Consumer Advertising Law Blog

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

Disclosure-Patterned Wrapping Paper: Federal Reserve Proposes Gift Card Restrictions and Disclosures

Recently, this blog reported on federal district court cases that signaled the dangers of issuing potentially deceptive gift cards.

The Federal Reserve Board also has weighed in on gift cards with proposed rules that would restrict gift card fees and expiration dates, and require clear and conspicuous disclosures. The proposed rules implement section 401 of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act), which was enacted in May 2009. The Credit Card Act, amended the Electronic Funds Transfer Act (EFTA), by adding gift card restrictions and requiring the Federal Reserve Board to prescribe rules implementing the EFTA amendments. (See a related blog post, here)

The proposed rules prohibit gift card fees related to dormancy, inactivity, maintenance, card reloads, or balance inquiries unless the following three conditions are met:

1. There has been at least one year of inactivity on the card;
2. No more than one such fee is charged per month; and
3. The consumer is given clear and conspicuous disclosures about the fees

The proposed rules also prohibit gift card expiration dates that are less than five years after the date that the card is issued, or the date that funds were last loaded onto the card. The terms and conditions of any fees or expiration dates must be disclosed both prior to the purchase of the gift card, and on the surface of the actual gift card. Thus, if a gift card is sold within covered packaging, the disclosures must be noticeably written on the outside of the packaging. Gift card issuers are also required to provide a toll-free telephone number for consumers to obtain information on fees, card replacement, and underlying funds that may still be available on a gift card that has expired.

The proposed rules would only apply to gift certificates, store gift cards, and general-use prepaid cards that are marketed as gift cards. Several types of fund transfer devices are specifically excluded from the rules, including:

• Calling cards;
• Reloadable cards not marketed as gift cards;
• Cards not marketed to the general public (like a returned-item store credit, or a tax refund card from a tax preparation company); and
• Cards that solely grant admission to an event or venue.

Gift cards that are given to a consumer as part of a loyalty or awards program are also excluded from the proposed rules, but these cards are still required to provide disclosures related to fees, an expiration date, and a toll-free telephone service number.

The Federal Reserve Board is seeking comments on several aspects of the proposed rules until December 20, 2009, so there are opportunities for the rules to evolve before their final enactment. Yet it is clear that this holiday season will be the last for gift cards lacking disclosures.

UPDATE: A more extensive write-up on the proposed rules can be found here.

- Beth DeSimone and Brian Larkin

“No Surprises” Gift Cards

The holidays are approaching, and once again gift card season is upon us. Gift cards bring the joy of freedom for those who like to choose their own presents, but, for some financial institutions, these cards may bring legal troubles under unfair and deceptive practices laws. Last week, two United States District Court cases within the Third Circuit, Mwantembe v. TD Bank, and Mann v. TD Bank held that plaintiffs could pursue their state claims against banks that the sale of gift cards containing dormancy fees were deceptive and misleading practices. Plaintiffs in both cases were unable to successfully claim that the existence of gift card dormancy fees were illegal, but their claims that the banks’ marketing of these fees is deceptive survived.

Dormancy fees are charges against the value of a gift card, that accrue if a card is not used within a certain period of time. The court in Mwantembe analogized the payment of a dormancy fee to a shopper entering a store, paying for a product, and then exiting the store without the product. Plaintiffs in both cases were represented by the same counsel, and made very similar allegations with regard to the disclosure of dormancy fees. They believe that the following characteristics of gift cards related to advertising, term disclosure, fee conditions, and card design were all deceptive:

Advertising: Representing gift cards containing dormancy fees as “free” or having “no fees” in marketing materials and advertisements.

Term Disclosure: Packaging the terms of the gift cards related to dormancy fees in such a manner that a consumer will not be aware of the terms before purchasing the card, and an ultimate recipient of the gift card would not be aware of the terms either.

Fee Conditions: Conditioning dormancy fees on a length of time following the issue date of the card, but not disclosing the issue date on the gift card.

Card Design: Displaying a “Good Thru” date on the front of the gift card, while the dormancy fees could potentially diminish nearly all of the card’s value before the “Good Thru” date.

