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CFPB Continues Credit Card Enforcement Activity
On October 1, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and several of its subsidiaries alleged to have violated multiple consumer financial protection laws. According to the CFPB, the investigations conducted by it and other federal regulators and a state regulator revealed that the companies (i) charged illegal late fees, (ii) discriminated on the basis of age in the offering of credit, (iii) engaged in deceptive marketing, and (iv) failed to properly report consumer credit disputes. To resolve the allegations, the companies agreed to enter into several different consent orders. Two orders obtained by the CFPB and a joint CFPB/FDIC order require three of the subsidiaries collectively to refund approximately $85 million to approximately 250,000 customers and pay a cumulative $18 million in civil money penalties. Likewise, the OCC issued a consent order that includes an additional $500,000 penalty, and provides for restitution that overlaps with the broader restitution ordered by the CFPB. Finally, an order obtained by the Federal Reserve Board, requires the company, and certain of its subsidiaries, to pay an additional $9 million penalty. Furthermore, pursuant to the various orders, the companies agreed to undergo an independent audit and implement enhanced compliance systems to address the alleged illegal practices. This is the third public CFPB-led enforcement action aimed at credit card companies, and the first to go beyond allegations regarding ancillary products and resolve alleged violations of the CARD Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act.
CFPB Announces Enforcement Action Against Credit Card Issuer
On September 24, the CFPB announced that it resolved an investigation initiated by the FDIC and subsequently joined by the CFPB into telephone sales of certain ancillary or “add on” products marketed and sold by a major credit card issuer. The products related to (i) payment protection, (ii) credit monitoring, (iii) identity theft protection, and (iv) protection in the event of wallet loss. Pursuant to the Joint Consent Order released by the CFPB, the bank will pay a $14 million penalty and provide approximately $200 million in restitution to eligible consumers who purchased one or more ancillary products over a period of approximately four years. The order also calls for certain changes to the bank’s marketing and sales practices in connection with the products. During a press call to announce the consent order, CFPB Director Richard Cordray explained that the CFPB “expect[s] that more such actions will follow.” The CFPB is publishing the orders from its various actions on its administrative adjudication docket. Mr. Cordray also stated that “[i]n the meantime, [the CFPB is] signaling as clearly as [it] can that other financial institutions should review their marketing practices to ensure that they are not deceiving or misleading consumers into purchasing financial products or services.” In July, the CFPB issued Bulletin 2012-06, which outlines the CFPB’s expectations for the institutions it supervises, and their vendors, with regard to offering ancillary products in compliance with federal consumer financial laws. BuckleySandler represented the bank in this joint CFPB-FDIC investigation and enforcement action.
Canada Proposes Adding Mobile Payments to Card Industry Voluntary Code of Conduct
Recently, Canada’s Department of Finance published a consultation paper that proposes an addendum to the Code of Conduct for the Credit and Debit Card Industry in Canada to apply the Code to mobile payments. The Code, which took effect in August 2010, is a voluntary measure applicable to credit and debit card networks and covers point-of-sale, Internet, and phone payment methods. The addendum would extend the Code to apply explicitly to payments initiated by consumers that access a deposit or credit account through a payment network accessed by mobile device at the point-of-sale. The addendum also would clarify the way in which five of the ten elements of the code would apply to mobile payments. For example, the addendum would prohibit credit and debit card functions from co-residing in the same mobile payment application. Canada’s Department of Finance has invited stakeholder comments on all aspects of the proposal.
