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Financial Services Law Insights and Observations

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  • Bank enjoined from administering prepaid debit cards for EDD benefits

    Courts

    On June 1, the U.S. District Court for the Northern District of California issued a preliminary injunction enjoining a national bank from certain actions in administering prepaid debit cards to class member recipients of Employment Development Department unemployment or disability benefits. Under the terms of the preliminary injunction, the bank is prohibited from “considering the results of [its] initial automated fraud claims filter” when investigating or resolving any alleged unauthorized transaction error claims, or from closing claims or denying credit before conducting an investigation, pursuant to EFTA and Regulation E. Class members are also entitled to a written explanation of investigative findings before the bank can deny or close a claim. Additionally, the bank is, among other things, (i) prohibited from considering the results of its claim fraud filter as justification for freezing the card account of any class member; (ii) required to reopen any claims that were closed or denied “based solely” on results of its claim fraud filter if those claims have not already been paid or previously reopened and investigated; (iii) required to provide written notice to class members with blocked accounts explaining that their accounts will be unblocked if they authenticate their identity; and (iv) establish a process for handing class member claims.

    Courts Debit Cards Prepaid Cards Class Action Covid-19 EFTA Regulation E

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  • Fed proposes changes to its PSR Policy governing intraday credit

    Agency Rule-Making & Guidance

    On May 7, the Federal Reserve Board issued a notice of proposed rulemaking (NPRM) seeking comments regarding proposed amendments to Regulation II, which implements Section 920 of the EFTA, that would require banks to ensure that two unaffiliated payment networks are available on their debit cards for online purchases. In a memo to the Board, Fed staff noted that due to the growth in online commerce, “card-not-present transactions have become an increasingly significant portion of all debit card transactions, and technology has evolved to enable multiple networks for these transactions.” However, “[d]espite this, two unaffiliated payment card networks are often not available to process card-not-present transactions, such as online purchases, because some issuers do not enable multiple networks for such transactions.” This outcome, Fed staff stated, is “inconsistent with Regulation II’s requirement that at least two unaffiliated networks be available to process each debit card transaction.”

    The NPRM addresses this issue by amending Regulation II and its official commentary to (i) “clarify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions”; (ii) clarify requirements imposed “on debit card issuers to ensure that at least two unaffiliated payment card networks have been enabled for debit card transactions”; and (iii) “standardize and clarify the use of certain terminology.” Notably, Fed staff emphasized in their memo that the NPRM would not impact Regulation II’s provisions governing interchange fees for certain debit card transactions. As previously covered by InfoBytes, last month, two North Dakota trade associations filed a complaint against the Fed claiming that the agency has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.”

    The Fed published its report on debit card transactions in 2019, and noted it “will continue to review the parts of Regulation II that directly address interchange fees for certain electronic debit transactions in light of the most recent data collected by the Board pursuant to section 920 of the EFTA and may propose revisions in the future.”

    Agency Rule-Making & Guidance Federal Reserve Debit Cards Fintech

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  • North Dakota trade associations sue Fed over debit-card interchange fees

    Courts

    On April 29, two North Dakota trade associations filed a complaint against the Federal Reserve Board, claiming the Fed has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.” The plaintiffs’ suit revolves around interchange fees—currently capped at 21 cents—paid by merchants to card issuer banks to process debit-card transactions. The interchange fees are intended to compensate issuers for their costs in a transaction, but the plaintiffs contend that the fees have become a “lush profit center for issuers.” Among other things, the plaintiffs allege that the Fed has failed to enforce provisions under Dodd-Frank’s “Durbin Amendment,” which amended the EFTA and limited the interchange fees paid to large issuers to an amount “that is ‘reasonable and proportional to the cost incurred by the issuer with respect to the transaction.’” The amendment also directed the Fed to distinguish between incremental, processing costs and other costs “not specific to a particular electronic debit transaction”—a requirement the plaintiffs argue is not reflected in the Fed’s final rule. Moreover, the plaintiffs contend that the Fed’s final rule, Regulation II, creates “a one-size-fits-all fee” that does not tie the maximum allowable fee to a specific transaction, and allows all covered issuers to charge up to 21 cents for any debit-card transaction regardless of the issuer’s actual processing costs (as well as .05 percent of each transaction “to compensate the issuers for fraud losses”). The plaintiffs claim the Fed’s actions are arbitrary and capricious and exceed the Fed’s statutory authority and ask the court to vacate the rule at issue.

