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CFPB Seeks Comments on Preemption of State Gift Card Escheat Laws

The Consumer Financial Protection Bureau (CFPB) is considering requests that it make a determination on whether certain provisions of the Maine and Tennessee abandoned property laws are inconsistent with the CARD Act provisions of the Electronic Fund Transfer Act (EFTA) and Reg. E and are thus preempted.

Under the EFTA, the bureau must evaluate whether state law is inconsistent with federal law. One way for a state law to be inconsistent is by “requir[ing] or permit[ing] a practice or act prohibited by the federal law.” An inconsistent state law is preempted by federal law only to the extent of the inconsistency. State law cannot be preempted, however, if the state law provides consumers greater protection than federal law.

The gift card provisions of Reg. E prohibit expiration dates of less than five years. The abandoned property laws of Maine and Tennessee, however, generally require escheatment to the state of unused balances on certain types of gift cards after two years of card inactivity. A bank or retail gift card issuer that has escheated funds to the state may subsequently honor the card if it’s presented for payment and file a request for reimbursement with the state. However, such issuer may also elect to decline to honor the card, in which case, the consumer will have to attempt to reclaim card funds directly from the state (although it may not be obvious to the consumer which state to contact).

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CFPB International Remittance Transfer Rules Create Substantial Compliance Hurdles

One provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) that generated comparatively little concern when it was passed was section 1073 entitled “Remittance Transfers.” Closer examination and subsequent issuance of regulations has now drawn scrutiny to this provision, which was already so detailed and lengthy when it was inserted into the Dodd-Frank Act that there was little room for modification by the CFPB when the bureau issued its implementing regulations. To assist Bryan Cave’s client and friends in efforts to comply with the new law and regulations in time for its February 7, 2013 effective date, we’ve prepared a Bryan Cave Client Alert on the Final Remittance Transfer Rules.

The CFPB’s new regulations are clearly “comprehensive.” Among other things, they:

  1. mandate certain disclosures, including the amount of the exchange rate and the amount to be received, prior to and at the time of payment by the consumer for the transfer;
  2. provide for Federal rights regarding consumer cancellation and refund policies;
  3. require remittance transfer providers to investigate disputes and remedy errors regarding remittance transfers; and
  4. establish standards for the liability of remittance transfer providers for the acts of their agents and authorized delegates.

With the recent issuance by the CFPB of some modifications intended to soften the impact of the Remittance Transfers law and implementing regulations (the “Remittance Rules” or “Rules”), we now have the complete and final picture of how these new Remittance Rules will work.

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CFPB Focusing on General Purpose Reloadable Prepaid Cards

As a precursor to further regulation of general purpose reloadable (GPR) cards, the Consumer Financial Protection Bureau (CFPB) is seeking responses to 10 questions before July 23, 2012.

The CFPB recently released an advance notice of proposed rulemaking (ANPR) seeking comments, data and information regarding GPR cards, including questions regarding costs, benefits and risks to consumers. The ANPR is the first step in the long-anticipated process of regulation by the CFPB over “open loop” or “general use” prepaid cards.

While the ANPR specifically discusses “cards,” other mechanisms that access a prepaid financial account are also encompassed, including key fobs and cell phone apps. The ANPR is focused on GPR cards which the CFPB defines loosely as a general use prepaid card “issued for a set amount in exchange for payment made by a consumer” that is reloadable by the consumer, “meaning the consumer can add funds to the card.”  The ANPR is not seeking information about corporate-funded cards, closed-loop prepaid cards, traditional debit cards, non-reloadable cards, payroll cards, EBT cards or gift cards.

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CFPB Proposes Rule to Supervise Nonbanks Posing Risks to Consumers

The CFPB recently released a proposed rule outlining its procedures for supervising nonbanks engaging in “conduct posing risks to consumers.” The CFPB is authorized to require reports from and conduct examinations of nonbanks subject to its supervision.

Under the Dodd-Frank Act, the CFPB has the authority to supervise several categories of nonbanks:

(1) nonbanks in specific markets (mortgage companies, payday lenders and private education lenders);

(2) nonbanks that are larger participants in other financial products and services markets; and

(3) nonbanks that it may have reasonable cause to determine are posing risks to consumers based on complaints or other information received.

