more stringent standards for consumers that are marketed FHA-backed loans. FHA will increase the up-front mortgage insurance premium from 1.75% to 2.25%, while also seeking legislative power to charge a higher annual mortgage insurance premium. FHA will also limit the availability of 3.5% downpayment mortgages to borrowers who are not considered subprime, with all other borrowers required to provide at least a 10% downpayment. Additionally, FHA will propose a reduction in allowable seller concessions from 6% to 3% to conform with industry standards.

The FHA also is aggressively investigating lenders and seeking greater enforcement powers against lenders suspected of fraud. This month, the FHA issued fifteen subpoenas to lenders with high loan failure rates. In announcing these subpoenas, the FHA stated that it will use the HUD’s Inspector General’s powers to thoroughly examine the loss claims of these companies and determine whether fraud or misrepresentations may have been involved. Additionally, this week, the FHA permanently withdrew FHA approval for three mortgage lenders, while also suspending a fourth.

HUD has stated that it will seek to complement FHA’s current efforts by lobbying to Congress for additional HUD enforcement powers aimed to further reduce the risk of fraud in the FHA mortgage process. For example, HUD will seek the power of indemnification from lenders who directly endorse FHA-backed mortgages in lieu of submitting initial paperwork on an applicant to HUD. Additionally, HUD will lobby for legislative authority to withdraw nationwide FHA-approval for lenders on the basis of their actions within one region.

While these initiatives have the potential to reduce the availability of mortgages marketed to borrowers by strengthening requirements now and aggressively using its enforcement powers to combat possible fraudulent actions, the FHA may be able to avoid the mistakes of the subprime market for both lenders and borrowers.

UPDATE: For a more extensive write-up on this issue, go here.

- Beth DeSimone and Brian Larkin

House Vote Pushes Consumer Financial Protection Agency One Step Closer to Reality

The U.S. House of Representatives on Friday afternoon passed its comprehensive financial regulatory reform legislation. The vote for H.R. 4173, called the “Wall Street Reform and Consumer Protection Act of 2009, was fairly close, 223-202, with twenty seven Democratic congressman voting against it along with all of the Republican members.

One of the central planks of the legislation is the creation of the Consumer Financial Protection Agency, or CFPA which will have rulemaking and regulatory authority over consumer financial products and services, including mortgages, home equity lines, credit and debit cards, pay day loans, installment loans, auto loans and leases and other consumer financial products. This plank has been controversial from the start, but it survived an amendment offered during the debate that would have substituted the CFPA for a 12 member council of regulators (similar to the FFIEC) that would have had rulemaking authority over financial products as well as safety and soundness concerns. That amendment failed by 223-208, with 33 Democrats voting for it.

Thus, as passed, the legislation requires that the rulemaking functions for the laws governing these products and services, which have been generally housed in the Federal Reserve, to be moved to this new agency. These laws would be supervised and enforced for nonbank companies by the CFPA, but the federal banking agencies would continue to have examination and enforcement authority over an estimated 98% of all financial institutions, as any bank or credit union that has less than $10 billion in assets are exempt from CFPA enforcement authority. The FTC also would lose rulemaking authority over nonbank institutions for unfair and deceptive practices but would retain back up enforcement authority.

The legislation mandates that the CFPA issue minimum standards for unfair and deceptive practices in the sale and provision of consumer financial products and services, as well as enhanced disclosures. The legislation also mandates that the agency impose certain fair dealing standards. However, there is no longer any requirement that the agency require lenders to offer “plain vanilla” products along with any nonstandard offerings. There also is no restrictions on interest rates, which are mostly governed by state law.

The final legislation also continues to allow national banks and federal savings banks to preempt certain state consumer protection laws, but only the state law "prevents, significantly interferes with, or materially interferes" the business of banking.” This is what is called the “Barnett Bank” standard, which is named after the 1996 Supreme Court case that articulated this standard.

The legislation now faces a somewhat uncertain outlook. Senator Chris Dodd (D-CT), head of the Senate Financial Services Committee, issued a discussion draft of his counterpart legislation in November, but Committee members on both the Democrat and Republican urged him to seek a more bi-partisan bill. Thus, the draft is currently being rewritten by different Committee groups, with Sen. Dodd and Sen. Richard Shelby (R.-AL) taking the lead on the CFPA title. The content of the revised draft, as well as timing, will become clearer in the coming weeks. However, if provisions creating a CFPA survive, its creation will be historic, as it will transfer major consumer responsibilities now divided among several federal agencies into one agency whose sole purpose will be consumer financial protection.

- Beth DeSimone & Brian Larkin