Although these gift card cases still remain in litigation, financial institutions should be very cautious about marketing gift cards with the above listed characteristics. Courts, as well as regulatory agencies, are trending towards closer scrutiny and enforcement of laws related to gift cards and unfair and deceptive practices. Banks should review their gift card terms and conditions for compliance not just with the disclosure laws, but also to make sure that the disclosures are clear and not deceptive. A stocking full of coal will be the least of a bank’s holiday worries if the marketing of its gift cards are ruled unfair and deceptive.

- Beth DeSimone and Brian Larkin

Dare to Compare (Credit Cards) at NAD

We Americans love our freebies, and the competition for “what’s in your wallet” has never been more intense, with issuing banks focusing on wooing our loyalty with cash back, airline miles and points to get other free stuff as much or more often than focusing on credit terms. (I must confess I have no idea how the rate I am getting for my Disney Rewards Card compares but I reach for my “Mickey card” most often as I sure love my earned discounts when I go to the World!) NAD was asked to review a campaign for the US Bank FlexPerks Visa card, that gave side by side comparisons to American Express’ SkyMiles card, with claims such as “more value vs. less,” earn points “fast,” and “double points,” and recommended modifications to certain of the claims.

Because the parties did not submit any consumer perception evidence, NAD put on its consumer hat and made its own determinations as to how a reasonable buyer would interpret the advertising claims. Any company bringing or defending an action at the NAD has to make the difficult choice as to whether to conduct consumer surveys, almost always an expensive proposition if done right and still subject to critique, or roll the dice with NAD’s interpretations.

NAD found that the “more value vs. less” claim stating that 20,000 FlexPoints are worth up to $400 of airline travel whereas 20,000 SkyMiles are only worth $200 worth of airline travel, misled consumers to believe that SkyMiles could only be redeemed with American Express’ “Pay with Miles” program. However, SkyMiles may be redeemed in a variety of ways and 20,000 SkyMiles have potential values greater than $200.00. US Bank did provide a parenthetical disclosure that the “more value for less” claim applies only to comparisons between US Bank’s “Awards Tickets” program and the American Express “Pay with Miles” program. However, NAD found the disclosure to be inadequate for two reasons: 1) many ordinary consumers would not understand these terms and the fact that the programs are qualitatively different, and 2) the parenthetical was too small and inconspicuous.

In addition, NAD found that there was no evidence that FlexPerks consumers earned points “fast” as compared to SkyMiles consumers. Further, FlexPerks consumers do not “always” earn “double rewards” on either gas, groceries or airline purchases because the “double rewards” program does not apply to such expenditures exceeding $12,000 per year; and SkyMiles redemptions are not subject to “blackout dates” because consumers could choose to redeem more miles to obtain tickets for certain flights that are unavailable at the general miles requirement level.

Cybercrime Mastermind: The Lord of the Rings?

On August 17, the US Attorney’s Office for the District of New Jersey charged Miami native Albert Gonzalez and two other men in what the Department of Justice is calling “the largest hacking and identity theft case ever prosecuted.” The indictment alleges that Gonzalez and some unnamed co-conspirators stole over 130 million debit and credit card numbers in a scheme to breach the data security systems of a number of companies, including Heartland Payment Systems, 7-Eleven, and Hannaford Brothers. Gonzalez also is separately facing trial in the District of Massachusetts for alleged his role in the much-publicized “TJX” data breach.

The Gonzalez case should serve as a cautionary tale about an alarming trend in the ever-increasing size of data breaches and sophisticated identity theft schemes.  As recently as September 2004, for example, the US Attorney’s Office for the Southern District of New York announced the guilty plea of Philip Cummings to charges relating to an identity theft scheme that was, at the time, hailed as the “largest identity theft case in [the] nation’s history.”  Cummings and his accomplices were charged with unlawfully stealing the credit reports of more than 30,000 people. (Full disclosure: one of the authors of this post, Marcus Asner, led the Cummings prosecution while serving as an AUSA in the SDNY.)  Subsequently, in February 2005, ChoicePoint announced the theft of data pertaining to 145,000 individual victims, and, in August 2008, DOJ announced the TJX data breach that involved the theft of 40 million debit and credit card numbers. Then-Attorney General Mukasey called the TJX case the single largest and most complex identity theft case ever charged in this country.

