Consumer Financial Services Alert - June 2, 2009

President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act of 2009. The Act amends several provisions of the Truth in Lending Act, the Fair Credit Reporting Act and the Electronic Funds Transfer Act. The following is a summary of some of the major provisions of the Act that affect credit card and gift card operations.

Increase in APR and Other Changes in Terms. The Act requires credit card issuers to give 45 days’ advance notice to borrowers before an increase in the APR, with certain exceptions. The 45-day advance notice requirement also applies to a change in terms of the credit card agreement that is “significant,” as determined by the FRB. Furthermore, if a creditor increases the APR based on credit risk, market conditions or other factors, it must also consider those factors in subsequently determining whether to reduce the APR. Accounts that have been subject to a rate increase since January 1, 2009 must be reviewed every six months to determine whether such factors have changed, and the APR must be decreased when a reduction is indicated by such review. Also, a borrower who cancels a credit card account cannot be obligated to immediately repay the obligation in full, and the methods by which the borrower may be required to repay the balance upon such cancellation are restricted. In addition, the retroactive application of an increased APR, fee or finance charge is impermissible unless the increase relates to (1) the expiration of a temporary APR, (2) an increase in a variable APR, (3) a workout or temporary hardship arrangement, or (4) a payment that is over 60 days late. With certain exceptions, no APR, fee or finance charge increases are permitted in the first year a credit card account is open.

Fees. The Act also restricts the assessment of certain fees. For example, the Act restricts the charging of overlimit fees and prohibits a credit card issuer from assessing an overlimit fee unless the borrower has expressly authorized the issuer to permit overlimit transactions. Also, penalty fees must be reasonable and proportional to the violation according to standards to be established by the FRB. Fees on subprime and “fee harvester” accounts are also restricted.

Billing, Payments, Periodic Statements and Other Credit Card Provisions. The Act prohibits double-cycle billing and mandates that payments received by 5 PM on the payment due date be deemed timely. Moreover, amounts in excess of the minimum payment amount must be allocated to balances with the highest rates first. In addition, the payment due date must be the same day every month. Furthermore, periodic statements must be sent at least 21 days before the payment due date. The Act also restricts extensions of credit to borrowers under the age of 21 and the marketing of credit cards on college campuses.

Gift Cards. With some exceptions, the charging of dormancy fees, inactivity charges or fees and service fees, as well as the imposition of an expiration date on gift card accounts, are prohibited. These restrictions apply to general-use prepaid cards, gift certificates and store gift cards. The FRB must promulgate regulations to carry out these restrictions.

Most requirements of the Act will go into effect nine months after the Act was signed into law, i.e., February 2010. The requirements to give 45 days’ advance notice for APR increases and other changes in terms and to mail periodic statements at least 21 days before the payment due date, however, are effective 90 days after the Act was signed into law, i.e., August 20, 2009. Also, the requirements to review accounts on which the APR has been increased and reduce the APR if warranted, the requirement that fees be reasonable and proportional and the restrictions applicable to gift cards will take effect 15 months after the Act’s enactment, i.e., August 2010.  Click here for a copy of the Act.

President Obama signed the Helping Families Save Their Homes Act of 2009, which primarily amends the operation of the Hope for Home Owners Program. These amendments include putting a cap on upfront and annual fees and allowing payments to servicers and underwriters for successful modifications. The Act also amends Section 131 of the Truth in Lending Act, giving purchasers of residential mortgage loans (including investors, such as investment and hedge funds) affirmative disclosure obligations to consumers. Specifically, the Act provides that a “creditor” that purchases or is assigned a mortgage loan must notify the borrower in writing of a sale or transfer of his or her mortgage loan, not later than 30 days after the transaction’s completion. This disclosure would be in addition to any transfer of servicing notice required under the Real Estate Settlement Procedures Act. The notice must include the following information:

• the name, address, and telephone number of the new creditor;
• the date of transfer;
• how to reach an agent or party having authority to act on behalf of the new creditor;
• the location of the place where transfer of ownership of the debt is recorded; and
• any other relevant information regarding the new creditor.

Unlike most TILA disclosures, this new disclosure obligation is not imposed on the person extending credit, but, instead is imposed on the new owner of the loan or assignee. The civil liability provisions of TILA are amended to allow borrowers a private right of action against the assignee for noncompliance with this disclosure obligation. A borrower would be able to recover actual damages, as well as statutory damages of no more than (1) $4,000 in individual actions, or (2) the lesser of $500,000 or 1% of a creditor's net worth in a class action. There is some ambiguity on the use of the word “creditor” in the Act. In TILA, this term is defined as the person that extends credit, but the Act imposes the new disclosure obligation on the creditor that is the new owner or assignee.  Click here for a copy of the Act.

