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Missouri District Court Holds State Funds Transfer Act Preempts Certain Customer Indemnity Agreements
On August 20, the U.S. District Court for the Western District of Missouri dismissed a bank’s counterclaims that its customer’s agreement to indemnify the bank for any losses, costs, or expenses covers the customer’s losses from an allegedly fraudulent transfer of funds. Choice Escrow & Title, LLC v. BancorpSouth Bank, No. 10-03531, slip op. (W.D.Mo. Aug. 20, 2012). The customer sued the bank claiming that a $440,000 wire transfer from its account through the bank’s internet wire transfer system was fraudulently initiated by a third-party. The bank filed four counterclaims for the same amount based on indemnity agreements signed by the customer. The customer moved to dismiss the counterclaims, arguing that the state Funds Transfer Act, part of the Uniform Commercial Code, displaces the counterclaims. Describing its decision as a “very close call,” the court held that the Funds Transfer Act preempts the types of indemnity agreements relied upon by the bank in its counterclaims and dismissed those claims. The court reasoned that while the Funds Transfer Act generally was not intended to preempt or displace all causes of action between a bank and its customers, the Act does provide that common law causes of action based on allegedly fraudulent transfers are preempted where the common law claims would create rights, duties, or liabilities inconsistent with the Act or where the circumstances giving rise to the claims are specifically covered by the Act. The court held the indemnity agreements could require the customer to pay back to the bank the very losses the bank might owe if the customer proves a fraudulent transfer, a result that is inconsistent with the Act.
White House Requires Agencies to Implement Electronic Recordkeeping
On August 24, the Office of Management and Budget and the Archivist of the United States issued a directive that requires all executive offices and federal agencies to eliminate paper and implement electronic recordkeeping for all records, regardless of security classification. The directive, which was required by a November 2011 Presidential Memorandum that outlined an effort to reform federal records management policies and practices, seeks to improve agencies’ compliance with federal records management statutes and regulations. The directive states that by the end of 2013, each agency must develop a plan to achieve electronic management of all permanent electronic records by the end of 2019. By the end of 2016, all agencies must manage email records in an electronic system that supports records management and litigation requirements. The National Archives and Records Administration will revise transfer guidance for permanent electronic records, issue new email management guidance, and support research in applied technologies to facilitate electronic records management. The Archivist will facilitate the initiative by leading a group of federal entities and private sector leaders in information technology, legal counsel, and records management to solve electronic records management challenges.
District Court Holds Gift Cardholders Suffer No Damages from Inability to Apply Unexhausted Balances
On August 17, the U.S. District Court of the Southern District of New York dismissed a putative class action alleging deceptive sales practices under New York law against gift card distributors. Preira v. Bancorp Bank, No 11-1547, 2012 WL 3541702 (S.D.N.Y. Aug. 17, 2012). The plaintiff alleged that the defendants advertised that the gift cards could be used like debit cards, but that in fact merchants would not allow cardholders to conduct split transactions where the card was used to pay for a portion of a transaction and other means were used to pay the remaining balance. This restriction, the plaintiff claimed, prevented cardholders from completely depleting the value of the gift cards. The court rejected the plaintiff’s claim, holding that she failed to allege a cognizable injury because (i) some merchants do accept split transactions, (ii) the cardholder agreement provides that cards can be returned to the issuer in exchange for the unused balance, which never expires, and (iii) even if the damages are not based on the loss of the remaining value of the cards but on misleading statements that lead cardholders to believe the cards function like debit cards, the plaintiff failed to allege that debit cardholders can make split purchases at any retailer and, in any event, deception itself, without further injury, is not a cognizable harm under state law.
State Law Update: New York Bans Yield Spread Premiums, Expands Consumer Privacy Protections
On August 17, New York Governor Andrew Cuomo signed Senate Bill 886, which prohibits any compensation paid to a mortgage broker or lender that is based on the terms of a mortgage, except for compensation linked to the principal balance of the loan. This prohibition of so-called yield spread premiums is a change from existing state law that prohibited “abusive” yield spread premiums in connection with high-cost mortgages.
On August 14, New York enhanced consumer privacy protections when it enacted Assembly Bill 8992. Just as the Federal Privacy Act of 1974 applies to federal, state, and local government agencies, this bill prohibits private businesses from conditioning the provision of services on a consumer’s willingness to disclose his or her Social Security number upon request. The law provides several exceptions, including when the collection of the Social Security Number is (i) otherwise required by law, (ii) requested in connection with the opening of a deposit account or a credit transaction initiated by the consumer, or (iii) required for any business function allowed under the Gramm Leach Bliley Act.
