Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
On August 27, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), including as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank ability-to-repay and qualified mortgage provisions (ATR/QM). The CFPB is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2018. The following thresholds will be effective on January 1, 2019:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will increase from $27 to $28, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase from $38 to $39;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $21,549, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,077; and
- The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) 3 percent of the total loan amount for loans greater than or equal to $107,747; (ii) $3,232 for loan amounts greater than or equal to $64,648 but less than $107,747; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,549 but less than $64,648; (iv) $1,077 for loan amounts greater than or equal to $13,468 but less than $21,549; and (v) 8 percent of the total loan amount for loan amounts less than $13,468.
Arizona Supreme Court holds statute of limitations for credit cards begins to accrue upon first missed payment
On July 27, the Arizona Supreme Court held that a cause of action to collect a credit card debt subject to an acceleration clause begins to accrue as of the date of the consumer’s first uncured missed payment. According to the opinion, the consumer was sued in 2014 by a debt collector for an unpaid balance of over $17,000 on a credit card issued in 2007. Throughout 2007 and 2008 the consumer routinely made late payments and completely missed the February 2008 payment. The consumer moved for summary judgment, arguing that the claim was barred by Arizona’s six-year statute of limitations, which began to accrue at the time of the first missed payment in February 2008. The motion was granted by the trial court. The appellate court reversed, agreeing with the debt collector that the cause of action for the entire debt does not accrue until the creditor accelerates the debt. Disagreeing with the appeals court, and affirming the trial court’s decision, the Arizona Supreme Court distinguished revolving credit card accounts from closed-end installment contracts, which have a set date that the debt must be paid in full. The court explained that with installment contracts, the accrual date can be no later than the date in which the entire balance must be paid, as compared to credit card accounts, which have no end date. On that basis, the court held that allowing a creditor to delay accrual by not accelerating the debt, would “functionally eliminate the protection provided to defendants by the statute of limitations.”
Federal Reserve submits annual report to Congress on credit card profitability of depository institutions
In July, the Federal Reserve Board submitted its annual report to Congress on the profitability of credit cards as required by Section 8 of the Fair Credit and Charge Card Disclosure Act of 1988. The Report to Congress on the Profitability of Credit Card Operations of Depository Institutions (the Report) focuses on credit card banks with assets exceeding $200 million meeting the following criteria: (i) more than 50 percent of assets are loans made to individual consumers; and (ii) 90 percent or more of consumer lending involves credit cards or related plans. As of December 31, 2017, the 12 banks that met this criteria accounted for almost 50 percent of outstanding credit card balances on the books of depository institutions. According to the Report, credit card loans have replaced other methods of borrowing, such as closed-end installment loans and personal lines of credit. In the aggregate, “consumers carried slightly over $1 trillion in outstanding balances on their revolving accounts as of the end of 2017, about 6.1 percent higher than the level at the end of 2016.” While the Report notes the difficulty with tracking credit card profitability due to revisions in accounting rules and other factors, it indicates that delinquency rates and charge-off rates for credit card loans saw a modest increase in 2017 across all banks but remained below their historical averages.
The Report also discusses recent trends in credit card pricing practices. Data from a survey that studied a sample of credit card issuers found that the average credit card interest rate across all accounts is about 13 percent, while the average interest rate on accounts that assessed interest was closer to 15 percent. The Report notes that, “while average interest rates paid by consumers have moved in a relatively narrow band over the past several years,” there exists is a great deal of variability across credit card plans and borrowers, reflecting various card features and the risk profile of the borrower.
On June 29, the CFPB announced a $335 million settlement with a national bank who allegedly violated the Truth in Lending Act by failing to properly implement annual percentage rate (APR) reevaluation requirements, which would reduce APRs for certain consumer credit card accounts, consistent with Regulation Z. According to the consent order, the Bureau also claimed the bank failed to put in place reasonable written policies and procedures to conduct the APR reevaluations. Under the terms of the consent order, the bank is required to pay $335 million in restitution to affected consumers and implement corrected policies and procedures to ensure proper APR reevaluation processes. The Bureau further noted that it did not assess civil monetary penalties due to efforts undertaken by the bank to self-identify and self-report violations to the Bureau. The bank also voluntarily corrected the deficiencies, took steps to initiate remediation to affected consumers, and implemented compliance management system enhancements.
On June 25, the U.S. Supreme Court in a 5-4 vote held that a credit card company did not unreasonably restrain trade in violation of the Sherman Act by preventing merchants from steering customers to other credit cards. As previously covered by InfoBytes, in September 2016, the U.S. Court of Appeals for the 2nd Circuit considered the non-steering protections included in the credit card company’s agreements with merchants and concluded that such provisions protect the card company’s rewards program and prestige and preserve the company’s market share based on cardholder satisfaction. Accordingly, the 2nd Circuit concluded that “there is no reason to intervene and disturb the present functioning of the payment‐card industry.” In June 2017, a coalition of states, led by Ohio, petitioned the Supreme Court to review the 2nd Circuit decision, arguing the credit card industry’s services to merchants and cardholders are not interchangeable and therefore, the credit card market should be viewed as a two-sided market, not a single market. The Supreme Court disagreed with the petitioners’ arguments, finding that the credit card industry is best viewed as one market. The court reasoned that while there are two sides to the credit card transaction, credit card platforms “cannot make a sale unless both sides of the platform simultaneously agree to use their services,” resulting in “more pronounced indirect network effects and interconnected pricing and demand.” Accordingly, the two-sided transaction should be viewed as a whole for purposes of assessing competition. The court further concluded that the higher merchant fees the credit card company charges result in a “robust rewards program” for cardholders, causing the company’s anti-steering provisions to not be inherently anticompetitive, but in fact to have “spurred robust interbrand competition and has increased the quality and quantity of credit-card transactions.”