CFPB Director Testifies Before House Committee, Promises CARD Act Ability to Repay Rule
On September 20, CFPB Director Richard Cordray appeared before the House Financial Services Committee in connection with the CFPB’s Semiannual Report issued July 30, 2012. During the House hearing the Director faced questions on topics covered during prior committee hearings, including (i) the status and potential impact of the CFPB’s qualified mortgage/ability to repay (QM) rule, (ii) whether that rule will provide a safe harbor or a rebuttable presumption, (iii) whether the CFPB will commit to a definition of “abusive” practices, and (iv) whether the CFPB will raise the threshold for banks exempt from compliance with new CFPB remittance rules. Mr. Cordray reiterated that the QM rule will be finalized before the end of 2012, and that while the final regulations are still under consideration, the CFPB intends to provide bright line standards to help limit litigation risk. He continued to avoid offering a definition or description of abusive practices and did not express a willingness to revisit the remittance standards. Mr. Cordray also revealed that the CFPB has determined that it cannot resolve through the issuance of guidance a problem with the application of the Federal Reserve Board’s credit card ability to repay rule that is restricting access to credit for stay-at-home spouses. Mr. Cordray committed to releasing a proposed rule to remedy the problem prior to Congress’ return following the November elections.
CFPB Readies for Launch of Short-Form Credit Card Agreement Pilot Program
On September 18, the CFPB published a Notice and Request for Comment on information it plans to collect with regard to a pilot program designed to test a short-form credit card agreement. The CFPB announced last year its plan to partner with Pentagon Federal Credit Union to test its prototype agreement. The recently-published notice indicates that Pentagon Federal Credit Union will begin sending the short-form agreement to new cardholders in the fourth quarter of 2012 and the first quarter of 2013, and that the CFPB plans to conduct qualitative research through surveys of new cardholders. Parties interested in commenting on the CFPB’s proposed research have through October 18, 2012 to do so.
Ninth Circuit Holds Omission of Annual Fee in Credit Card Advertisements, Online Application Not Misleading
On August 31, the U.S. Court of Appeals for the Ninth Circuit upheld a district court’s dismissal of a putative class action alleging that a credit card issuer and a retailer violated California law when they failed to explicitly state the card’s annual fee in advertisements. Davis v. HSBC Bank Nevada, N.A., No. 10-56488, 2012 WL 3804370 (9th Cir. Aug. 31, 2012). The cardholder applied for a credit card that offered rewards for purchases, to be used at the retailer’s stores. Neither the advertisement for the card nor the application website mentioned that the card required an annual fee. The fee was disclosed only in the “Terms and Conditions” that the cardholder acknowledged having read and accepted prior to opening the credit account. On appeal, the cardholder argued that the omission of the annual fee in the advertisements, combined with the promise of rewards, constituted false advertising because it implied that no offsetting charges would erode the rewards. The court held that the advertisement was unlikely to deceive a reasonable consumer, even though it is possible that some people could misunderstand the terms. The court also rejected the cardholder’s argument that the issuer and retailer fraudulently concealed the fee. In doing so the court drew a distinction from its earlier decision in Barrer v. Chase Bank, N.A., 566 F.3d 883 (9th Cir. 2009), in which it held that a provision granting the issuer the right to alter the cardholder’s APR was buried in fine print and therefore violated TILA’s “clear and conspicuous” requirement. The court explained that its decision in Barrer had no bearing on the cardholder’s instant common law claims. Finally, the court rejected the cardholder’s claim that the online application and advertisements violated the state’s Unfair Competition Law because the online application is protected by a federal safe harbor and the advertisements were not deceptive.
Federal Court Declines to Enjoin AG Prosecution of Claims Subject to Class Settlement
On August 22, the U.S. District Court for the Middle District of Florida denied a major bank’s motion to enjoin prosecution by two state attorneys general of claims related to the bank’s credit card payment protection products. Spinelli v. Capital One Bank, USA, No. 08-cv-00132, 2012 WL 3609028 (M.D. Fla. Aug. 22, 2012). In 2010 the bank entered a global class action settlement to release certain claims regarding payment protection, including those by all natural persons who have or had credit card accounts with the bank and who were charged for payment protection during a defined time period. After the Attorneys General of Hawaii and Mississippi (the state AGs) filed cases earlier this year regarding the same products, the bank petitioned the court that approved the class settlement to enjoin the state AGs, as well as any other person or entity with knowledge of the class settlement, from prosecuting similar claims against the bank. The bank argued that the state AG actions were brought on behalf of citizens who were bank customers released as part of the class settlement. The court held that a state’s sovereign interests cannot be compromised by a private settlement, the AGs were not bound by the class settlement, and an injunction would violate due process. The court also held that it no longer retained jurisdiction over the matter and that the courts hearing the state AG claims must decide whether the claims can properly proceed.