This proposal is pursuant to the third category of such supervisory authority, although the CFPB notes that the Dodd-Frank Act does not require it to issue this rulemaking. Rather, it is doing so to be “transparent in its authorities and procedures.” Under the proposal, the CFPB will have significant  powers to supervise entities that otherwise would not be subject to CFPB examination, based primarily on complaints received under the CFPB’s mandate to collect and track consumer complaints regarding consumer financial products or services. This makes it all the more important that all companies offering or otherwise providing financial products and services to consumers deal promptly with and take steps to resolve consumer complaints, especially recurring complaints from numerous consumers focusing on the same issue.

Based on consumer complaints or other information it receives, the CFPB will identify nonbanks for which it may have reasonable cause to determine they are engaging in, or have engaged in, conduct that poses risks to consumers with regard to offering or providing consumer financial products or services. The Bureau will issue a Notice of Reasonable Cause to these nonbanks. 

The recipient of a notice (referred to as a respondent) will have 20 days to provide a written response to the CFPB that (a) sets forth the basis for the respondent’s contention that it is not a nonbank covered person that is engaging, or has engaged, in conduct posing risks to consumers with regard to the offering or provision of consumer financial products or services and (b) includes all documents, records or other evidence the respondent wishes to use to support the arguments or assertions set forth in the response. A respondent also has the option of providing a supplemental response by telephone. Alternately, a respondent may simply consent to the CFPB’s supervisory authority.

Within 45 days of the respondent’s response, the CFPB’s Deputy Assistant Director for Nonbank Supervision will make a recommendation to the Director of the Bureau regarding whether the respondent should be supervised. The Director has another 45 days to determine whether to adopt, modify or reject the Assistant Director’s recommendation.

The proposal also provides a mechanism for covered nonbanks to petition for termination of the CFPB’s supervisory authority after two years.

The proposal states that a Notice of Reasonable Cause would not constitute a notice of charges for any violations of law. These procedures are considered informal and are not adjudicatory proceedings under the Administrative Procedures Act. Therefore, there is no process for discovery and no witnesses will be called.

Comments on the proposal are due by July 24, 2012. The proposal is available here; the CFPB’s related press release can be viewed at here.

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11th Circuit Upholds Deposit Agreement Arbitration Provision

The United States Court of Appeals for the 11th Circuit rendered an important decision on March 5, 2012, addressing the enforceability of binding arbitration provisions in consumer deposit agreements. The case began when Lawrence and Pamela Hough brought suit against Regions Bank for allegedly violating federal and state law by collecting overdraft charges under its deposit agreement. The deposit agreement contained an arbitration provision and Regions moved to compel arbitration. The federal district court hearing the case denied the motion to compel on the ground that the arbitration clause was substantively unconscionable because it contained a class action waiver. Regions appealed the decision to the 11th Circuit Court of Appeals and the appellate court vacated the ruling and sent it back to the trial court in light of a recent United States Supreme Court which held that the Federal Arbitration Act preempted a California’s judicial rule regarding the unconscionability of class arbitration waivers in consumer contracts. This time around the district court found other reasons to deny Regions’ motion to compel arbitration, holding that the arbitration clause was substantively unconscionable under Georgia law because it believed that a provision granting Regions the unilateral right to recover its expenses for arbitration allocated disproportionately to the Houghs the risks of error and loss inherent in dispute resolution.

The lower court decision was again appealed to the 11th Circuit. On appeal the Houghs argued that while the arbitration provision in the deposit agreement capped the Houghs’ costs for the arbitration proceeding at $125, another paragraph required the Houghs to reimburse Regions as a prevailing party for its costs of arbitration. The arbitration agreement permitted Regions, if it was “the prevailing party,” to obtain “reimburse[ment] for [its] costs and expenses (including reasonable attorney’s fees) … [in] arbitration” and to collect that amount by “charg[ing] [the Houghs’] account.” The district court concluded that the reimbursement provision was unconscionable because Regions had an exclusive right of setoff. The 11th Circuit disagreed, and noted that under Georgia law an arbitration provision is not unconscionable because it lacks mutuality of remedy. The district court also ruled that the arbitration clause had a degree of procedural unconscionability, but the 11th Circuit found that to be unconscionable under Georgia law, a contract must be so one-sided that “no sane man not acting under a delusion would make and that no honest man would participate in the transaction.” The court found that the arbitration clause in the Houghs’ agreement fell well short of that standard. Although the district court found it troubling that the clause was presented to the Houghs “on a take-it-or-leave-it basis with no opt-out provision,” the 11th Circuit noted that under Georgia law, an adhesion contract (i.e., one that is not truly negotiated between the parties such as a deposit agreement or a credit card agreement) is not per se unconscionable.

