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Senators Introduce Prepaid Card Bills
On January 9, Senator Mark Warner (D-VA), released the Prepaid Card Disclosure Act of 2014. The bill would amend the Electronic Fund Transfer Act to require any person that offers certain prepaid card accounts to offer with any application a table of fees that (i) can be “easily understood”; (ii) is “clearly and conspicuously” displayed; and (iii) includes, at a minimum, the amount and description of each fee that may be charged in connection with the account. In addition, a toll-free number and website at which the consumer can access the fee disclosure would have to be included on the card or other means of account access. The bill would require the CFPB to establish by rulemaking a format for the fee table and would allow the CFPB to require the placement of a QR code or similar technology on any packaging, card, or other object associated with the account to provide an electronic link to the disclosures. The bill follows the December 2013 introduction of the Prepaid Card Consumer Protection Act, sponsored by Senators Robert Menendez (D-NJ) and Richard Blumenthal (D-CT). The bill includes disclosure requirements similar to the Warner bill, plus a “wallet sized” fee disclosure requirement. In addition, Senator Menendez’s bill would, among other things, prohibit numerous fees and most credit features, and would require that financial institutions and account providers close accounts and refund the balance after 12 months of inactivity or other term of inactivity established by the CFPB, and upon request of the consumer.
CFPB Releases Preliminary Results Of Ongoing Arbitration Study
On December 12, the CFPB published the preliminary results of its ongoing study of arbitration agreements in consumer finance contracts. Section 1028(a) of the Dodd-Frank Act directs the CFPB to study the use of pre-dispute arbitration contract provisions, and preconditions the CFPB’s exercise of rulemaking authority regarding arbitration agreements on a finding that the regulation is “in the public interest and for the protection of consumers.” The CFPB commenced its arbitration study in early 2012, and expanded its review this year with a proposal to survey credit card holders, and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements, as Director Cordray indicated during a September House Financial Services hearing.
The CFPB reports the following preliminary results, among others:
- Larger banks are more likely to include arbitration clauses in their credit card contracts and checking account contracts than smaller banks and credit unions.
- Just over 50% of credit card loans outstanding are subject to arbitration clauses, while 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- Arbitration clauses are prevalent across the general purpose reloadable (GPR) prepaid card market, with arbitration clauses appearing in the cardholder contracts for 81% of GPR prepaid cards studied by the CFPB.
- Class action waivers are ubiquitous, appearing in approximately 90% of arbitration provisions.
- A minuscule number of consumers exercise contract carve-outs permitting disputes to be pursued in small claims courts, while credit card issuers are “significantly more likely” to sue consumers in small claims court.
The CFPB did not consider specific policy options at this stage. However, the report outlines numerous additional steps the CFPB plans to take as part of its arbitration study, which may expand to include other financial product markets. For example, in response to stakeholder comments, the CFPB is revising a prior proposal to conduct a survey of consumers that addresses consumer awareness of arbitration clauses and consumer perceptions of and expectations about formal dispute resolution. The CFPB also intends to assess the possible impact of arbitration clauses on the price of consumer financial products. Finally, the CFPB is examining the interrelationship between public enforcement and private aggregate enforcement (i.e., class actions) by conducting an empirical analysis of the types of cases brought by public and private actors, and the relationship between any actions against the same defendants or challenging similar conduct. The report does not provide anticipated timelines for these or any of the other future steps the Bureau describes.
CFPB Director Testifies Before Senate Banking Committee
On November 12, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recent Semi-Annual Report to Congress, which covered the period April 1, 2013 through September 30, 2013.
The session covered a range of topics, including mortgage rule implementation, auto finance, student lending, Military Lending Act rulemaking, prepaid cards, Gramm-Leach-Bliley Act privacy notices, and the CFPB’s data collection practices. A summary of the discussion of each of those topics follows. Notably, the hearing did not touch on (i) short-term, small dollar lending (outside of the Military Lending Act), online lending, or the ongoing investigations of payment processors, (ii) the status of the CFPB’s HMDA rulemaking or small business lending rule, or (iii) the CFPB’s integrated mortgage disclosure rule, which is expected later this month.
Mortgage Rule Implementation
Several committee members asked the Director about the CFPB’s compliance expectations for financial institutions when the various mortgage rules take effect in January. Director Cordray reiterated statements he has made recently in other forums: (i) the CFPB believes the vast majority of financial institutions, both large and small, will be in substantial compliance by January, (ii) the CFPB is sticking with the January implementation deadline, and (iii) “in the early months” the CFPB will not be looking for strict compliance, but rather will assess whether institutions have made “good faith efforts” to come into “substantial compliance.”