The Ninth Circuit Court of Appeals recently reversed the dismissal of a Truth in Lending Act class action against Chase Bank for allegedly improper disclosure of potential credit card rate increases. Plaintiffs claimed that Chase failed to disclose that its credit cards interest rates could increase based upon Chase’s analysis of their credit scores. The Court dismissed the case because Chase had disclosed this practice in a change in terms amendment to their card agreements. The Ninth Circuit agreed that the content of Chase’s disclosure of the change in terms was sufficient to comply with TILA, but found that Chase’s disclosure was not sufficiently “clear and conspicuous” as the change in terms provision appeared “five dense pages after the disclosure of the [interest rate]” in Chase’s agreement. Given that “Chase cannot show that, as a matter of law, the Agreement made clear and conspicuous disclosure” of the change in terms, the Ninth Circuit remanded the case to the District Court. Click here for Barrer v. Chase Bank USA, N.A., No. 07-35414 (9th Cir. May 19, 2009).

The unanimous California Supreme Court affirmed dismissal of a class action against Bank of America challenging overdraft and NSF fees on certain savings and bank accounts. Plaintiff claimed that the bank improperly charged these fees to customers whose source of funds derived from Social Security or other public benefits under Kruger v. Wells Fargo Bank, which bars California banks from satisfying independent debts, such as credit card debt, from accounts containing public funds. The Court of Appeals overturned a trial court verdict against the bank, finding that Kruger was distinguishable, and the Supreme Court agreed. The Court found that fees incurred as a result of a customer’s over-drafting on his account were dissimilar to the debts from independent accounts at issue in Kruger, and that the alternative – forcing banks to dishonor checks – was more harmful to consumers. The Court found further support in California’s statutory scheme regarding a bank’s right to setoff debts, as the legislature specifically excluded overdraft and NSF fees from the statute’s definition of “debts.” Given the distinction between plaintiff’s claims and Kruger, the Court affirmed the dismissal of the class action. Click here for Miller v. Bank of America (Cal. Supreme Court, Docket No. S149178, June 1, 2009).

The White House Office of the Press Secretary released a memorandum from President Obama outlining his Administration’s policy on federal agencies issuing regulations that preempt state law. The memorandum states that the Administration’s policy is: “preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption. Executive departments and agencies should be mindful that in our Federal system, the citizens of the several States have distinctive circumstances and values, and that in many instances it is appropriate for them to apply to themselves rules and principles that reflect these circumstances and values.” The memorandum states that agencies should review regulations issued within the last 10 years that contain statements or provisions in preambles or regulations that preempt state law in order to decide whether such statements or provisions are justified under applicable legal principals governing preemption. If such statements are not justified, the memorandum goes on to state that the agency should take appropriate action, which may include changes to the regulation. Click here for a copy of the memorandum.

The FTC announced that it is seeking public comment on two advance notices of proposed rulemaking concerning unfair and deceptive practices in the mortgage industry. The first rulemaking, the Mortgage Assistance Relief Services rulemaking, seeks to assess whether the FTC should adopt rules to protect consumers using loan modification and foreclosure rescue services. Specifically, the FTC seeks comment on whether it should restrict providers of loan modification and foreclosure rescue services from accepting advanced fees from consumers. The second rulemaking, the Mortgage Acts and Practices rulemaking, seeks to assess whether the FTC should adopt rules that would regulate the following mortgage lending activities: (1) advertising and marketing, (2) origination, including underwriting, loan terms and disclosures, (3) appraisals, and (4) servicing. The proposed rules would not apply to banks, which are not within the FTC's jurisdiction. The comment period for the Mortgage Assistance Relief Services rulemaking ends July 15, 2009, and the comment period for the Mortgage Acts and Practices ends July 30, 2009. Click here for the Mortgage Assistance Relief Services notice and here for the Mortgage Acts and Practices notice.

The federal banking agencies issued a joint notice of proposed rulemaking seeking to amend their regulations to implement the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. The proposal implements the portion of the Act requiring any bank employees acting as residential mortgage loan originators to register with and obtain a unique identifier from the Nationwide Mortgage Licensing System. The agencies are specifically requesting comment on whether the de minimus exception of 25 or fewer mortgage loan originations is appropriate. The agencies are also specifically requesting comment on whether the definition of “mortgage loan originator” should cover individuals who (1) modify existing residential mortgage loans; (2) engage in approving mortgage loan assumptions, (3) engage in certain refinancing transactions, and (4) engage in loan modification and limited refinancing activities. Comments are due within 30 days of publication in the Federal Register. Click here for a copy of the proposal.