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CFPB Creates Ombudsman’s Office

The Consumer Financial Protection Bureau has created an ombudsman’s office to help resolve individual and systemic problems that banks, nonbanks and consumers have with the bureau. The announcement states that depository or non-depository entity that the CFPB supervises may use the Ombudsman’s Office when they have not had success with the existing CFPB processes, or to achieve an informal resolution. Further information may be found at http://www.consumerfinance.gov/ombudsman/#FAQ.

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CFPB Seeks Suggestions for Streamlining Inherited Regs

The CFPB is requesting suggestions for streamlining the regulations it has inherited from other agencies pursuant to the Dodd-Frank Act.

In particular, the bureau is asking the public to identify provisions of such regulations that it should make the highest priority for updating, modifying or eliminating because they are outdated, unduly burdensome or unnecessary, including:

  • Certain definitions in Reg E, Reg P, Reg Z
  • Annual privacy notices under Reg P
  • ATM fee disclosures under Reg E
  • Coverage and scope of Reg Z
  • Electronic disclosures required under Reg E and Reg Z

Publication of the CFPB’s notice in the Federal Register is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-05/pdf/2011-31030.pdf. Comments are due by March 5, 2012; commenters will have until April 3, 2012, to respond to other comments.

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CFPB Issues Guidance on Confidential Supervisory Info

The CFPB recently issued guidance on the treatment of confidential supervisory information.  CFPB Bulletin 12-01 states that once the bureau issues a request for information, supervised financial institutions (i.e., those with total assets of more than $10 billion) are required to provide all documents and other information responsive to the request.  The bulletin adds:

Supervised institutions may not selectively withhold responsive documents based on their judgment that such materials are not necessary to the Bureau’s execution of its responsibilities or that other materials would be sufficient to suit the Bureau’s needs. The supervisory process is based on the supervisor’s full and unfettered access to information, and the supervisor is entitled – indeed, duty bound–to ensure that it thoroughly understands the institution in question and has access to all information that, in its independent judgment, may bear on its supervisory responsibilities.

The Bulletin argues that providing requested information to the bureau will not result in a waiver of any privilege that may attach to such information, and thus it will not consider waiver concerns to be a valid basis for withholding information from the agency.  However, the agency will give “due consideration to … requests to limit the form and scope of any supervisory request for privileged information.”

Finally, the Bulletin reiterates that all information obtained in the supervisory process will be treated as confidential and privileged, other than in cases when the exchange of such information with other regulators that share supervisory jurisdiction over a supervised institution is prudent, as determined by the CFPB’s general counsel.

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CFPB Republishes Regs E, P and Z

The CFPB is republishing regulations for which it is assuming authority from other agencies pursuant to the Dodd-Frank Act and making technical and conforming changes to reflect the transfer of authority and other changes required by the act. Among others, the CFPB issued interim final rules with request for public comment for the Federal Reserve’s Regulation E (Electronic Fund Transfers, Regulation P (Privacy of Consumer Financial Information) and Regulation Z (Truth in Lending).

The preambles to the interim final rules state that the regulations do not impose any new substantive obligations on persons subject to the existing regulations as published by the Federal Reserve.

The interim final rules became effective Dec. 30, 2011. The Reg E interim final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-27/pdf/2011-31725.pdf; comments are due by Feb. 27, 2012. Reg P is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-21/pdf/2011-31729.pdf; comments are due by Feb. 21, 2012. Reg Z is available at http://www.gpo.gov/fdsys/pkg/FR-2011-12-22/pdf/2011-31715.pdf; comments are due by Feb. 21, 2012.

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President Obama Appoints Cordray in Recess Appointment

President Obama recently announced his recess appointment of former Ohio Attorney General Richard Cordray to head the CFPB. This came despite the fact that the Senate held a series of “pro forma” sessions held over the congressional recess in an attempt to preclude a recess appointment. In response, the President dismissed the procedural requirements of a recess appointment, calling the pro forma sessions ‘gimmicks.’

Insiders have speculated some consequences of the recess appointment, including retaliation by Republicans in holding up the nominations of other agency heads. But more importantly, litigation is likely to stem from Cordray’s appointment, calling into question whether the specific requirements for a recess appointment were met. There is also the technical issue of whether the Dodd-Frank Act requirement of a “Senate-confirmed director” is met, which is key in establishing the CFPB’s authority over nonbanks. Despite Cordray’s appointment, it is unclear whether the bureau can legally exercise its full powers over nonbanks.

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