Proposed Consumer Financial Protection Agency: Taking Over from the FTC and a Whole Lot More

Several weeks ago, on June 17, 2009, the Obama Administration unveiled details of its proposal to reform financial regulation. The proposal, which has been highly publicized, recommends that Congress and regulatory agencies adopt a comprehensive series of changes that would increase the role of the federal government in almost every aspect of the financial services industry. For example, if adopted as proposed, the proposal would:

• Create several new federal agencies, offices, and councils, including a new Consumer Financial Protection Agency (CFPA), dedicated to policing consumer financial products and services
• Install the Federal Reserve as an overarching regulator for any type of financial firm identified as being systemically significant, giving it authority over certain entities that historically have been subjected to little or no oversight
• Impose heightened consolidated supervisory standards, including capital, liquidity, and prudential requirements, on all large interconnected financial firms
• Drastically scale back the preemption powers of federally chartered financial institutions
• Regulate the markets for over-the-counter (OTC) derivatives and impose requirements on the securitization of debt
• Require Securities and Exchange Commission (SEC) registration of advisers to hedge funds, venture capital funds, and other private investment funds

The first part of the proposal to be fleshed out was the proposed new CFPA through the release by the Administration on June 30 of proposed legislation to establish the agency. The CFPA is designed solely to regulate the offering of consumer financial products and services (except as to instruments regulated by the SEC or CFTC). Its proposed authority is very broad, with a proposed mandate to promulgate, interpret and enforce rules implementing all existing federal consumer financial services and fair lending laws. More importantly, its authority would extend not only to banks, thrifts and credit unions, but also to mortgage lenders, title insurers, money service businesses, marketers and issuers of prepaid cards or stored value, consumer reporting agencies, debt collectors, certain lessors, certain investment advisors, and those that engage in financial data processing. To do that, the proposed legislation transfers all of the authority over these products and services from the federal bank regulatory agencies and the FTC to the CFPA. While the FTC would retain some back up authority (as would the bank regulators) this will be a substantial change in the regulatory landscape.

FDIC Cranking Up the Consumer Credit Crack Down on Unfair and Deceptive Practices

The FDIC has stepped up its enforcement efforts of state-chartered institutions alleged to be engaged in unfair and deceptive practices in connection with credit card solicitations, recently announcing the issuance of two cease and desist orders - one against American Express Centurion Bank and the other against Advanta Bank Corp.

The order issued against American Express Centurion Bank alleged that the bank failed to provide timely notices to card-holders that their credit lines were being reduced at the same time that the bank sent the card holders convenience checks (the press release can be found here). Consequently, when consumers tried to use the checks, believing they had credit limit room, they were dishonored, resulting in the consumers incurring bounced check fees, which the FDIC alleged was an unfair practice under Section 5 of the FTC Act. The bank agreed to make restitution of $160 per dishonored check, or an aggregate of approximately $3 million, as well as to implement new procedures for reviewing credit limits and notifying consumers of changes to their limit. The bank also agreed to implement procedures whereby a customer could obtain preauthorization to use a convenience check for a specified dollar amount for a specified time period. In addition, the bank was ordered to pay a civil money penalty of $250,000.

The order issued against Advanta Bank Corp. (which ceased issuing cards in May 2009) alleged that the bank marketed a cash back reward feature on its business credit card accounts (the press release can be found here). Due to the tiered structure of the cash back payments, however, the FDIC alleged that the advertised percentage cash back was not available for all purchases, and indeed, the agency alleged that it was effectively impossible to earn the stated percentage of cash back reward payments. The FDIC thus concluded that the Bank's solicitations were likely to mislead a reasonable customer and that the representations were material and that therefore, the Bank engaged in a pattern of deceptive acts or practices in violation of Section 5 of the FTC Act.

Gift Cards Given Gobs of Granular Guidance

The new Credit Card law that was signed into law by President Obama on Friday, May 22, 2009 (called the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 or the “CARD Act”), contains several new restrictions on merchant gift cards, gift certificates and general use prepaid cards, issued by banks, that are marketed like gift cards (“gift card”.).