On June 7, the CFPB released the latest quarterly consumer credit trends report, which focuses on credit card borrowing patterns at the end of the year using data from the CFPB’s Consumer Credit Panel. The report notes that consumer spending peaks each year during the “holiday shopping season” in November and December, with retail sales more than $50 billion higher in December than any other month. The CFPB highlighted some key findings regarding credit card borrowing and repayment patterns around this time: (i) credit card and retail store card debt steadily rise before the end of the calendar year and then gradually fall through March; (ii) consumers with subprime credit scores do not experience the same “seasonality” in borrowing that consumers with superprime credit scores do—they are much more likely to have higher utilization rates of available credit before the holiday shopping season; and (iii) seasonal delinquency patterns may indicate financial distress at the end of the year for some credit card users.
New Mexico Attorney General announces settlement with payment card companies to resolve excessive interchange fees
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.
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.
On January 26, the U.S. Court of Appeals for the 10th Circuit affirmed a District Court’s decision dismissing a consumer’s claim that, under the Fair Credit Billing Act (FCBA), two credit card providers (collectively, defendants) must refund his accounts after a merchant failed to deliver goods purchased using credit cards issued by the defendants. The FCBA allows consumers to raise the same claims against credit card issuers that can be raised against merchants, but limits such claims to the “amount of credit outstanding with respect to [the disputed] transaction.” According to the opinion, the consumer ordered nearly $1 million in wine from a merchant and prior to delivery of the complete order, the merchant declared bankruptcy. The consumer filed lawsuits against each credit card provider in the U.S. District Court for the District of Colorado seeking a refund to his credit accounts for the amounts of the undelivered wine. The District Court dismissed the suits against both defendants because the consumer had fully paid the balance on his credit cards. In affirming the District Court’s decision, the 10th Circuit concluded that because “‘the amount of credit outstanding with respect to’ the undelivered wine is $0” the consumer had no claim against the defendants under the FCBA.
On January 3, the U.S. Court of Appeals for the Ninth Circuit issued an opinion affirming a district court decision that a California law banning credit card surcharges violated the First Amendment because it was an unconstitutional restriction of speech and unconstitutionally vague. California Civil Code Section 1748.1(a) prohibits retailers from imposing surcharges on customers who pay with credit cards, but allows businesses to offer discounts for cash or debit card payments. In 2014, plaintiffs challenged the constitutionality of the law, and the district court granted summary judgment in favor of the plaintiffs and permanently enjoined its enforcement, holding that the statute violated the First Amendment because it amounted to “a content-based restriction on commercial speech rather than an economic regulation.” The California Attorney General's Office appealed.
The Ninth Circuit affirmed the district court decision, finding that California Civil Code Section 1748.1(a) could not withstand intermediate scrutiny because (i) the plaintiffs’ speech was not misleading, (ii) Section 1748.1(a) failed to promote California’s interest in protecting consumers from deception, and (iii) Section 1748.1(a) was more extensive than necessary to achieve California’s stated interest for the regulation. Though the panel affirmed the district court’s ruling, it also modified the district court’s injunction to apply only to the plaintiffs, and only with respect to the specific pricing practice they seek to employ.
See previous InfoBytes coverage here on court decisions regarding credit card surcharges
- Heidi M. Bauer and Dan Ladd to discuss "'So you want to form a joint venture' — Licensing strategies for successful JVs" at RESPRO26
- Tim Lange to discuss "Update from 2019 NMLS Conference" at the California Mortgage Bankers Association Mortgage Quality & Compliance Committee webinar
- Jonice Gray Tucker to to discuss "DC policy: Everything but the kitchen sink" at CBA Live
- Jonice Gray Tucker to discuss "Small business & regulation: How fair lending has evolved & where are we heading?" at CBA Live
- Daniel P. Stipano to discuss "Lessons learned from ABLV and other major cases involving inadequate compliance oversight" at the ACAMS International AML & Financial Crime Conference
- Jon David D. Langlois to discuss "Transaction management-issues surrounding purchase & sale agreements, post acquisition integration & trailing docs" at the Investment Management Network Residential Mortgage Servicing Rights Forum
- Daniel P. Stipano to discuss "A year in the life of the CDD final rule: A first anniversary assessment" at the ACAMS International AML & Financial Crime Conference
- Moorari K. Shah to discuss "State regulatory and disclosures" at the Equipment Leasing and Finance Association Legal Forum
- Daniel P. Stipano to discuss "The state of the BSA 2019: What’s working, what’s not, and how to improve it" at the West Coast Anti Money-Laundering Forum
- Hank Asbill to discuss "Creative character evidence in criminal and civil trials" at the Litigation Counsel of America Spring Conference & Celebration of Fellows
- Brandy A. Hood to discuss "Flood NFIP in the age of extreme weather events" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "UDAAP compliance" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "State examination/enforcement trends" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Benjamin K. Olson to discuss "LO compensation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Kathryn L. Ryan to discuss "Major state law developments" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "Leveraging big data responsibly" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program