Reed Smith colleagues on our Global Regulatory Enforcement Law Blog discussed a recent California Supreme Court ruling that declared illegal the collection of an individual’s ZIP code when completing a credit card transaction. As a result, the ability of many retailers to generate in-store marketing leads becomes even more difficult. We encourage you to visit the blog to read the full summary and analysis.
As many of our readers are likely aware, the Credit Card Accountability, Responsibility and Disclosure Act (the “CARD Act”) largely becomes effective in just a few days – February 22, 2010. The CARD Act was signed into law in May 2009 to establish new regulations, standards and disclosure requirements for open-end consumer credit plans. In addition to several entirely new regulations that card issuers will be required to follow and implement in the course of their issuing processes and procedures, the CARD Act amends the Truth-in-Lending Act.
One particular regulation contained within the CARD Act requires that a card issuer take into account a consumer’s ability to pay before opening a new consumer credit account and/or increasing the person’s pre-existing credit limit. While the spirit behind this regulation is certainly admirable, how is this supposed to play out in the marketplace?
In October 2009, the Federal Reserve Board (“FRB”) proposed regulations that would have required an issuer (like a Macy’s or Home Depot, that issues its own department store cards) to consider a consumer’s income, assets and current financial obligations. The FRB further proposed that the issuer would be permitted to rely on information provided by the consumer, as well as information in a credit report.
Understandably, retailers expressed serious reservations over these proposed regulations. The mere thought of asking a consumer to disclose his/her income or asset worth at a check-out counter (where most store-brand credit cards are issued) made these retailers shudder. Moreover, there was even concern that a consumer who wished to apply for a store-branded credit card may be required to provide underlying substantiation and documentation, like a tax return, pay stub or W2 to verify such person’s income. Besides the embarrassment this would inevitably cause a consumer in having to show intimate, personal records to essentially complete strangers, retailers expressed concern over the likelihood of consumers abandoning purchases at the point of sale, and the delay that would result from a significantly more involved application and approval process.
Fortunately for retailers, the FRB provided further guidance (and a touch of reality) to clarify its proposal when it finalized the CARD Act regulations in anticipation of the looming February 22, 2010, effective date. Essentially, under the regulations, a card issuer must still review any reasonably available information regarding a consumer’s income, assets or current obligations before issuing or increasing credit. However, an issuer may “consider information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer’s income or assets.” While the regulation still requires some heightened level of checks and balances in determining a consumer’s credit-worthiness when issuing credit at a point of sale, the regulation seemingly allows the issuer (aka retailer) to rely upon a credit report or some other third-party verification without having its team of accountants, bookkeepers and credit analysts pore over a consumer’s tax return in the midst of a President’s Day Sales Bash.
Why this Matters: Based on the FRB’s revised guidance and the allowance of a retailer to make credit decisions on the basis of credit reports and the like, little will probably change on a day-to-day basis, except that what was previously good business practice will soon be law. Certainly retailers and consumers should be pleased with the outcome of this legislation, though the real question will now be what additional measures retailers will adopt and integrate into their credit review process in this climate of consumer protectionism to avoid not simply having bad debt on its books, but also a lawsuit or investigation.
As the Federal Trade Commission continues to step up its efforts to police deceptive advertising across industries and product categories alike, other governmental divisions are following suit. The FDIC, for example, has turned its attention to financial institutions alleged to be engaging in deceptive practices related to credit card solicitations and credit card rate increases—the first such actions of this nature for the FDIC since its action against CompuCredit in 2008.
The FDIC recently announced the issuance of two cease-and-desist orders—one against American Express Centurion Bank and the other against Advanta Bank Corp, both for deceptive credit card practices.
