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Lawsuit says Prepaid Accounts Rule is “arbitrary and capricious”
On December 11, a payments company filed a lawsuit against the CFPB in the U.S. District Court for the District of Columbia alleging that the Bureau’s Prepaid Account Rule (Rule), which took effect April 1 and provides protections for prepaid account consumers, exceeds the agency’s statutory authority and is “arbitrary and capricious” under the Administrative Procedures Act (APA). The company further asserts that the Rule violates its First Amendment rights by requiring it to make confusing disclosures that contain categories not relevant to the company’s products. According to the complaint, the Rule mandates that the company send “short form” fee disclosures to customers that include references to fees for ATM balance inquiries, customer service, electronic withdrawal, international transactions, and other categories, and “prohibits [the company] from including explanatory phrases within the disclosure box to describe the nature of these fee categories.” These disclosures, the company asserts, have confused many customers who mistakenly believe the company charges fees to access funds stored as a balance with the company, to make a purchase with a merchant, or to send money to friends or family in the U.S. The company also claims that the Bureau erroneously lumped it into the same category as providers of general purpose reloadable cards (GPR cards), and argues that the Rule ignores how prepaid cards fundamentally differ from digital wallets, which has resulted in several unintended consequences.
The company asserts that the Rule is unlawful and invalid under the APA and the Constitution for three principal reasons:
- The Rule contravenes the Bureau’s statutory authority by (i) establishing a mandatory and misleading disclosure regime that is not authorized by federal law; and (ii) “impos[ing] a 30-day ban on consumers linking certain credit cards to their prepaid account—a prohibition the law nowhere authorizes the Bureau to impose.”
- Even if the Bureau possesses the statutory authority it claims to have, the rulemaking process was “fundamentally flawed” due to its one-size-fits-all Rule that misunderstands the different characteristics of digital wallets compared to GPR cards. By treating digital wallets as if they are GPR cards, the Rule violates the APA’s reasoned decision-making requirement. Additionally, the Rule is marked by “an insufficient cost-benefit analysis that failed to properly weigh the limited benefits consumers might derive from the Rule against the costs” stemming from the Rule’s changes.
- The Rule violates the First Amendment by failing to satisfy the heightened standard that a law or regulation “directly advances a substantial government interest” because it requires the company to makes certain disclosures that are irrelevant to its digital wallet product. Moreover, the Rule’s disclosure obligations “functionally impair the speech in which [the company] might otherwise engage” by mandating that it provide confusing and misleading disclosures about the nature of its offerings.
The complaint asks that the Rule be vacated and declared arbitrary, an abuse of discretion, not in accordance with the law, and unconstitutional, and additionally seeks injunctive relief, attorneys’ fees and costs.
FDIC fines Delaware-based bank for unfair and deceptive practices
On March 7, the FDIC announced that a Delaware-based bank agreed to settle allegations of unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act for assessing transaction fees in excess of what the bank previously had disclosed. The FDIC also found that the bank’s practices violated the Electronic Funds Transfer Act, the Truth in Savings Act, and the Electronic Signatures in Global and National Commerce Act. According to the FDIC, from December 2010 through November 2014, the bank overcharged transaction fees to consumers who used prepaid and certain reloadable debit cards to make point-of-sale, signature-based transactions that did not require the use of a personal identification number. The transaction fees allegedly exceeded what the bank had disclosed to consumers. Under the terms of the settlement order, the bank will, among other things, (i) establish a $1.3 million restitution fund for eligible consumers; (ii) prepare a comprehensive restitution plan and retain an independent auditor to determine compliance with that plan; and (iii) provide the FDIC with quarterly written progress reports detailing its compliance with the settlement order. The settlement also requires the bank to pay a civil money penalty of $2 million.
Buckley Sandler Insights: OMB releases updated and possibly outdated CFPB rulemaking agenda
OMB has released the CFPB’s Fall 2017 rulemaking agenda. Although this is the first update to the agenda since Richard Cordray left the agency in November 2017, delays in the publication of rulemaking agendas are common so the updated agenda may not reflect the views of new CFPB leadership. The updated agenda does not appear on the Bureau’s website. Further:
- HMDA & ECOA Amendments: The updated agenda states that the Bureau planned to determine by December 2018 whether to make permanent adjustments to the threshold for reporting open-end lines of credit. However, as discussed in greater detail here, the CFPB stated on December 21 that it intended to engage in a broader rulemaking to (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required by the Dodd-Frank Act.