OCC and DOJ Announce SCRA Enforcement Action Against a National Bank
On July 26, the OCC and the DOJ announced resolution of actions brought against a national bank for alleged violations of the Servicemembers Civil Relief Act (SCRA). The DOJ filed a complaint and consent order in the U.S. District Court for the Eastern District of Virginia, simultaneously bringing and resolving allegations that over a roughly five year period the bank failed to provide sufficient protections to servicemembers (i) denying valid requests for interest rate reductions because the servicemembers’ military orders did not include specific end dates for the period of military service, (ii) foreclosing without a court order, (iii) repossessing motor vehicles without a court order, and (iv) obtaining default judgments without first filing accurate affidavits. Under the DOJ settlement, the bank must pay $12 million in damages to servicemembers. Concurrently, the OCC released consent orders resolving similar allegations. Under both the DOJ and OCC orders, the bank must take specific actions to enhance compliance with SCRA, including with regard to vendor management, training, and internal reporting. The OCC also is requiring that the bank report periodically to the OCC, and conduct a look-back review of its servicemember accounts. The DOJ notes that the bank already has adopted enhanced SCRA policies on its own initiative, including extending a four percent interest rate to qualifying servicemembers and giving an additional one-year grace period before de-enrolling servicemembers from the reduced interest rate program.
Major Settlement Reached in Consolidated Interchange Fee Litigation
On July 13, the parties to the long-running consolidated class action litigation against the two major payment network providers and 17 banks filed a proposed settlement to resolve allegations that the defendants unlawfully conspired to fix the fees that merchants are charged each time a customer uses a card for a purchase, so-called “swipe” or “interchange” fees. Class Settlement Agreement, In re Payment Card Interchange Fee & Merchant Discount Antitrust Litigation, No. 05-MD-1720 (E.D.N.Y. Jul. 13, 2012). In total, the settlement is valued at $7.25 billion. Of that total amount, roughly $6 billion would be paid to a class of millions of merchants and certain individual merchants. Another $1.2 billion of the total amount would be used to provide merchants with a temporary reduction in interchange fees. Further, the agreement allows merchants, for the first time, to apply a surcharge to customer transactions processed over the payment networks.
CFPB Announces First Public Enforcement Action; Issues Related Compliance Bulletin
On July 18, the CFPB announced its first public enforcement action - a Consent Order entered into by a major credit card issuer to resolve allegations that the issuer’s vendors deceptively marketed ancillary products such as payment protection and credit monitoring. The OCC made a corresponding enforcement announcement and released a Cease and Desist Order and Civil Money Penalty to resolve related charges. Under the CFPB order, the issuer will refund approximately $140 million to roughly two million customers, and will pay a $25 million penalty. The OCC order requires restitution of approximately $150 million (of which $140 million overlaps with the CFPB order) and an additional $35 million civil money penalty. Under both agencies’ actions, the issuer is prohibited from selling and marketing certain ancillary products until it obtains approval to do so from the regulators, and the issuer must take specific actions to enhance compliance with consumer financial laws.
Concurrently, the CFPB issued Bulletin 2012-06, which states that the CFPB expects supervised institutions and their vendors to offer ancillary products in compliance with federal consumer financial laws. The guidance cites “CFPB supervisory experience [that] indicates that some credit card issuers have employed deceptive promotional practices when marketing” such products, including (i) failing to adequately disclose terms and conditions, (ii) enrolling customers without their consent, and (iii) billing for services not performed. The Bulletin reviews applicable federal law and outlines the compliance program components that the CFPB expects supervised institutions to maintain.