Consumer Financial Services Alert - February 10, 2009

The FRB, OTS and NCUA published a joint final rule intended to prohibit unfair and deceptive credit card practices. Among other things, the rule prohibits double-cycle billing, bans raising interest rates on pre-existing balances, requires that consumers receive a reasonable amount of time to make payments, prohibits the use of payment allocation methods that unfairly maximize interest charges, and bans deceptive credit offers.

In related news, the FRB published a final rule amending Regulation Z to revise the disclosures consumers receive with credit card accounts and other revolving credit plans.

Both rules are effective July 1, 2010. Click here for the unfair and deceptive credit card practices rule and here for the Regulation Z rule.

The FRB published a final rule amending Regulation DD to require all banks to disclose aggregate overdraft fees on periodic statements, not just banks that promote the payment of overdrafts. The rule includes format requirements aimed at making the aggregate fee disclosures more effective and noticeable to consumers. The rule also requires banks that provide account balance information through an automated system to disclose the amount of funds available for the consumer’s immediate use or withdrawal, without including additional funds the bank may provide to cover overdrafts. The rule is effective on January 1, 2010. Click here for the rule.

The FRB issued a proposed Regulation E rule which would limit the ability of a bank to assess an overdraft fee for paying ATM withdrawals and one-time debit card transactions that overdraw a consumer’s account, unless the consumer is given notice of the right to opt out of the payment of such overdrafts, and the consumer does not opt out. As an alternative approach, the proposal would limit the ability of a bank to assess an overdraft fee for paying ATM withdrawals and one-time debit card transactions that overdraw a consumer’s account, unless the consumer affirmatively consents, or opts in, to the bank’s payment of overdrafts for these transactions. In addition, the proposal would prohibit banks from assessing an overdraft fee if the overdraft would not have occurred but for a debit hold placed on funds in the consumer’s account that exceeds the actual amount of the transaction. Comments must be received on or before March 30, 2009. Click here for the proposal.

A California appellate court dismissed a class action lawsuit alleging that California’s and Arizona’s “holiday statutes” prohibited Bank of America from charging late fees or interest for credit card payments posted the first business day after a holiday due date. Holiday statutes provide that if a legal or contractual act is required to be performed on a holiday, the act may be performed on the next business day without any adverse consequences. The court held that holiday statutes are preempted by OCC regulations which allow national banks to set the schedule for repayment on non-real estate loans and set the payment dates without regard to state law limitations. The court reasoned that by changing when a payment is due, holiday statutes affect the schedule for repayment of principal and interest and affect the payments due set by a national bank. Click here for Miller v. Bank of America, No. C057896 (Cal. Ct. App. Jan. 28, 2009).

The Supreme Court of California unanimously held that plaintiffs only have standing to sue under the California Consumer Legal Remedies Act if they allege actual damages resulting from violations of the statute. Plaintiffs sued a cellular phone company, claiming that its contract contained unconscionable terms, including an arbitration provision and waiver of the right to bring a class action suit. Although the phone company had not sought to enforce any of the alleged unconscionable terms against plaintiffs, they contended that the “very presence of unconscionable terms” constituted damage under the CLRA. The Court rejected plaintiffs’ theory, holding that “not only must a consumer be exposed to an unlawful practice, but some kind of damage must result.” The Court reasoned that plaintiffs’ legal costs did not result from the alleged CLRA violations, because there was no dispute or threatened dispute between the parties that implicated the unconscionable contract terms. Because plaintiffs failed to satisfy the statute’s “low but nonetheless palpable threshold of damages,” they had no standing to sue under the CLRA. Click here for Pamela Meyer, et al. v. Sprint Spectrum L.P., No. S153846 (Cal. Supreme Ct. Jan. 29, 2009).

A Massachusetts bankruptcy judge recently reversed on reconsideration one of a series of controversial decisions by the Massachusetts bankruptcy courts holding that creditors lack standing to seek relief from stay or to foreclose. In an earlier decision, the court held that the creditor had failed to prove its ownership of the debtor’s mortgage loan, dismissed the claim for lack of standing, and issued an order to show cause why the creditor and its counsel should not be sanctioned “for filing and prosecuting its Motion for Relief from the Automatic Stay without competent evidence that  [the creditor] had the requisite standing under applicable law as the holder of the mortgage.” Following a further hearing and the submission of factual affidavits and documentary evidence, including evidence of the securitization and transfer of the loan, the same court held that the creditor’s “pleadings filed in support of its Motion for Reconsideration and in conjunction with its amended proof of claim . . . cured the defects found by the court [in its initial decision] and [the creditor] has standing to assert its claim in the bankruptcy case.” Goodwin Procter partner Rich Oetheimer represented the creditor at the successful hearing. Click here for In re Hayes, No. 07-13967 (Bankr. D. Mass. Jan 29, 2009); click here for the related order.

The FDIC published the results of its survey on banks’ efforts to serve unbanked and underbanked individuals and families in their market areas. The survey concludes that the majority of banks reach out in various ways to the unbanked and underbanked, but more needs to be done to make them long-term customers. For example, the survey found that the majority of banks – 63% – offer basic financial education materials, but fewer participate in the types of outreach efforts that are viewed by the industry as most effective to attract and maintain the unbanked and underbanked as long-term customers, such as offering deposit, payment, credit and electronically based products that address the unique needs of this segment of the market. Click here for the survey.

The FDIC issued a final rule on processing deposit accounts in the event of a bank failure. The rule establishes the FDIC's practices for determining, for deposit insurance and receivership purposes, deposit and other account balances at failed banks. Effective July 1, 2009, the rule requires banks to inform their sweep account customers of the nature of their swept funds and how those funds would be treated if the bank should fail. Excluded from the requirement are sweep arrangements where funds are moved between deposit accounts and the deposit insurance available to the customer is unchanged. The preamble to the rule provides examples of commonly used sweep transactions indicating in each case how the swept funds would be treated in the event of failure. The rule is effective on March 4, 2009, except for the customer disclosure requirements, which are effective July 1, 2009. Click here for the rule.