First, dormancy fees, inactivity charges or service fees may not be charged on these gift cards, unless

• There has been no activity on the card in the 12-month period ending on the date on which the charge or fee is imposed;
• No more than one fee may be charged in any given month; and
• The card clearly and conspicuously discloses the following items:(i) that a dormancy fee, inactivity charge or fee, or service fee may be charged; (ii) the amount of the fee or charge; (iii) how often that fee or charge will be assessed; and (iv) that this fee or charge may be assessed for inactivity. The issuer or vendor of the certificate or card also must inform the purchaser of the card of the charge or fee before the certificate or card is purchased, regardless of whether the certificate or card is purchased in person, over the Internet, or by telephone.

Second, the new law prohibits gift cards from having an expiration date earlier than 5 years after the date on which card funds were last loaded to the general-use prepaid card. State laws that have more restrictive rules are not preempted.

These restrictions, which go into effect in August 2010, will not apply to general prepaid cards, issued by banks, that are reloadable and are not marketed or labeled as a gift card or gift certificate. They also will not apply to cards used solely for telephone services, loyalty, award or promotional gift cards, gift certificates issued in paper form only, gift cards or certificates only redeemable for concerts or events, and cards not marketed to the general public.

There will be some interesting interpretive questions arising from these provisions, including the type of prepaid cards that are covered, and how a retailer will be able to advise the purchaser of the fees that will be imposed without being subject to some kind of liability. It will be up to the Federal Reserve, which is required to issue regulations under these provisions, to provide this and other guidance.

- Beth DeSimone

Popular Card Legislation Charging Toward Passage

The US Senate is poised this week to debate legislation restricting certain credit card practices. The bill, which is very similar to regulations issued by the Federal Reserve Board last year that are scheduled to go into effect in June 2010, would, among other things, restrict when card issuers could raise interest rates on cards, mandate the order in which issuers may apply payments to different interest rates, and ban double-cycle billing and universal default. A companion bill has already passed the US House of Representatives on April 30, 2009.

The legislative push for this bill is being driven in part by the Obama administration, which has been focusing on credit card reform in the past two weeks. And the bill does differ from the Federal Reserve regulations in certain respects by imposing additional restrictions on issuers increasing interest rates in the event of late payments, requiring customer consent before an issuer could charge an over-limit fee, and restricting access to credit cards by college students. The bill also contains restrictions on gift cards, gift certificates and more general purpose gift cards. Furthermore, the Senate bill, unlike the House bill, requires issuers to comply with these restrictions sooner than the Federal Reserve’s June 30, 2010 effective date.

Given the crowded legislative calendar this year, however, it is curious that Congress and the Administration is spending meaningful and precious time on issues that to a large extent have already been handled by regulation. We believe it is an effort to support the consumer in the face of the large and continuing financial support to the banking industry. Regardless, given the momentum the bills appear to be having, financial institutions, retailers, and other who issue gift cards or certificates should be paying attention to these developments and potential earlier implementation dates, and not assume that either the House bill (which more closely mirrors the Federal Reserve rules) will prevail or these provisions will otherwise be diluted. Non-card issuers also may be advised to pay attention to this legislation, as it may auger how other initiatives (such as mortgage loan reform) may be implemented that will affect a broader range of institutions than this bill.

- Beth DeSimone

Acting BCP Director Looks at What Lies Ahead in Wake of the Economic Crisis

In remarks made during a Friday Breakfast Meeting at the ABA Spring Meeting, Acting Director of the Bureau of Consumer Protection (BCP) Eileen Harrington emphasized the role that the FTC will play in the government’s responses to the financial crisis.  Section 626 of the Omnibus Appropriations Act of 2009 gives the FTC broad rulemaking authority with respect to mortgages.  Relying on the FTC’s expertise in protecting consumers of financial services, Ms. Harrington said that the FTC will consider new rules protecting consumers from fraudulent and unfair loan modification services, loan rescue and foreclosure abatement services, loan servicing practices, and loan collection and foreclosure practices.  She described this as a “target rich environment.”  Consistent with its jurisdiction, the FTC will focus on consumer protection and will work closely with those federal agencies regulating financial institutions.  This rulemaking should begin within the next three months.

BCP will also focus on promulgating rules under Section 13407 of the American Recovery and Reinvestment Act of 2009 which gives the FTC rulemaking authority to establish notification requirements for electronic health records vendors and other non-HIPAA covered entities if the security of electronic health records is breached.  

