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OCC Opines that Federal Preemption Still Exists, Despite Dodd-Frank

The OCC recently sent a letter to Sen. Tom Carper (D-Dela.) in response to his request for the OCC to clarify how it would interpret particular aspects of the preemption provisions of the Dodd-Frank Act.  Among other things, the letter states that federal preemption of state consumer protection laws would continue even under Dodd-Frank, in accordance with the “Barnett” standard. Of particular interest, the OCC letter noted that Dodd-Frank did not overrule or reverse any pre-existing judicial decisions that were based on the Barnett standard and which found that the state law conflicted with bank powers.

The Dodd-Frank Act restricts the ability of national banks and federal savings associations to assert preemption from state consumer protection laws.  For example, the ability to assert “field preemption” over an entire body of law (even if there is no conflict) no longer exists. However, contrary to some assertions, preemption is not “dead.”  One way preemption would apply is when the state consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers, as established by the Supreme Court in the Barnett case.

In its letter, the OCC declares that this preemption standard as statutorily referenced in the Dodd-Frank Act is a “directive to apply the conflict preemption standard articulated in the Barnett decision.”  However, the letter further adds that the OCC “recognizes that going forward, after the transfer date, the Dodd-Frank Act imposes new procedures and consultation requirements with respect to how [the OCC] may reach future preemption determinations, including the case-by-case requirement…” and specifically mentions that the OCC will be required to first consult with the Consumer Financial Protection Bureau prior to making its determination.

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Avoiding Legal Traps When Offering "Groupon" or "Living Social"-like Discounts

We have heard from many retailers and service providers who are interested in building up new business by offering a deeply-discounted “Groupon” or “Living Social”-like” promotional certificate program.  This is how these work: emails go out to local residents letting them know, for example, that for $30 they can get a certificate worth $60 towards food at the French Bistro, a local restaurant.  However, the discounted certificate almost always has a short expiration date:  like a manufacturer’s coupon, the consumer must take advantage of the offer within a few weeks or months.

And that’s the problem.  Of course, a short expiration date makes perfect sense from a marketing perspective.  But these are different from the manufacturer’s coupons you get in your Sunday paper, because the consumer has had to pay for them. Even though the consumer pays less than full value, they are still paying.  That is why, although these programs are highly popular, there has also been a spate of class action lawsuits because certain expiration dates may violate certain federal or state laws.

The good news is that there is a way to offer a discounted Groupon-like promotional certificate program, without getting on the wrong side of the law. Here’s how.

I.  The Issues Under Federal Law.

In 2009, Congress passed the CARD Act, which among other things, regulates gift cards and gift certificates.  Under the CARD Act, both open and closed loop gift certificates and gift cards are prohibited from expiring prior to five years from date of issuance.

However, there is an important exclusion for loyalty, award and promotional cards (referred to collectively as “promotional cards”).  Expiration dates are permitted on promotional cards provided that the fact that it is a “promotional card” and the expiration date are both clearly disclosed on the front of the card or certificate.

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Prepaid Cards That Access Lines of Credit Are "Credit Cards"

On March 18, 2011, the Federal Reserve Board of Governors issued a Supplementary Information and Final Regulation and Commentary (“Supplementary Information”) which, among other things, clarified the definition of credit card. The following Client Alert focuses on how the new Supplementary Information impacts debit and prepaid cards that access a separate line of credit.

Since publication of the February 2010 and June 2010 Final Rules, the Board has become aware that clarification is needed to resolve confusion regarding how institutions must comply with particular aspects of those rules. In order to provide guidance and facilitate compliance with the final rules, the Board published proposed amendments to portions of the regulation and the accompanying staff commentary on November 2, 2010. See 75 FR 67458 (November 2010 Proposed Rule).

With respect to prepaid cards, the Supplementary Information discusses what happens when a customer opens a line of credit in connection with a prepaid card account.  Depending on how the line of credit works, the prepaid card or prepaid card account number, or both, may be deemed a “credit card” under Reg Z. If the prepaid card or its account number is a credit card, then all Reg Z requirements applicable to a “credit card account under an open-end (not home-secured) plan” would apply.

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