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Financial Services Law Insights and Observations

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  • Colorado UCCC administrator issues guidance on alternative loan changes

    State Issues

    On January 4, the administrator of the Colorado Uniform Consumer Credit Code issued a memo providing introductory guidance on alternative charge loans in response to Proposition 111, which amends the state’s Deferred Deposit Loan Act (DDLA) and takes effect February 1. (See previous InfoBytes coverage here.) Among other things, Proposition 111 reduces the maximum annual percentage rate that may be charged on deferred deposits or payday loans to 36 percent, eliminates an alternative APR formula based on loan amount, prohibits lenders from charging origination and monthly maintenance fees, and amends the definition of an unfair or deceptive practice.

    The memo—issued in response to creditors currently offering loans under the DDLA who have expressed an interest in offering loans imposing the alternative charges allowed by Colo. Rev. Stat. § 5-2-214—explains that such alternative charges may only be charged if (i) the financed amount is $1000 or less; (ii) the minimum loan term is at least 90 days but no more than 12 months; (iii) installment payments are scheduled in substantially equal periodic intervals; (iv) Truth-In-Lending disclosures show the loan is unsecured; (v) a creditor has not taken any collateral as security for the loan, including a post-dated check or certain ACH authorization; (vi) an ACH agreement reached with a consumer is voluntary and not required by the loan; and (vii) the loan has not been refinanced more than three times in one year.

    State Issues Payday Lending Consumer Finance Interest Rate Usury ACH

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  • 6th Circuit affirms no breach of contract for processing ACH transactions in order received

    Courts

    On July 6, the U.S. Court of Appeals for the 6th Circuit affirmed a district court’s decision, holding that there was no breach of contract between a consumer and a bank arising from the order in which the bank processed automated clearing house (ACH) transactions against the consumer’s checking account. According to the opinion, the consumer brought two state law breach of contract claims against the bank alleging that the order in which the bank processed ACH transactions against his checking account resulted in eight initial overdraft fees. Addressing the first breach of contract claim, the appeals court rejected the consumer’s argument that the agreement required the bank to process ACH transactions in the order incurred by the consumer. According to the agreement, “transactions will be processed ‘as they occur on their effective date for the business day on which they are processed’”—not necessarily the actual date that the transaction was initiated. Under the ACH Guidelines, the “effective date” is the date when the merchant presents the transactions to the ACH Operator (the Federal Reserve). Specifically, the bank processed the transactions in the order presented in the Federal Reserve’s batch files. The 6th Circuit also rejected the consumer’s second breach of contract claim, which asserted that the bank’s initial debiting of eight overdraft fees violated the parties’ agreement. Under the terms of the parties’ agreement, the consumer was not required to pay more than five overdraft fees per day, and while the initial debiting of the eight charges constituted a breach, the next-business-day reversal eliminated any damages. Accordingly, the appeals court affirmed the lower court’s decision to grant summary judgment in favor of the bank.

    Courts Sixth Circuit Appellate ACH

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  • Federal Reserve Board Amends Policy on Payment System Risk

    Agency Rule-Making & Guidance

    On August 25, the Board of Governors of the Federal Reserve System (Board) published in the Federal Register an amendment to Part II of its Policy on Payment System Risk (PSR Policy) in order to “conform to enhancements to the Reserve Banks’ same-day automated clearinghouse (ACH) service.” Posting rules set forth in the PSR Policy govern the times that credits and debits are posted to institutions’ accounts at the Federal Reserve Banks and determine an institution’s intraday account balance and whether the institution has incurred a negative balance (i.e., a “daylight overdraft”).

    Changes to the PSR Policy include the following:

    • An ACH derived returns function to enable institutions to generate returns via FedLine Web using information from the forward ACH items received through FedACH. The function is intended for institutions that lack the ability to generate returns on their own. Because the derived returns function uses information not available until the day after the processing day for forward ACH items, the Reserve Banks will provide users of the function an interim solution: a same-day paper return option for same-day forward entries greater than $10,000.
    • Clarification of posting times for paper returns and paper notifications of change of prior-dated items. Because these items are manually processed by Reserve Bank staff during normal business hours, the Board has announced that posting will now only occur at 5:00 p.m. The PSR Policy has been modified to remove the 8:30 a.m. posting time. However, depending on when the Reserve Banks receive FedLine Webs returns and FedLine Web notifications of change, these items will continue to be posted at 8:30 a.m. and 5:00 p.m.

    Details regarding amendments to the “Procedures for Measuring Daylight Overdrafts,” including specific details corresponding to the 8:30 a.m., 1:00 p.m., and 5:30 p.m. transaction posting times, are also included in the Board’s policy statement.

    Agency Rule-Making & Guidance Federal Reserve ACH Electronic Transfers Federal Register

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  • Noncash Payment Growth Highlighted in Sixth Federal Reserve Payments Study

    Fintech

    On June 30, the Board of Governors of the Federal Reserve issued its sixth payments study entitled The Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices. The study includes data on business and consumer noncash payments made in the United States in 2015. Among other things, the study details the differences between business and consumer payments in 2015 compared to those from 2000, general-purpose payment card use in 2015, and increases in use of alternative payment methods.

    According to the report, the most popular noncash payment types among consumers were, in descending order: non-prepaid debit cards, general-purpose credit cards, checks, and finally, ACH debit transfers. For businesses, however, ACH credit transfers were the most popular, then checks, general-purpose credit cards, and non-prepaid debit cards. Consumers wrote fewer than half the number of checks in 2015 than they did in 2000 but almost doubled the number of noncash payments that they made. Businesses also cut check-writing by more than half but differed from consumers by more than doubling the number of ACH transfers that they initiated during the same period.

    General-purpose or “network-branded” cards accounted for more than 65 percent of noncash payments in 2015. The data showed that 60 percent of these card accounts carried revolving debt, while 40 percent of accounts were paid in full each month.

    Information on fraudulent payments also was collected and should be available in the third quarter of this year.

    Fintech Digital Commerce Federal Issues Federal Reserve Electronic Fund Transfer ACH Payments Credit Cards

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  • FDIC Restricts Bank's Card Businesses Pending BSA Compliance Enhancements

    Fintech

    On June 5, the FDIC and a Delaware bank entered a consent order that prohibits the bank from entering into any new relationships with third-party prepaid card processors or prepaid card program managers until the FDIC approves a written report from the bank that details the steps taken by the bank to (i) implement new BSA compliance policies and procedures; (ii) improve staff training; (iii) implement controls sufficient to mitigate BSA and safety and soundness risk associated with prepaid card, credit card merchant acquiring, and ACH activities; and (iv) perform a BSA risk assessment. The order similarly restricts the bank’s activities related to credit card merchant acquiring and ACH merchant payment processing. The order does not prohibit the bank from issuing prepaid cards through existing distribution channels under existing contracts with third-parties, but does restrict certain activities related to existing credit card and ACH processing activities. In addition, the bank must (i) retain and designate BSA and OFAC officers; (ii) conduct a suspicious activity reporting look-back review; and (iii) submit periodic progress reports. Finally, the order requires increased board supervision of the bank’s BSA compliance program and mandates the creation of a board-level BSA committee.

    FDIC Credit Cards Payment Systems Prepaid Cards Anti-Money Laundering Bank Secrecy Act Enforcement ACH

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