Senator Coburn (R-OK) sought clarification on the terms “early months” and “good faith effort.” On the former, the Director stated that it remains undefined. With regard to the latter, the Director explained that the CFPB will look to see whether institutions generally are taking the rules seriously and if they have compliance management system is in place that allow for monitoring and reporting to the institution’s board. He added that the CFPB does not intend to play “gotcha.”
Auto Finance
Several Republican members raised concerns about the CFPB’s approach to auto finance supervision and enforcement and specifically the indirect auto finance bulletin issued earlier this year. For example, Senator Moran (R-KS) urged Director Cordray to provide more specific answers to questions recently posed by a bipartisan group of Senators, including more detail on the CFPB’s statistical methodology for determining disparate impact and its use of proxies. Director Cordray’s November 4 response to the Senate letter largely re-stated the CFPB’s response to a similar inquiry submitted by a group of House members over the summer.
In the most recent letter, Director Cordray explained further the CFPB’s integrated methodology for proxying race and national origin, which combines probabilities about an individual’s race or ethnicity based on surname and geocoding. In a related blog post, the CFPB’s Assistant Director of Fair Lending and Equal Opportunity described proxy methodologies employed by “responsible lenders,” and attempted to further justify the CFPB’s methodology. During the hearing, Director Cordray asserted that the CFPB’s approach to both is time honored and well-tested. He explained that the CFPB’s proxy methodology is a refinement of that used by the Federal Reserve Board and is “state of the art.” He acknowledged that some may have a problem with the state of the art, but asserted that the methodology is proven in social science literature and used beyond the lending context, and added that the CFPB has to have confidence in the approach knowing that it could be tested in court.
Director Cordray expressed concern about discussing the CFPB’s specific methods in detail because they relate to ongoing investigative processes the CFPB is pursuing with the DOJ. He also repeatedly referenced today’s auto finance forum as a venue in which these issues will be discussed in more detail, and one that will provide industry an opportunity to weigh in on the CFPB’s approach. He dismissed concerns that the CFPB’s activities in the auto finance realm—in particular its push towards flat fee compensation arrangements for dealers—might constrain credit or raise consumer costs, citing the “red hot” car market.
Senator Warren (D-MA) commented on dealer markups, citing “studies” that show markups cost consumers $26 billion a year and that minorities pay a higher share of those costs. She called for Congress to remove the Dodd-Frank Act exemption for dealers and provide the CFPB authority over all auto lending. Director Cordray later stated that the law drew an “unnatural line” between finance companies on the one hand and dealers on the other, but that the CFPB understands its jurisdiction and does not want to be perceived to be extending its reach to cover dealers.
Student Lending
Student loans were the only product that received special, though not new, attention in the CFPB Director’s written testimony. There and in his oral statement he highlighted the comments and complaints the CFPB has received on student lending issues and again identified problems in the student loan market that the CFPB believes mirror those seen in the mortgage market prior to the financial crisis.
Senator Coburn posited that some of the student debt problem is attributable to borrowers maxing out loans for purposes other than paying for costs not directly associated with education and suggested that Congress look at limiting acceptable uses of federal loans.
Military Lending Act
In response to a question from Senator Reed (D-RI), Director Cordray stated that the CFPB, the DOD and other agencies are close to proposing new rules under the MLA. He indicated that the proposal is pending OMB review.
Prepaid Cards
Senator Menendez (D-NJ) complained about prepaid card fees and stated he plans to reintroduce his prepaid card bill. Director Cordray generally agreed that the CFPB has concerns about the prepaid market and noted the Bureau’s 2012 ANPR. The CFPB’s spring rulemaking agenda indicated the CFPB could propose a prepaid card rule before the end of this year. However, the Director did not provide an updated timetable for issuing a prepaid card rule during his testimony.
GLB Act Privacy Notices
Senator Brown (D-OH) continued to push his bill that would exempt from the Gramm-Leach-Bliley Act’s annual privacy policy notice requirement any financial institution that (i) provides nonpublic personal information only in accordance with specified requirements and (ii) has not changed its policies and practices with regard to disclosing nonpublic personal information from its most recent disclosure. The House of Representatives passed its version earlier this year and the Senate could move the bill before the end of this year. Director Cordray indicated that the CFPB continues to work on a rulemaking on this issue, and that while the CFPB may not be able to go as far as Congress could through legislation, the CFPB rule is “moving in the same direction” as the legislation.
