Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
11th Circuit reverses dismissal of EFTA action alleging inadequate overdraft notice, denies EFTA safe harbor defense
On August 27, the U.S. Court of Appeals for the 11th Circuit reversed the dismissal of a consumer’s action against her credit union, in which the consumer alleged the credit union used the wrong balance calculation method to impose overdraft fees. According to the opinion, the consumer filed suit against the credit union for using an “available balance” calculation method to impose overdraft fees on her account when the credit union allegedly agreed to use the “ledger balance” method at the time of account opening, in violation of the Electronic Fund Transfer Act (EFTA) and various state law contract claims. The district court dismissed the action, concluding that the agreements “unambiguously permitted [the credit union] to assess overdraft fees using the available balance calculation.”
On appeal, the 11th Circuit disagreed with the district court’s interpretation of the agreements. The court noted that while the opt-in overdraft agreement used by the credit union is based on Regulation E’s (the EFTA’s implementing regulation) Model Form A-9, the model does not address which account balance calculation method is used to determine whether a transaction results in an overdraft. The language chosen by the credit union, according to the appellate court, is “ambiguous because it could describe either the available or the ledger balance calculation method for unsettled debits” and therefore, does not describe the calculation in a “clear and readily understandable way” as required by Regulation E. Because the language was ambiguous, the consumer did not have the opportunity to affirmatively consent to the overdraft service. Moreover, the appellate court concluded that the credit union was not protected under the EFTA’s safe harbor because it used the Model Form A-9 text. Specifically, the appellate court reasoned that the “safe-harbor provision insulates financial institutions from EFTA claims based on the means by which the institution has communicated its overdraft policy,” but does not provide a shield from allegations of inadequacy. Because the consumer argued that the credit union violated the EFTA due to its failure to prove enough information to allow for affirmative consent, the safe-harbor provision does not preclude liability.
On June 13, the FDIC released a new publication, Consumer Compliance Supervisory Highlights, intended to provide information and observations related to the FDIC’s consumer compliance supervision activities in 2018. Specifically, the report covers approximately 1,200 consumer compliance examinations conducted by the FDIC in 2018. Overall, the FDIC noted that, “supervised institutions demonstrated strong and effective management of consumer compliance responsibilities.” The report identifies some of the most salient compliance issues identified by the FDIC during 2018, including (i) overdraft programs, which were found to be potentially unfair or deceptive when an institution used an “available balance method,” sometimes resulting in more overdraft fees than were appropriate because the institution assessed a fee when the transaction did not overdraw the account; (ii) RESPA anti-kickback violations, which concerned payments “disguised as above-market payments for lead generation, marketing services, and office space or desk rentals” or as marketing and advertising agreements; and (iii) Regulation E, where certain institutions were found to have incorrectly calculated consumer liability for unauthorized transfers, failed to resolve errors properly, or discouraged consumers from filing error resolution requests. The report also covers issues with skip-a-payment loan programs and the calculation of finance charges and disclosures related to lines of credit.
On February 22, the FDIC issued FIL-9-2019, which announces revisions to interagency examination procedures for evaluating compliance with the CFPB’s Prepaid Accounts Rule. The Rule was originally finalized in October 2016 and expands coverage under Regulation E to provide consumers, among other things, additional federal protections on prepaid financial products, person-to-person payment products, and other electronic accounts with the ability to store funds. (Covered by InfoBytes here.) In January 2018, the CFPB finalized updates to the Rule and delayed the effective date until April 1, 2019. (Covered by InfoBytes here.) The FIL contains a link to the interagency procedures listed in the FDIC Compliance Examination Manual and confirms that after April 1 the examination staff will begin supervising institutions for compliance with the rule.
