On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the DFS sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.
On August 6, the CFPB’s Student Loan Ombudsman, Rohit Chopra, published a blog post addressing the financial arrangements between financial institutions and institutions of higher education that market financial products to students. Last year, the CFPB urged banks to disclose any agreements with colleges and universities to market debit, prepaid, and other products to students and warned that “[t]he CFPB prioritizes its supervisory examinations based on the risks posed to consumers” and “[failing to make] college financial product arrangements transparent to students and their families . . . increase[s] such risks.” In this latest review, the CFPB assessed the Big Ten schools and found that at least 11 have established banking partners to market financial products to students. Of those 11, the CFPB found only four contracts on the bank websites, and it characterized three of those four contracts as “partial”—i.e. in the CFPB’s view, the disclosed agreements “did not contain important information, such as how much they pay schools to gain access to students in order to market and sell them financial products and services.” Concurrent with the blog post, the CFPB sent letters to schools asserting that “their bank partner has not yet committed to transparency when it comes to student financial products.”
On April 22, Senator Elizabeth Warren (D-MA), Congressman George Miller (D-CA) and 22 other lawmakers sent a letter to Department of Education (DOE) Secretary Arne Duncan, supporting the DOE’s ongoing efforts to revise its rules that govern the ways higher education institutions request, maintain, disburse, and otherwise manage federal student aid disbursements. The DOE is considering changes that would, among other things, clarify permissible disbursement practices and agreements between education institutions and entities that assist in disbursing student aid, and increase consumer protections governing the use of prepaid cards and other financial instruments. The lawmakers specifically called on the DOE to “mandate contract transparency, prohibit aggressive marketing, and ban high fees when colleges partner with banks to sponsor debit cards, prepaid cards, or other financial products used to disburse student aid” through rulemaking that would, among other things, (i) prohibit colleges from entering into preferred relationships with financial institutions to offer debit cards or other financial products that charge fees associated with the disbursement and use of federal student aid; (ii) ban revenue sharing deals between colleges and financial institutions; and (iii) require colleges to post agreements with banks on their websites and report them to the CFPB and other government agencies annually.
On March 21, the U.S. Court of Appeals for the D.C. Circuit held that the Federal Reserve Board’s final rule imposing a 21-cent per transaction limit on debit card interchange fees (up from a 12-cent per transaction limit in its proposed rule) was based on a reasonable construction of a “poorly drafted” provision of the Dodd-Frank Act and that the Board acted reasonably in issuing a final rule requiring debit card issuers to process debit card transactions on at least two unaffiliated networks. NACS v. Bd. of Governors of the Fed. Reserve Sys., No. 13-5270, 2014 WL 1099633 (D.C. Cir. Mar. 21, 2014). The action was brought by a group of merchants challenging the increase to the interchange fee cap and implementation of anti-exclusivity rule for processing debit transactions that was less restrictive than other options. In support of their challenge, the merchants argued that in setting the cap at 21 cents the Board ignored Dodd-Frank’s command against consideration of “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The court held, in a decision that hinged on discerning statutory intent from the omission of a comma, that when setting the fee cap the Board could consider both the incremental costs associated with the authorization, clearance, and settlement of debit card transactions (ACS costs) and other, additional, non-ACS costs associated with a particular transaction (such as software and equipment). The court further concluded that the Board could consider all ACS costs, network processing fees, and fraud losses. The court, however, remanded the question of whether the Board could also consider transaction-monitoring costs when setting the fee cap, given that monitoring costs are already accounted for in another portion of the statute. Finally, the court rejected the merchants’ argument that the Board’s final rule should have required the card issuers to allow their cards to be processed on at least two unaffiliated networks per method of authentication (i.e., PIN authentication or signature authentication) holding that the statute goes no further than preventing card issuers or networks from requiring the exclusive use of a particular network.