CFPB Seeks Input on Conflict Between State and Federal Gift Card Laws
On August 16, the CFPB issued a Notice that it intends to make a preemption determination with regard to two state gift card laws. The CFPB is seeking public comment to inform its response to requests that the CFPB address conflicts between the EFTA’s gift card expiration provisions and those in Maine’s and Tennessee’s laws. The Notice explains that Maine’s and Tennessee’s laws presume gift cards to be “abandoned” and release businesses from the obligation to honor the gift cards after two years of inactivity, while federal law generally prohibits the sale of a gift card with an expiration date under five years. The CFPB requests public comment on whether there is any inconsistency between the identified state and federal expiration date provisions and, if so, on the nature of the inconsistency. The CFPB also seeks comment on whether card issuers could comply with the federal and state laws as they currently exist, and whether the Maine and Tennessee laws provide greater consumer protection than the federal law.
House Members Seek Delay of CFPB Remittance Rule
On August 16, a group of thirty-two Members of the House of Representatives sent a letter to CFPB Director Richard Cordray asking that the Bureau delay the effective date of recently adopted remittance transfer rules and examine the potential impact of the rules on consumers. The legislators state that the rules, which are set to take effect in February 2013, include “arbitrary and unworkable requirements . . . that will drastically curtail the availability of international transfers to consumers.” Specifically, the letter argues that the final rule (i) includes disclosure requirements that are infeasible for the majority of financial institutions, (ii) will work against the statutory mandate that policymakers expand the use of the automated clearinghouse system, and (iii) risks increasing fees for consumers.
FTC Finalizes Privacy Settlement with Facebook
On August 10, the FTC approved a final settlement to resolve charges that Facebook deceived customers by failing to meet stated privacy protections. The FTC alleged, among other things, that Facebook shared personal information with advertisers despite assurances that it would not do so. The agreement does not include any monetary penalty, but Facebook is prohibited from making any deceptive privacy claim, and it must obtain consumers' approval before changing the way it shares their data. For the next twenty years, Facebook also must obtain periodic assessments of its privacy practices by independent auditors. One Commissioner objected, stating that because the agreement includes a denial of the allegations, the Commission does not have sufficient grounds under the FTC Act to accept the consent agreement. Further, the dissenting Commissioner stated that the settlement is insufficient because it does not clearly extend to all representations made in the Facebook environment and specifically may not cover third-party applications.
FTC Announces Settlement With Google Over Privacy Violations
On August 9, the FTC announced that it obtained from Google a $22.5 million civil penalty to resolve allegations that the company misrepresented certain privacy protections to consumers. According to the FTC, Google violated a previous FTC settlement and order when it placed advertising tracking cookies on the computers of Apple’s Safari Internet browser users, despite Google specifically telling users that they would be opted out of such tracking by default. The FTC states that the penalty is the largest it has ever obtained for violation of a previous order.
FDIC Settles Student Debit Card Fee Enforcement Action; CFPB Issues Related Consumer Advisory
On August 8, the FDIC announced consent orders with a debit card issuer and vendor to resolve allegations that the entities operated an allegedly unfair and deceptive student debit card account program that (i) charged student account holders multiple nonsufficient fund (NSF) fees from a single transaction, (ii) allowed accounts to remain in overdrawn status while NSF fees accrued, and (iii) collected fees from subsequent deposits to the accounts. Collectively the settling companies will provide $11 million in restitution and agreed to pay civil money penalties totaling $282,000. The orders also require that the companies enhance their compliance programs and take specific steps to alter their NSF practices. On August 9, the CFPB issued a consumer advisory in which it reminds students that they (i) cannot be required to use a specific bank or card, (ii) should select bank account before arriving at school, and (iii) should opt for direct deposit as soon as it is offered.
CFPB Modifies Final Remittance Rule to Exempt Small Banks
On August 7, the CFPB released a final rule supplementing and modifying a previously issued rule that amends Regulation E and requires remittance transfer providers to (i) deliver written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds, as well as the amount of funds the recipient will receive, and (ii) investigate consumer disputes and remedy errors. With the previous final rule, the CFPB sought comment on additional revisions that would (i) set a specific safe harbor for remittance transfer providers that do not provide such services in the “normal course of business” and (ii) apply the new disclosure and cancellation requirements in cases where the request is made several days in advance of the transfer date. In response to those comments, the modified rule now exempts institutions that do not provide transfers in the “normal course of business” if they consistently conduct 100 or fewer remittance transfers per year. The final rule also modifies several aspects of the prior rule regarding remittance transfers that are scheduled before the date of transfer, including preauthorized remittance transfers.