As previously covered in InfoBytes, the CFPB recently released its summer 2017 Supervisory Highlights (Highlights) outlining its supervisory progress this year. Included among the issues highlighted by the Bureau is its recent activity in the remittance transfer rule (RTR) space under Regulation E. The Highlights indicate that the CFPB intends to continue its focus on RTR compliance at both large and small institutions. Of particular note, the Bureau—for the first time—has provided informal guidance on international mobile top-up products for telephone airtime. Prior to the Highlights, it was unclear to what extent these products were subject to the RTR. The Highlights confirm that the CFPB will take the position that these products fall within the scope of the rule and has taken supervisory action against at least one institution for that institution’s failure to treat international mobile top-ups in excess of $15 as remittance transfers subject to the RTR.
This edition of the Highlights helps to clear up prior confusion around the industry regarding international mobile top-ups and bill pay products, as discussed in a recent article.
Buckley Sandler Special Alert: CFPB Releases Four Prototype Overdraft Disclosure Forms and a Report on Frequent Overdrafters
On August 4, the CFPB released four new prototype overdraft opt-in model disclosure forms and a report titled “Data Point: Frequent Overdrafters.” A summary of the forms and report are provided below. The prototype forms are still in the process of being developed, and the Bureau is requesting feedback as it works toward finalizing them, but the prototypes are intended to replace the current model form A-9 found in Appendix A of Regulation E. The report focuses on bank customers who overdraft their accounts more than 10 times per year and provides context to the Bureau’s concerns on the impact overdraft services may have on financially vulnerable consumers.
Although overdrafts have long been a focus of the CFPB’s enforcement and supervisory activities, this represents the first sign of movement by the Bureau toward the potential new overdraft services rulemaking listed on its 2017 rulemaking agenda, which is currently in the pre-rule stage. We anticipate that aspects of the approach and language contained in these prototype forms may eventually make their way into account agreements. We invite you to review the forms and report to gain insight into the CFPB’s view of overdraft services and the types of concerns the Bureau may attempt to address in future rulemaking.
If you have questions about the report or other related issues, please visit our Retail Banking practice page, or contact a Buckley Sandler attorney with whom you have worked in the past.
CFPB Seeks Comments on Proposed Amendments to Prepaid Rule, Releases Updated Small Entity Compliance Guide
On June 15, the CFPB announced a request for comment on proposed amendments to Regulation E, which concerns prepaid accounts under the Electronic Fund Transfer Act (EFTA) and the Truth in Lending Act (Regulation Z). According to the Bureau, the request aims to address prepaid companies’ concerns over “unanticipated complexities” regarding certain aspects of the rule. As previously covered in InfoBytes, in April the CFPB issued a final rule delaying the general effective date to April 1, 2018. The prepaid rule provides consumers, among other things, additional federal protections under EFTA on prepaid financial products, person-to-person payment products, and other electronic accounts with the ability to store funds. Specifically, the proposed amendments would impact error resolution requirements for unregistered accounts, enhance flexibility for credit cards linked to digital wallets, and open for consideration whether a further delay to the rule’s effective date is necessary due to the proposed amendments or if safe harbor provisions should be added for early compliance. The proposal also addresses amendments affecting the following: (i) the exclusion of loyalty, award, or promotional gift cards; (ii) “unsolicited issuance of access devices and pre-acquisition disclosures”; and (iii) submission of account agreements to the Bureau. Comments are due 45 days after the request is published in the Federal Register.
Separately, on the same day, the Bureau released an updated edition of its small entity compliance guide for the prepaid rule. The guide notes the new effective date, and also offers clarification on prepaid reload packs, the consistent use of fee names and other terms, foreign language disclosure requirements, URL names in short form disclosures, mobile accessible transaction histories, account agreement submissions to the Bureau, and clarification that stipulates “reversing a provisional credit does not otherwise trigger Regulation Z coverage under the Prepaid Rule.”
On March 7, the CFPB issued a disclosure guide with instructions on how to prepare short form disclosures for prepaid accounts. The guidance provides steps for completing the disclosure but does not address other requirements under Regulation E, as amended by the Prepaid Rule, and is not applicable to government benefit accounts or payroll card accounts. The guide also covers information pertaining to insertion of fee amounts, static fees, additional fee types, statements explaining variable fees, informational statements, and size requirements.