CFPB Student Loan Ombudsman Questions Marketing Of Student Financial Products; GAO Recommends More Transparency
On February 13, CFPB Student Loan Ombudsman Rohit Chopra published on the CFPB’s blog an update on the CFPB’s review of student financial products and raised concerns about certain marketing arrangements between financial institutions and colleges and universities, and the level of transparency associated with those agreements and the products marketed under them. He specifically questioned financial institutions that “generate a significant amount of their revenue on these products while students are currently in school.” On the same day, the GAO published a report on student debit and prepaid cards and marketing agreements, which recommends that Congress take steps to increase transparency. Read more…
On October 25, the United States District Court for the Northern District of California partially denied a bank’s motion for judgment on the pleadings seeking to dispose of class claims under California’s Unfair Competition Law (UCL) based on allegations that the bank reordered debit card transactions in order to maximize overdraft fees collected in connection with such transactions and misled customers regarding this practice in account agreements and monthly checking account statements. Hawthorne v. Umpqua Bank, No. 11-06700, 2013 WL 5781608 (N.D. Cal. Oct. 25, 2013). Departing from the conclusion reached by two other district courts, the court held that the bank’s debit cards constituted a “service” for purposes of the Consumer Legal Remedies Act (CRLA), which prohibits unfair methods of competition and unfair or deceptive acts and practices so long as the challenged conduct is part of a transaction involving the intended sale or lease of goods or services to a consumer. Two prior district courts had concluded that overdrafts and overdraft fees were not services sold or leased under the CLRA, but the Hawthorne court reached the opposite conclusion relying on the fact that (i) the CLRA is liberally construed and generally applicable to financial institutions and (ii) its determination that classifying debt cards as a service for consumers was consistent with the convenience benefits consumers receive from such cards. The court granted the bank’s motion for judgment on the pleadings with respect to a number of plaintiffs’ other claims, including violation of the unfair prong of the UCL, breach of the implied covenant good faith and fair dealing, breach of contract, and unjust enrichment.
On September 30, the CFPB (or the Bureau) hosted a “Banking on Campus” forum, an event it described as a continuation of its February 2013 request for information about financial products and services marketed to college students. The event featured remarks from government officials, including the CFPB and the U.S. Department of Education, as well as presentations from students, school officials, financial institution representatives, and consumer advocacy groups. Generally, the discussion centered on the potential financial impact of exclusive marketing arrangements between schools and financial service providers on students, particularly with regard to financial aid disbursement products.
Director Cordray provided opening remarks in which he stated the Bureau’s concern that colleges and universities may be encouraging or even requiring students to use financial products that do not offer the best deals, while the schools are “secretly making money” from marketing agreements with financial service providers.
CFPB Student Loan Ombudsman, Rohit Chopra followed with a presentation that summarized the findings from the Bureau’s request for information, which may indicate the direction the CFPB will take in further scrutinizing student banking products and services. According to Mr. Chopra, the CFPB received 162 responses to its request for information and reviewed publicly available information. The Bureau’s initial observations include, among others, that: (i) financial product marketing partnerships have shifted to student checking, debit and prepaid card products (particularly student ID card accounts and financial aid disbursement cards/accounts); (ii) college affinity products generally do not appear to have more attractive features compared to other student checking products; and (iii) marketing arrangements between financial institutions and institutions of higher education for many student banking products are not well understood. Read more…
Congressional Democrats Seek Information on Student Debit Cards; CFPB Plans “Banking on Campus” Event
On September 26, several Democratic Members of Congress, including Assistant Senate Majority Leader Dick Durbin (D-IL), House Financial Services Ranking Member Maxine Waters (D-CA), House Education Committee Ranking Member George Miller (D-CA), and Senate Banking Committee members Sherrod Brown (D-OH) and Elizabeth Warren (D-MA), sent letters to the CEOs of numerous financial institutions asking that the institutions explain their student debit card deals with colleges and universities. The letters ask each financial institution for: (i) a list of colleges/universities where the institution has an agreement to enroll students in any deposit account or prepaid debit account and where the marketing, materials or financial instruments used to access such accounts are co-branded with a college or university logo, symbol, mascot or name; (ii) the number of accounts opened through agreements at each institution of higher education listed from the previous question, and the total fees collected from such accounts over the last three academic years; (iii) the total value of monetary and non-monetary remuneration provided to such institutions of higher education for the marketing of these products over each of the last three academic years; and (iv) whether any of the institution’s employees or agents have ever provided any monetary or non-monetary gift to an employee or agent of an institution of higher education, including meals, entertainment, gift cards, or compensation for an advisory committee above a $10 value as part of the institution’s marketing strategy over the past three academic years.
Earlier this year the CFPB initiated a review of campus affinity relationships, and on Monday, September 30, the CFPB is hosting an event regarding financial products offered at colleges.
On July 31, the U.S. District Court for the District of Columbia held that the Federal Reserve Board’s 2011 final rule implementing the so-called Durbin Amendment is invalid under the Administrative Procedures Act (APA). NACS v. Bd. of Govs. Of the Fed. Res. Syst., No. 11-2075, slip op. (D.D.C. Jul. 31, 2013). Several retailers and their trade associations filed suit to challenge the Federal Reserve Board’s rule that set a 21-cent cap on interchange fees – the fees payment networks charge merchants on each debit card transaction to compensate the card issuer – and required that only two unaffiliated networks be available for each debit card. The court found that the Board exceeded its authority under the Durbin Amendment by adjusting the fee cap in the Final Rule to include costs (such as network processing fees and fraud losses) that were not permitted to be considered. The court also concluded that the Board violated the APA by not requiring that all debit transactions be able to run over at least two unaffiliated networks, regardless of authorization method (i.e., signature or PIN). The court further noted that the Board did not provide merchants the ability to choose the network on which they would process transactions. The court vacated the Board’s interchange transaction fee and network non-exclusivity regulations as arbitrary, capricious or otherwise not in accordance with law and remanded them to the Board for further action. However, in order to avoid disrupting commerce, the court allowed the current regulations to remain in place temporarily. The court invited further briefing on the appropriate length of the stay and whether the current standards should remain in place until they are replaced or the Board should develop interim standards sufficient to allow the court to lift the stay.