    Courts Federal Reserve Debit Cards Interchange Fees Dodd-Frank

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  • Federal Reserve Board extends temporary actions on intraday credit availability

    Federal Issues

    On October 1, the Federal Reserve Board extended certain temporary actions that are designed to increase the availability of intraday credit to mitigate the impact of Covid-19.  The temporary actions were previously announced on April 23 (previously covered here), and include: (1) suspending uncollateralized intraday credit limits and waiving overdraft fees for eligible institutions; (2) permitting a streamlined procedure to request collateralized intraday credit; and (3) suspending two collections of information that are used to calculate net debit caps.  The actions are extended to March 31, 2021.

    Federal Issues Covid-19 Federal Reserve FRB Consumer Credit Overdraft Fees Debit Cards

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  • District court approves final settlement resolving breach of contract and conversion claims related to debit card overdraft fees

    Courts

    On May 28, the U.S. District Court for the Southern District of California granted final approval to a roughly $24.5 million settlement resolving class action allegations that a credit union unfairly charged optional overdraft protection fees on certain debit card transactions. In 2017, the plaintiffs challenged the credit union’s practices, alleging breaches of contract, covenant of good faith and fair dealing, and conversion. Specifically, the plaintiffs challenged whether the language in the accountholder agreements prohibited the credit union from assessing and collecting optional overdraft protection fees on certain debit card transactions that were authorized against positive available account balances. In 2018, the court granted in part and denied in part the credit union’s motion to dismiss, allowing the plaintiffs’ breach of contract and conversion claims to proceed. The parties entered into settlement discussions, and reached an agreement. Under the terms of the settlement, the credit union will provide $24.5 million in relief to class members, along with approximately $6.1 million in attorneys’ fees. However, the court denied a request to reimburse plaintiffs’ expert witness for work completed after the settlement agreement was preliminary approved last year, stating “as a matter of awarding funds from the [s]ettlement [f]und, the [c]ourt cannot find reasonable the $109,100.00 price tag for an exercise that appears to post-date the preliminary approval order and which merely confirmed what the parties already understood to be the class’s potential recovery.”

    Courts Overdraft Class Action Settlement Debit Cards Fees

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  • Federal Reserve releases report on 2017 debit card transactions

    Federal Issues

    On March 21, the Federal Reserve Board announced the release of its biennial report on debit card transactions in 2017. The report is the fifth in a series published every two years pursuant to Section 920 of the Electronic Fund Transfer Act (EFTA). As in prior years, the 2017 report reflected that issuers’ costs of authorizing, clearing, and settling debit card transactions (excluding issuer fraud losses) varied significantly across respondents. Among other things, data compiled in the report estimates that (i) in 2017, payment card networks processed 68.5 billion debit and prepaid card transactions valued at $2.62 trillion in the U.S.; (ii) debit and prepaid card fraud losses to all parties increased to 11.2 basis points in 2017 from 10.3 basis points in 2015; and (iii) the median covered issuer had average fraud prevention and data security costs of 1.5 cents per transaction, down from 1.7 in 2015.