Ms. Harrington indicated that the FTC will increase its focus on fair credit reporting.  The FTC has recently launched a viral marketing campaign to eliminate consumer confusion about their right to obtain free credit reports through AnnualCreditReport.com.  The first videos in this campaign are spoofs of the catchy FreeCreditReport.com ads and are designed to educate consumers that the only place to receive a truly free credit report is through AnnualCreditReport.com.  In addition, the FTC will renew its focus on accurate credit reporting.

Although privacy and data security has been a primary area of activity for the FTC, taking a cue from Chairman Liebowitz, Ms. Harrington indicated that the FTC may expand its focus to include practices such as the collection of data on-line for purposes other than advertising.  Furthermore, broader privacy legislation may be introduced in the near future, and the FTC will act as a thought leader as any such legislation develops.

Although much of her remarks discussed what lies ahead for BCP, Ms. Harrington also talked about continuity of the BCP’s enforcement priorities and of BCP management and personnel.  She highlighted national advertising, both self-regulation and enforcement, food marketing to children, consumer credit statute enforcement, and order enforcement as continuing priorities for BCP.

Independent Mortgage Lenders & Brokers: Get Ready, the FTC is Coming

The new Chairman of the Federal Trade Commission - Jon Leibowitz - announced late last week that the agency would use new authority granted to it in the recently passed budget law to prohibit certain lending practices engaged in by mortgages brokers and lenders (announcement here).

In the past, the FTC could only bring an action against a specific mortgage lender or broker alleging unfair and deceptive practices under the Federal Trade Commission Act. The new law for the first time allows the agency to instead issue regulations setting forth what is a permissible lending practice and would be considered an unfair and descriptive practice. The FTC could then take action against specific lenders for violating the regulations, and asses penalties for violations. The regulations also are expected to provide for restitution to consumers harmed by deceptive practices.

Mr. Leibowitz said that the new rules would be issued by the end of the year. Since the FTC currently only has power over lending companies not owned by banks, any new rules would apply to mortgage lenders and brokers not affiliated with financial institutions.

The lack of regulations over independent mortgage brokers and lenders has been seen as one of the causes of the subprime mortgage crises. Indeed, Mr. Leibowitz noted that the rules the FTC will be issuing are needed because “a lot of the advertising is clearly, facially deceptive” and “a lot of mortgage holders have been deceived” about what they must pay, he said. He also noted that while abusive and deceptive lending is not the only reason for the current foreclosure issues, “ it is one of the reasons we are in this mess.” We expect therefore to see pretty tough rules proposed, as well as a push to have whatever the FTC proposes also extended to bank-owned lenders.

While Chairman Leibowitz looks forward to expanding the FTC’s bag of tricks to combat deceptive practices in the mortgage industry, to date the agency has not been hamstrung. In recent testimony before Congress, Acting Director of the Bureau of Consumer Protection Eileen Harrington reports on behalf of the Commission that in the last decade the FTC has brought 26 actions involving the mortgage lending industry and collected nearly $345 million in consumer redress.

- Beth DeSimone

Federal Bank Regulators Adopt New Rules Curtailing Unfair and Deceptive Credit Card Practices and Modifying Disclosure Requirements

On December 18, 2008, the Federal Reserve Board, the Office of Thrift Supervision, and the National Credit Union Administration, following consultation with the OCC, FDIC, and the FTC, issued final rules prohibiting financial institutions from engaging in certain activities in connection with consumer credit card accounts and modifying disclosure requirements related to open-end credit plans and overdraft services. The final rules are available here on the Federal Reserve’s website. Citing concerns over abusive credit practices and a lack of consumer understanding and choice, the Agencies in the final rules declared various credit card lending practices “unfair and deceptive” under section 5(a) of the Federal Trade Commission Act.

The final rules reflect the increased regulatory scrutiny of consumer credit terms - scrutiny that has only intensified in the wake of the sub-prime mortgage crisis. The final rules also illustrate the Agencies’ willingness to take a more active and aggressive approach toward consumer protection - a trend that will only continue next year with a Democratic administration. Unlike previous rulemakings, which have focused on improving disclosure, the final rules impose substantive credit terms, including prohibiting certain lending activities outright, and significantly limit the fees that may be charged in connection with the extension of consumer credit.