On May 23, the Federal Reserve Board issued a report showing that the exemption designed to protect small debit card issuers from interchange fee standards applied to large issuers is working as intended. The report indicates that depository institutions with consolidated assets of less than $10 billion, which are exempt from the interchange fee standard in Regulation II, received fee revenue of 43 cents per transaction in 2012 – roughly the same as the average received before Regulation II took effect. While the Dodd-Frank Act exempted small issuers from the interchange fee standard set in the regulation, it did not provide an exemption from the statute’s prohibition on network exclusivity. As a result, Regulation II requires every debit card issuer, regardless of size, to have at least two unaffiliated networks on every debit card. According to the report, most small issuers that responded to a survey about the effect of the network exclusivity provisions of the rule indicated that significant compliance costs were not incurred.
On January 16, Florida Attorney General Pam Bondi announced that she obtained “first of their kind” settlements from the state’s five largest prepaid debit card companies. The settlements resolve claims that the companies failed to properly disclose information about fees and misled consumers with claims that use of the cards would improve credit history. While the agreements are not identical, they each require enhanced compliance measures, which generally relate to fee disclosures, use of comparison charts, and use of claims about credit improvements. Each company also agreed to make a donation to the Central Florida Chapter of Junior Achievement and pay the cost and fees for the matters investigated to the Office of the Attorney General.
Recently, Canada’s Department of Finance published a consultation paper that proposes an addendum to the Code of Conduct for the Credit and Debit Card Industry in Canada to apply the Code to mobile payments. The Code, which took effect in August 2010, is a voluntary measure applicable to credit and debit card networks and covers point-of-sale, Internet, and phone payment methods. The addendum would extend the Code to apply explicitly to payments initiated by consumers that access a deposit or credit account through a payment network accessed by mobile device at the point-of-sale. The addendum also would clarify the way in which five of the ten elements of the code would apply to mobile payments. For example, the addendum would prohibit credit and debit card functions from co-residing in the same mobile payment application. Canada’s Department of Finance has invited stakeholder comments on all aspects of the proposal.
On August 8, the FDIC announced consent orders with a debit card issuer and vendor to resolve allegations that the entities operated an allegedly unfair and deceptive student debit card account program that (i) charged student account holders multiple nonsufficient fund (NSF) fees from a single transaction, (ii) allowed accounts to remain in overdrawn status while NSF fees accrued, and (iii) collected fees from subsequent deposits to the accounts. Collectively the settling companies will provide $11 million in restitution and agreed to pay civil money penalties totaling $282,000. The orders also require that the companies enhance their compliance programs and take specific steps to alter their NSF practices. On August 9, the CFPB issued a consumer advisory in which it reminds students that they (i) cannot be required to use a specific bank or card, (ii) should select bank account before arriving at school, and (iii) should opt for direct deposit as soon as it is offered.
On July 30, the FTC released staff comments submitted in response to the CFPB’s Advance Notice of Proposed Rulemaking regarding the regulation of prepaid cards. The CFPB issued the Notice in May, noting its intention to extend Regulation E to cover general purpose reloadable gift cards and seeking comment, data, and information about such cards. In response, the FTC staff comments review the current regulation of payment cards, and identify for the CFPB’s consideration several consumer protection issues that may arise with regard to prepaid cards, including (i) liability limits, (ii) disclosure and fees expiration dates, (iii) error resolution procedures, (iv) authorization standards for recurrent payments, and (v) consumer access to account information.
On July 27, the Federal Reserve Board issued a final rule that amends Regulation II. The rule allows a debit issuer that is subject to the interchange fee standards to charge—in addition to interchange fees—a fraud-prevention fee to defray costs associated with implementing policies and procedures that reduce fraudulent electronic debit transactions. The fee cannot exceed one cent per transaction, unchanged from the Federal Reserve’s interim final rule on this issue. The final rule details fraud-prevention program requirements that an issuer must meet in order to charge the fee. An issuer charging such a fee must annually review and update its fraud-prevention program and notify its payment card networks that it complies with the rule’s fraud prevention standards. The rule takes effect October 1, 2012.