The order issued against American Express Centurion Bank (“AMEX”) alleged that the bank failed to provide timely notices to cardholders that their credit lines were being reduced, at the same time that the bank sent them convenience checks. Consequently, when cardholders tried to use the checks—believing they had credit limit room—the checks were dishonored, resulting in the consumers incurring bounced check fees, which the FDIC alleged was an unfair practice under Section 5 of the FTC Act. AMEX agreed to make restitution of $160 per dishonored check, or an aggregate of approximately $3 million, as well as to implement new procedures for reviewing credit limits and notifying consumers of changes to their limit. The institution also agreed to establish procedures that would allow customers to obtain pre-authorization to use a convenience check, before using the same to make purchases.
The order issued against Advanta Bank Corp. (“Advanta”) (which ceased issuing cards in May 2009) alleged that Advanta marketed and advertised a cash-back reward feature on certain of its business credit card accounts that was rarely attainable, if at all. For example, the advertised percentage cash-back was only available for certain purchases, and indeed, the FDIC alleged that it was effectively impossible to earn the stated percentage of cash-back reward payments, thereby rendering Advanta’s marketing materials as deceptive. As a result, the FDIC concluded that Advanta’s solicitations were likely to mislead a reasonable customer, and therefore, Advanta engaged in a pattern of deceptive acts or practices in violation of Section 5 of the FTC Act.
The FDIC also alleged that Advanta had substantially increased annual percentage rates (APRs) on cardholders that had neither exceeded their credit limits nor were delinquent in making payments on their accounts. The FDIC alleged that these rate increases had been implemented in an unfair manner, and without adequate notice as to (i) the amount or the reason for the increase, or (ii) the procedures to opt-out of the rate increase.
These questionable practices have also led to the recent decision of both the American Arbitration Association (“AAA”) and the National Arbitration Forum (“NAF”) to cease providing a forum for disputes between customers and their credit card companies (as well as cellphone companies). The AAA has stated that it will stop participating in consumer-debt collection disputes until new guidelines are established. Among the problems cited by both groups, provisions such as mandatory arbitration hearings in credit card agreements require customers to unknowingly waive important rights. According to the Minnesota Attorney General, Lori Swanson, who recently settled with the NAF over arbitration / debt-collection practices, “This is an issue beyond any one problem company. It is a systemic industry wide problem. Consumers are giving away rights without evening knowing it.” The practice of arbitrating consumer-debt collection matters has also caught the attention of Congress, where a congressional sub-committee is scheduled to hold a meeting on this various issue this week.
Maintaining this momentum of heightened regulations in the financial industry, on June 17, 2009, the Obama administration unveiled its plan for Congress and several regulatory agencies to adopt a comprehensive series of changes that would increase the role of the federal government in almost every aspect of the financial services industry, including the marketing and advertising of financial products. For example, if adopted as proposed by the President, the proposal would create several new federal agencies, offices, and councils, including a new Consumer Financial Protection Agency (CFPA), dedicated to policing consumer financial products and services.
The CFPA has been designed to regulate the offering of consumer financial products and services in their entirety, save those instruments that will continue to be regulated by the SEC or the CFTC. Its proposed authority is very broad, with a mandate to promulgate, interpret and enforce rules implementing all existing federal consumer financial services and fair lending laws. More importantly, its authority would extend not only to banks, thrifts and credit unions, but also to mortgage lenders, title insurers, money service businesses, advertising and marketing agencies, issuers of prepaid or stored value cards, consumer reporting agencies, debt collectors, certain lessors, certain investment advisors, and those that engage in financial data processing. To do that, the proposed legislation transfers all of the authority over these products and services from the federal bank regulatory agencies and the FTC to the CFPA. While the FTC would retain some back-up authority (as would the bank regulators), this will be a substantial change in the regulatory landscape.
For financial institutions, this all spells trouble. There are already myriad regulations that govern their activities. Adding yet another bureaucratic agency and the resulting collision of jurisdiction and inconsistent principles will only confuse an already difficult situation. But whether the CFPA comes to be or not, the horizon for banking regulation is certainly clouded with the likelihood of more oversight than ever before.
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