CFPB Data Collection
Much of the hearing again centered on the CFPB’s collection and use of personally identifiable information (PII). Sen. Crapo (R-ID) continued to press the issue for Republicans, and was joined by Senators Vitter (R-LA) and Toomey (R-PA). Those members asked Director Cordray to describe the types of data the CFPB collects and how that data is protected. Sen. Crapo focused primarily on the credit card account data that the CFPB obtains from Argus, which the Senator estimated to include 900 million accounts. Senator Crapo believes that even though the data may be “de-identified,” the possibility exists that it could be reverse engineered to allow CFPB staff to obtain PII or review individual accounts. Director Cordray repeatedly explained that the CFPB’s interest in that data set is to monitor market trends and the broad treatment of card holders, and the CFPB is not interested in monitoring individual accounts. He asserted the CFPB lacks the capability or interest to obtain or use consumer PII in that context. He pointed out that other regulators have had and continue to have access to the same data. Senator Crapo noted that he has requested a GAO review of this issue; Director Cordray welcomes the audit.
CFPB Rulemaking and Examination Processes
Senators Corker (R-TN) and Toomey (R-PA) brought up the recent Bipartisan Policy Center report on the CFPB to make the case that the CFPB should pursue open rulemakings instead of issuing guidance. Director Cordray stated that the CFPB will continue to use guidance when it is restating or clarifying the law, but otherwise will use open rulemakings. He admitted the auto finance guidance process could have been more open or inclusive, but again cited the upcoming forum as a way to address those concerns. He defended the CFPB’s debt collection bulletin and its 2012 fair lending bulletin.
Director Cordray stated that the CFPB still is only 80% staffed on supervision. While he agrees that the CFPB may have been slow on closing out examinations, the CFPB deliberately chose quality and consistency over speed while it staffed-up. He asserted that speed and responsiveness have greatly improved in recent months and will continue to improve next year.
CFPB Issues Guidance on Payroll Cards
On September 12, the CFPB issued a bulletin stating that the Electronic Fund Transfer Act (EFTA) and Regulation E apply to payroll card accounts, which Regulation E defines as “accounts that are established directly or indirectly through an employer, and to which transfers of the consumer’s salary, wages, or other employee compensation are made on a recurring basis.” This bulletin follows pressure from federal legislators on the CFPB to clarify the protections afforded to consumers receiving wages on payroll card accounts and to investigate the fees and practices associated with such accounts, and reports of at least one state-level investigation of payroll card practices.
The bulletin and press release emphasize that the following provisions apply to payroll card accounts:
- Fee disclosures. At account opening or before the first electronic fund transfer (EFT), a payroll card issuer must provide disclosures of any fees imposed by the financial institution for EFTs, limitations on liability, and other required information. The bulletin notes that some state laws dictate that certain information be provided before an employee elects to receive wages via payroll card.
- Account information. A payroll card issuer must provide periodic statements as required by Regulation E generally or, alternatively, must make available to the consumer - (i) by telephone, the consumer’s account balance; (ii) electronically (such as through a website); or (iii) in writing (if requested) - a history of the consumer’s transactions and fees covering the preceding 60 days.
- Unauthorized transfers. With limited exceptions regarding the period within which an unauthorized transfer must be reported, Regulation E’s limited liability protections apply to payroll cards.
- Error resolution. Financial institutions must respond to a consumer’s report of errors regarding a payroll card account if the report is received within 60 days of the consumer either accessing an electronic account history or receiving a written account history on which the error appears, whichever is earlier, or within 120 days after the alleged error occurs.
- Compulsory use. An employer may not require that its employees receive their wages by electronic transfer to a payroll card account at a particular institution. An employer may, however, offer employees the choice of receiving their wages on a payroll card or receiving it by some other means. The bulletin notes that most states’ laws contain additional restrictions on the manner in which employers may make wages available to their employees and that the EFTA and Regulation E preempt state laws “relating to” EFTs, among other things, only to the extent of any inconsistency. A state law is not considered inconsistent with the EFTA and Regulation E if the state law affords consumers greater protections.
Lastly, the bulletin notes the CFPB’s authority to examine supervised entities’ use of third-party service providers and to enforce the EFTA and Regulation E against both financial institutions and employers.
Federal, State Officials Focus on Employee Payroll Cards
On July 11, a group of Democratic Senators urged the CFPB and the Department of Labor to “take swift action” regarding prepaid payroll cards. The Senators expressed concern that workers do not understand the “excessive fees” and “harmful practices” associated with such cards, and suggested that those fees and practices - specifically, those relating to ATM use, balance inquiry, swipe purchases, overdraft, and inactivity, among others – may violate the Electronic Fund Transfer Act and its implementing regulation, Regulation E. The lawmakers asked the CFPB to conduct a study to better understand these fees and their impact on workers, and to clarify through a rulemaking or other supervisory action the options employers must provide to their employees under Regulation E. The Senators’ letter follows reports of an investigation by New York Attorney General Eric Schneiderman into potential state law violations related to employers’ use of payroll cards.