The final rules prohibit certain allegedly unfair or deceptive practices by those institutions in connection with credit card accounts. Key provisions of these amendments to Regulation AA, effective July 1, 2010, include:

• A ban on treating a payment as late unless the consumer has been given a “reasonable” amount of time to make the payment (with a safe harbor if statements are mailed or delivered at least 21 days prior to the due date).
• A provision requiring specific payment allocation methods, reversing the current industry practice where payments are first allocated to balances with the lowest APR.
• A prohibition on raising interest rates on outstanding balances, except under certain conditions, such as when a promotional rate has expired or when the cardholder’s payment is delinquent.
• A ban on double-cycle billing.
• A limitation on fees/security deposits charged to the account for the issuance of credit.

The final rules also amend the credit card rules under Regulation Z to simplify certain of the disclosures that consumers receive in connection with credit card accounts and other revolving credit plans (other than home-equity lines of credit). These amendments, effective July 1, 2010, contain format and content changes to application and solicitation disclosures, account opening disclosures, and disclosures on periodic statements. They also expand the circumstances under which a consumer must receive written notice of changes to account terms and limit the instances in which advertisements can refer to a rate as “fixed.”

Finally, the final rules amend the regulations implementing the Truth in Savings Act to address depository institutions’ disclosure practices related to overdrafts on deposit accounts. These amendments, effective January 1, 2010, require disclosure of aggregate overdraft fees for returned items for both the statement period and for the year-to-date. They also require institutions that provide account balance information through an automated system, such as via ATM, to provide a balance that does not include additional funds that may be available to cover overdrafts.

The regulatory and financial implications of the final rules are substantial. Although the Final Rules are not effective until the beginning and middle of 2010, financial institutions will be soon reviewing their current marketing, disclosure, and billing practices, and making any necessary or appropriate modifications to ensure compliance by the effective date. These rules also may be supplemented by additional requirements if Congress introduces additional legislation in this area during this legislative session. For further information, go here.

- Beth DeSimone

A Posting for the Season - Retailers and Gift Cards

Consumers, though worried about the bankruptcy of large retailers, still say they will make gift cards their top gift choice this Christmas.  In light of that fact, we offer this timely holiday reminder that businesses offering gift cards need to be familiar with the federal and state laws and regulations governing the terms of the gift cards they sell and the disclosures that they must make to consumers.  Of particular concern to regulators are expiration dates and fees, such as dormancy, maintenance, inactivity, monthly, and balance inquiry fees.  Sellers should make sure that the terms of their gift cards are clear to consumers before they buy, and also are clear to those who will be receiving and redeeming the cards.

In In re Kmart Corp., after 24 consecutive months of non-use, Kmart deducted a $2.10 per month “dormancy fee” from its gift cards for each of those 24 months.  This frequently resulted in gift card values being reduced to zero or a minimal amount.  The FTC alleged that Kmart engaged in unfair and deceptive practices in violation of section 5 of the FTC Act because the fee was disclosed in small print on the back of the card, the disclosure was obscured because the cards were attached to cardstock for sale, the language used was not understandable, and consumers purchasing gift cards on-line were not informed of the dormancy fee.  The resulting consent order offers a possible roadmap for businesses to use for their own gift cards.  It required Kmart to do the following:

• At the point of sale, prior to purchase, clearly and prominently disclose all material terms and conditions of any expiration date or fee.
• On the front of each card, clearly and prominently disclose the existence of any expiration date or fee.

Many states have enacted consumer protection laws that regulate gift card terms and required disclosures.  These laws often prohibit expiration dates and fees, or place severe restrictions on such terms.  A brief summary of some features of state laws can be found here.

Gift cards issued by banks, which are branded with the VISA or MasterCard logo, generally are not subject to state law limitations on gift cards, but still must comply with the federal regulators’ guidance on gift cards.  Both the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) have issued guidance in this area, which mandates prominent disclosures of fees and expiration dates.  The OCC guidance can be found here, and the OTS guidance can be found here.  Because the bank regulators are increasing their focus on unfair and deceptive practices, bank gift card issuers also should review their disclosures in light of FTC cases brought under section 5 of the FTC Act, such as the Kmart case.

- Beth DeSimone and Matthew Shultz