- Prepaid Cards: The updated agenda states that the CFPB expected to finalize amendments to its rule on prepaid cards in November 2017, but no final amendments have been issued. Instead, on December 21, the CFPB announced its intent to adopt final amendments “soon after the new year” and stated that it expects to extend the April 1, 2018 effective date to allow more time for implementation.
- Debt Collection: The updated agenda states that the CFPB expects to issue a proposed rule in February 2018 “concerning FDCPA collectors’ communications practices and consumer disclosures.” However, on December 14, OMB announced that the CFPB had withdrawn its planned survey regarding debt collection disclosures because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”
See previous InfoBytes coverage on the HMDA, Prepaid, and Debt Collection rulemaking updates.
Other noteworthy aspects of the updated agenda include:
- Regulation Reviews: The updated agenda reiterates the Bureau’s intent to review the regulations inherited from other agencies and “clarify ambiguities, address developments in the marketplace, and modernize or streamline regulatory provisions.” The updated agenda lists “pre-rule activities” as continuing through February 2018, rather than September 2017 under the prior agenda.
- “Larger Participants” in Installment Lending: Consistent with the prior agenda, the CFPB states that it is preparing a proposed rule to define the “larger participants” in the personal loan market (including consumer installment loans and vehicle title loans) that will be subject to Bureau examinations. The updated agenda also states that the Bureau is still considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.” However, while the prior agenda indicated that a proposal was expected in September 2017, the new agenda lists May 2018.
- Overdrafts: The updated agenda states only that the CFPB is “continuing to engage in additional research and consumer testing initiatives relating to the opt-in process” for overdraft protection and that “pre-rule activities” will continue through this month. Under the prior agenda, pre-rule activities were scheduled to continue through June 2017.
- Small Business Lending: The agenda indicates that the long-delayed implementation of the small business data reporting provisions of the Dodd-Frank Act will be delayed even longer. The last agenda listed “pre-rule activities” as continuing through June 2017, stating that the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.” The new agenda states that these activities will continue until May 2018, after which the Bureau “expects to begin developing proposed regulations concerning the data to be collected, potential ways to minimize burdens on lenders, and appropriate procedures and privacy protections needed for information-gathering and public disclosure.”
- TRID/Know Before You Owe Amendments: The updated agenda lists April 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in a Buckley Sandler Special Alert. The prior agenda listed March 2018.
- Mortgage Servicing Amendments: In October 2017, the CFPB issued proposed amendments to the mortgage periodic statement requirements to further address circumstances in which servicers transition between modified and unmodified statements in connection with a consumer’s bankruptcy case. The updated agenda does not provide an expected release date for final amendments.
- Credit Card Agreement Submission: The agenda continues to state that the Bureau is considering rules to modernize its database of credit card agreements to reduce the submission burden on issuers and to make the database more useful for consumers and the general public. The agenda lists “pre-rule activities” as continuing through February 2018. Under the prior agenda, pre-rule activities were scheduled to continue through October 2017.
Buckley Sandler Insights: CFPB Updates Rulemaking Agenda
On July 20, the CFPB released its Spring 2017 rulemaking agenda. The agenda was last updated in Fall 2016. The summer release date, and the fact that certain deadlines listed in the updated agenda have already passed, indicates that the agenda’s release may have been delayed after the CFPB drafted it. The following aspects of the updated agenda are particularly noteworthy:
- Regulation Reviews: The Bureau plans to begin “the first in a series of reviews of existing regulations that we inherited from other agencies through the transfer of authorities under the Dodd-Frank Act,” noting that “other federal financial services regulators have engaged in these types of reviews over time, and believe that such an initiative would be a natural complement to our work to facilitate implementation of new regulations.” The Bureau has formed “an internal task force to coordinate and deepen the agency’s focus on concerns about regulatory burdens and projects to identify and reduce unwarranted regulatory burdens….” The agenda lists “pre-rule activities” as continuing through September 2017. Separately, the Bureau notes its ongoing assessments of the effectiveness of the Mortgage Servicing Rules, the Ability-to-Repay/Qualified Mortgage Rule, and the Remittance Transfer Rule pursuant to the Dodd-Frank Act’s five-year lookback provision.
- Small Dollar Lending: The Bureau reports that it received more than one million comments on its June 2016 proposed rule to impose ability-to-repay requirements for payday, vehicle title, and similar installment loans. The Bureau states that it “continue[s] to believe that the concerns articulated in the [proposed rule] are substantial” but does not provide an expected release date for a final rule.
- “Larger Participants” in Installment Lending: The agenda lists September 2017 as the expected release date for “a proposed rule that would define non-bank ‘larger participants’ in the market for personal loans, including consumer installment loans and vehicle title loans.” Designation as a larger participant brings a non-bank entity within the CFPB’s supervisory jurisdiction. The agenda indicates that a companion rule requiring payday, vehicle title lenders, and other non-bank entities to register with the Bureau is also underway, as noted below.
- Debt Collection: In July 2016, the Bureau released an outline of proposals under consideration for debt collection and convened a panel under the Small Business Regulatory Enforcement Fairness Act in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy to consult with representatives of small businesses that might be affected by the rulemaking. The Bureau notes that, “[b]uilding on feedback received through [that] panel, we have decided to issue a proposed rule later in 2017 concerning debt collectors’ communications practices and consumer disclosures.” The agenda states that a proposed rule is expected in September 2017. The Bureau also states that, in a departure from the July 2016 outline of proposals, the Bureau “intend[s] to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
- Overdrafts: The Bureau states that the current opt-in regime “produces substantially different opt-in rates across different depository institutions” and that its “supervisory and enforcement work indicates that some institutions are aggressively steering consumers to opt in.” The Bureau reports that it is “engaged in consumer testing of revised opt-in forms and considering whether other regulatory changes may be warranted to enhance consumer decision making.” The agenda lists “pre-rule activities” as continuing through June 2017.
- Small Business Lending: The agenda lists “pre-rule activities” on the implementation of the small business data reporting provisions of the Dodd-Frank Act as continuing through June 2017. Specifically, the agenda states that, at this juncture, the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.”
- HMDA & ECOA Amendments: The agenda lists October 2017 as the expected release date for the April 2017 proposed ECOA amendments to clarify requirements for collecting information on ethnicity, race, and sex, but does not list an expected release date for finalization of the April 2017 proposed technical corrections to the 2015 HMDA rule, or the July 2017 proposed amendments to the 2015 HMDA rule’s requirements for reporting home equity lines of credit.
- TRID/Know Before You Owe Amendments: The agenda lists March 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in our special alert.
- Mortgage Servicing Amendments: The Bureau states that it expects to issue a proposal in September 2017 “to make one or more substantive changes to the rule in response to . . . concerns” raised by the industry.
- Arbitration: Interestingly, the agenda states that the Bureau’s final rule on mandatory arbitration clauses, which was released this month to significant controversy, was not expected until August.
- Non-Bank Registration: The Bureau states that it is “considering whether rules to require registration of [installment lenders] or other non-depository lenders would facilitate supervision, as has been suggested to us by both consumer advocates and industry groups.”
- Prepaid Cards: The agenda does not provide an expected release date for finalization of the June 2017 proposed amendments addressing error resolution and limitations on liability, application of the rule’s credit-related provisions to digital wallets, and other issues.
- Credit Card Agreement Submission: The Bureau is “considering rules to modernize our database of credit card agreements to reduce burden on issuers that submit credit card agreements to us and make the database more useful for consumers and the general public.” The agenda lists “pre-rule activities” as continuing through October 2017.
Buckley Sandler Insights: CFPB Releases Proposed Changes to Final Rule on Prepaid Accounts
On June 15, 2017, the Consumer Financial Protection Bureau (CFPB) released proposed changes (Proposal) to its final rule, published last November, which created consumer protections for prepaid accounts under Regulation E and Regulation Z (Final Rule). The CFPB is proposing these revisions because of feedback it received through its outreach to industry participants regarding the Final Rule combined with comments received in response to its effective date proposal (which was later finalized and which delayed the effective date by six months to April 1, 2018). Comments on the Proposal must be received by August 14, 2017.
The CFPB also released an updated version of its Small Entity Compliance Guide. The update reflects the effective date delay as well as other clarifications on the Final Rule. The update does not include any of the proposed changes included within the June 15, 2017 Proposal.
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.”
CFPB Encourages Alternatives to Deferred Interest Promotional Offers to Provide Transparency to Consumers
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.
Connecticut Law Expands Credit Card Fraud Statutes, Addresses Penalties for Rent Collections on Foreclosed Property
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.
Prepaid Card Company Settles FTC Charges, Agrees to Provide $53 Million in Consumer Relief
On March 31, the FTC announced that it had reached a $53 million settlement with a prepaid card company over charges that the company deceived consumers about access to funds deposited on its debit cards in violation of the FTC Act. The 2016 complaint alleged that the company participated in deceptive advertising claims by informing consumers that they would be able to immediately access funds stored on reloadable prepaid debit cards. Many consumers claimed, however, that they were unable to access their money for weeks or at all because the company either “denie[d] or delay[ed] activation of the card, or because it block[ed] consumers from using it,” and that as a result, many of them suffered severe financial hardships. Moreover, the complaint also claimed that some consumers who closed accounts and requested refunds had to wait several weeks for their money or were informed their funds were allegedly depleted by “account inactivity fees.” The settlement requires the company to provide the $53 million settlement amount to consumers in refunds.
The Commission vote approving the settlement was 2-1. Commissioner Terrell McSweeny issued a statement in support of the settlement, noting that he “believe[s] that the proposed stipulated order provides both injunctive and monetary relief that effectively addresses the challenged conduct. The order prohibits [the company] from misrepresenting to consumers how long it will take, or what conditions are necessary, to activate prepaid cards and have access to funds.” Acting Chairman Maureen Olhausen dissented, explaining, “[f]irst, the majority fails to consider the context of [the company’s] representations in concluding that [the company] made false claims to consumers. Second, the settlement order imposes monetary relief unrelated to [Defendant’s] allegedly deceptive advertising.” Olhausen further explained that, in her view, “[c]ontext often has a significant effect on what reasonable consumers take away from representations in advertising. As FTC law has long recognized, ‘the tendency of advertising to deceive must be judged by viewing it as a whole, without emphasizing isolated words or phrases apart from their context.’”
Payroll Card Regulations in New York Are Struck Down
In a Decision released on February 16, the New York Industrial Board of Appeals struck down the portions of a New York Department of Labor regulation (12 NYCRR 192), set to go into effect on March 7, that would have restricted a New York employers’ ability to pay its employees via payroll debit card. Specifically, the board ruled that the Department had exceeded its authority under New York labor law and encroached upon the jurisdiction of banking regulators when imposing fee limits and other restrictions on the cards.
The new rule – which was adopted by the Department of Labor in September 2016, and codified at section 192 of the New York Labor Law – set forth numerous regulations clarifying and/or specifying the acceptable methods by which employers in New York State may pay wages to certain employees. Among other things, the regulation required that an employer provide written notice to the employee and obtain written consent from the employee at least seven business days prior to taking action to issue the payment of wages by payroll debit card. The new rule would also have prohibited many fees, including charges for monthly maintenance, account inactivity and overdrafts, and for checking a card’s balance and contacting customer service.
At issue before the Industrial Board of Appeals was a petition submitted by a single payroll debit card vendor challenging the Department of Labor’s authority to regulate payroll debit cards. Ultimately, the Board agreed with the vendor, finding that the Department sought to improperly regulate banking services provided by financial institutions – an area subject to the exclusive jurisdiction of the New York Department of Financial Services. In reaching this holding, the Board noted that that the Department of Financial Services already regulates and has issued guidance concerning the fees that financial institutions may charge for banking services, including those related to checking accounts and licensed check cashers. The Board also noted that, should the Department of Labor wish to challenge the Decision, it may bring an Article 78 proceeding in New York Supreme Court, or, alternatively, it may choose to revise the Prepaid Card-related provisions identified in the Decision.