    Federal Issues Federal Reserve Debit Cards EFTA Payments

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  • New Mexico Attorney General announces settlement with payment card companies to resolve excessive interchange fees

    State Issues

    On April 18, the New Mexico Attorney General’s office announced a $3.4 million settlement with the country’s two largest payment card networks to resolve allegations that the companies charged excessive interchange fees during credit and debit card transactions. In 2014, the state filed a lawsuit claiming that the companies’ conduct violated New Mexico’s Antitrust Act and Unfair Practices Act along with various common law theories, including unjust enrichment and civil conspiracy. According to the terms of the settlement, the companies are required to pay a total of $3.4 million into the state’s settlement fund for “law enforcement efforts to prevent and prosecute financial fraud or unfair or deceptive acts or practices, including anti-competitive behavior, and to investigate, enforce, and prosecute other illegal conduct related to financial services or consumer protection and antitrust laws.” In agreeing to the terms of the settlement, the companies did not admit any liability or wrongdoing, did not admit the truth of any allegations or circumstances, and did not waive any defenses.

    State Issues State Attorney General Credit Cards Debit Cards Settlement

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  • Mississippi passes amendment concerning open-end credit finance charges

    State Issues

    On March 15, the Mississippi governor signed House Bill 1338, which amends sections of the Mississippi Code by authorizing state chartered or domiciled banks that offer open-end credit to assess finance charges, credit service charges, and other fees and charges “at rates and amounts . . . that financial institutions domiciled in other states are permitted to impose and collect when extending credit to Mississippi customers. . . .” In doing so, the amendment strives to retain existing financial services within the state. The amendment takes effect July 1.

    State Issues State Legislation Credit Cards Debit Cards

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  • CFPB Encourages Alternatives to Deferred Interest Promotional Offers to Provide Transparency to Consumers

    Consumer Finance

    On June 8, the CFPB reported that it sent letters encouraging top retail credit card companies to consider consumer financing promotions that are more transparent than the often-used deferred-interest credit card. These deferred-interest cards offer no interest on the promotional balance, but only if it is paid off by the end of the promotional period. If any promotional balance remains when the promotional period ends, consumers are charged retroactive interest on the entire promotional balance from the time of purchase.

    The CFPB suggests that a zero percent introductory interest rate is a better option for consumers who are sometimes confused by the retroactive interest in the deferred-interest products. Unlike with deferred interest, under 0% interest promotions, consumers are not assessed interest retroactively if the promotional balance is not paid in full by the end of the promotional period. As previously reported in InfoBytes, some consumers may have difficulty understanding the different credit terms when comparing deferred-interest promotions to zero interest promotions. According to the letters, because deferred-interest programs may be more difficult to understand than zero interest promotions, they require credit card companies to have robust compliance management systems and third party oversight measures to ensure consumers are fully informed of the true costs of the promotional financing.

    In a blog post from June 8, the CFPB explains the differences between zero interest promotions and deferred-interest promotions, and offers examples of each promotion.

    Consumer Finance CFPB Credit Cards Debit Cards Prepaid Cards Compliance Deferred Interest

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  • Connecticut Law Expands Credit Card Fraud Statutes, Addresses Penalties for Rent Collections on Foreclosed Property

    State Issues

    On June 6, Connecticut Governor Dannel Malloy signed into law Public Act No. 17-26, which expands the statutes on credit card fraud to cover crimes involving debit cards—including payroll and ATM cards—and outlines larceny penalties for collecting rent on foreclosed property. Paper and electronic checks or drafts are excluded from the definition of debit card under revised measure. Additionally, the law specifies changes pertaining to how “notice of a card’s revocation must be sent for purposes of these crimes and expands certain credit card crimes to cover falsely loading payment cards (credit or debit cards) into digital wallets.” Regarding larceny penalties, the law provides that a “previous mortgagor of real property against whom a final judgment of foreclosure has been entered” cannot continue to collect rent after the final judgment if there is no lawful right to do so. Penalties vary from a class C misdemeanor to a class B felony depending on the amount involved. The law takes effect October 1.

    State Issues Credit Cards Debit Cards Prepaid Cards State Legislation Financial Crimes Mortgages Digital Commerce Fraud

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