CFPB Releases Spring Rulemaking Agenda
On July 3, the CFPB released its spring 2013 regulatory agenda. Among the agenda items are three rulemaking activities listed for the first time: (i) “prerule activities” related to payday loans and deposit advance products anticipated for January 2014, (ii) “further action” on debt collection regulations expected in October 2013, and (iii) “prerule activities” related to Gramm-Leach-Bliley Act privacy notices planned for November 2013. The agenda also indicates that the CFPB expects, among other things, to (i) finalize its integrated mortgage disclosures rule in October 2013, (ii) issue a final student loan servicer “larger participant” rule in September 2013, and (iii) propose a rule regarding general purpose reloadable prepaid cards in December 2013. The agenda does not mention any planned activities related to small business lending data collection or auto finance issues.
FDIC Announces Enforcement Action Against Debit Card Issuer, Affiliated Service Provider
On May 31, the FDIC announced enforcement actions against a California bank and an affiliated service provider for alleged unfair and deceptive practices in the marketing and servicing of a prepaid reloadable MasterCard. According to the FDIC, the service provider’s website contained a number of misrepresentations while omitting other information. Specifically, the FDIC claimed that the firm deceptively advertised free online bill pay, promoted features that were not available to cardholders, and charged fees that were not clearly disclosed. Additionally, the service provider’s ACH error resolution procedures imposed additional, undisclosed requirements on card holders. Neither the bank nor the service provider admitted the allegations, but they agreed to establish a restitution fund of approximately $1.1 million for over 64,000 card holders, and pay civil money penalties of $600,000 and $110,000, respectively. The consent orders (i) direct both entities not to engage in further violations of law, (ii) establish specific corrective actions, and (iii) require enhanced compliance management systems and periodic reporting to the FDIC. The bank is further required to strengthen its oversight of third parties.
CFPB Issues Final Preemption Determination for Maine, Tennessee Unclaimed Gift Card Laws
On April 19, the CFPB issued a final preemption determination regarding whether the Electronic Fund Transfer Act (EFTA) and Regulation E preempt certain unclaimed gift card laws in Maine and Tennessee. The EFTA, as implemented by Regulation E, generally prohibits any person from issuing a gift certificate, store gift card, or general-use prepaid card with an expiration date, though under certain conditions, the card may have an expiration date so long as it is at least five years after the date of issuance (or five years after the date that funds were last loaded). The CFPB determined that the Maine law does not interfere with a consumer’s ability to use a gift cards at point-of-sale for at least as long as guaranteed by the EFTA and Regulation E because it requires the issuer to honor the gift card on presentation indefinitely even if the unused value has been transferred to the state. For Tennessee, the CFPB reached the opposite conclusion because the Tennessee provision permits issuers to decline to honor gift cards as soon as two years after issuance. According to the CFPB, the Tennessee law is inconsistent with federal law because, in effect, the provision allows funds to expire sooner than is permitted under EFTA and Regulation E.
CFPB Seeks Comments on GPR Prepaid Cards
On May 24, the CFPB made an advance notice of proposed rulemaking (ANPR) to solicit comments that it will use to evaluate general purpose reloadable (GPR) prepaid cards. According to the ANPR, the CFPB intends to issue a proposal to extend Regulation E requirements to GPR cards. This would mean that issuers of GPR cards would be subject to many of the requirements currently applicable to ATM transactions, POS terminal transfers, telephone bill-payment services, and other electronic fund transfer systems. Comments on the ANPR are due by July 23, 2012.
CFPB To Collect Information on Compliance Costs, Hold Hearing on Prepaid Cards
On May 15, the CFPB published a notice and request for comment regarding its collection of information concerning the costs expected to be incurred by institutions required to comply with CFPB rules. The notice identifies specifically the need to collect information about costs to mortgage and remittance industry participants in connection with upcoming CFPB rules. The notice further states that the CFPB seeks to understand the effect of compliance costs on financial service providers and consumers, but that it is particularly interested in the impact of regulations on the unit costs of delivering specific consumer products and services. The CFPB plans to use structured interviews, focus groups, written questionnaires, and other methods to collect the needed information, and will attempt to collect a representative sample of providers from affected markets. The public is invited to comment on the notice through June 19, 2012. On May 17, the CFPB announced that it will hold a public hearing to discuss issues in the prepaid cards market. The hearing is scheduled to take place on May 23, 2012 inDurham,NC, and will include remarks from Director Cordray.