As previously covered in InfoBytes, the Bureau released its final rule (the “Prepaid Rule”) on prepaid financial products in October of last year in order to provide consumers with additional federal protections under the Electronic Fund Transfer Act and to also offer consumers standard, easy-to-understand information about prepaid accounts. However, on March 8, the CFPB announced that it may delay this effective date by six months. If approved, the proposed rule would push back the current October 1 effective date to April 1, 2018. According to the proposed rule filed by the Bureau, the extension comes in response to comments received from “some industry participants” who “believe they will have difficulty complying with certain provisions.” Extending the deadline for compliance “would, among other things, help industry participants address certain packaging related logistical issues for prepaid accounts that are sold at retail locations.” Comments on the Bureau's proposal are due next month.
Senators Introduce Joint Resolution to Overturn CFPB's Prepaid Rule; CFPB Releases Prepaid Rule Compliance Guide on Same Day
On February 1, Sen. David Perdue (R-Ga.), and six fellow GOP lawmakers introduced a joint resolution proposing to overturn the CFPB’s final rule on prepaid accounts (Prepaid Rule) before it goes into effect on October 1. The proposed resolution calls for applying the Congressional Review Act to set aside the regulation—which, procedurally, would require only a simple majority vote in the Senate and House and approval by President Trump.
As previously covered by InfoBytes, the Prepaid Rule amends Regulations E and Z to extend disclosure requirements and consumer protections to certain government benefit cards and mobile wallet accounts, payroll cards, Visa- or MasterCard-branded cards sold in retail outlets for general use, and other types of prepaid products. Generally, the Prepaid Rule becomes effective October 1, 2017. The Prepaid Rule does, however, contain certain exceptions and accommodations related to the October 1 effective date.
Earlier that same day, the CFPB issued a small entity compliance guide, which provides a summary of the Prepaid Rule and highlighting information that may be helpful when implementing its various provisions. Among other things, the compliance guide covers: definitions of various prepaid accounts, exclusions in the rule, entities subject to the rule, required disclosures, change-in-terms notices, limited liability and error resolution, periodic statements, receipts at electronic terminals, access devices, compulsory use, account agreements, overdraft credit features, remittances, and record retention. The compliance guide also discusses the exceptions and accommodations related to the effective date noted above, which are also listed in the Prepaid Rule’s Effective Dates Factsheet.
The Federal Reserve Bank of Philadelphia has posted the latest edition of Consumer Compliance Outlook. This edition features articles on subpart B of Regulation E on Remittance Transfers and the updated interagency questions and answers regarding Community Reinvestment.
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Katherine L. Halliday to discuss "UDAP, UDAAP & the Map rule compliance basics" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss "Washington regulatory overview" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Consenting views: Achieving positive outcomes from consent order recovery" at the ACAMS AML & Financial Crime Conference
- APPROVED Webcast: Preparing for 2020 license renewals
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Daniel P. Stipano to discuss "AML developments: The latest trends, challenges and opportunities" at the American Conference Institute Financial Crime Executive Roundtable
- Marshall T. Bell and Jeffrey P. Naimon to discuss "Truth in lending" at the American Bar Association National Institute on Consumer Financial Services Basics
- Amanda R. Lawrence and Michael A. Rome to discuss "California Consumer Privacy Act compliance" at the Capital Area Compliance Roundtable
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions" at the Institute of International Bankers Risk Management and Regulatory Examination/Compliance Seminar
- Daniel P. Stipano to discuss "Customer identification program/customer due diligence/enhanced due diligence" at a National Association of Federal Credit Unions webinar
- Jonice Gray Tucker to discuss "MCCA's blueprint for selling & buying - A pitch workshop for outside counsel" at the Minority Corporate Counsel Association Creating Pathways to Diversity Conference
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
- Kathryn L. Ryan and Tim Lange to discuss "Temporary authority to operate - Are you prepared? Hear what the states are doing" at the RegList Annual Workshop
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference