On July 30, the U.S. District Court for the Northern District of California held that a payday lender whose loan agreements requiredborrowers to consent to electronic withdrawals of their scheduled loan payments violated the federal Electronic Fund Transfer Act’s prohibition on the conditioning of credit on a borrower preauthorizing electronic fund transfers (EFTs) for repayments. De La Torre v. CashCall, Inc., No. 8-3174, 2014 WL 3752796 (N.D. Cal. Jul. 30, 2014). The court previously certified a class seeking to recover actual and statutory damages under the EFTA. The class borrowers claim that the lender required borrowers to agree to electronic transfers of scheduled payments as a condition to obtaining their loans. The borrowers alleged those EFTs caused borrowers to incur insufficient fund fees on the accounts from which the loan payments were withdrawn. On summary judgment, the court rejected the lender’s argument that its promissory notes authorized, but did not require, payment by EFT, and that the EFTA only prohibits the conditioning of the extension of credit upon a requirement to make all loan payments by EFT. The court held that the plain meaning of the statute dictates that a violation of the EFTA occurs “at the moment of conditioning—that is, the moment the creditor requires a consumer to authorize EFT as a condition of extending credit to the consumer.” The court held that by extension, the borrowers also established that the lender violated the Unfair Competition Law. The court granted summary judgment in favor of the borrowers on both their EFTA and UCL claims. However, the court held that whether the EFTA violation caused borrowers to incur the insufficient fund fees is a disputed fact, which should be decided after liability is determined and with the borrowers’ claims for statutory damages and restitution.
On August 28, the OCC issued Bulletin 2014-43, which announces the issuance of a revised “Electronic Fund Transfer Act” booklet of the Comptroller’s Handbook. This booklet replaces the similarly titled booked issued in October 2011, and provides updated guidance to examiners and bankers relevant to recent changes made to Regulation E regarding remittance transfers. Specific updates address: (i) the transfer of rulemaking authority for the EFTA from the Board of Governors of the Federal Reserve System to the CFPB; (ii) Dodd-Frank’s amendments to the EFTA, which create a new system of consumer protections for remittance transfers; and (iii) the issuance of the CFPB’s final rule that restructures Regulation E and provides specific requirements for remittance service providers in new subpart B.
On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…
On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” to: (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds as well as the amount of funds the recipient will receive; and (ii) investigate consumer disputes and remedy errors. The rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.
The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations. Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.
Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.
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.
On August 8, the CFPB released an updated small business guide for the remittance transfer rule it finalized last year and revised in May 2013. The updated guide summarizes the remittance rule and discusses the new requirements, which take effect on October 28, 2013. The CFPB also issued technical corrections to the May 2013 amendments, and released a video that provides an overview of the rule and the recent changes, as well as implementation guidance.
Magistrate Judge Finds Tribal Payday Lender Subject to FTC Act; Lender Agrees to Settle Some FTC Charges
On July 22, the FTC announced that it obtained a partial settlement of claims it filed last year against a Native American Tribe-affiliated payday lending operation that allegedly charged undisclosed and inflated fees, and collected on loans illegally by threatening borrowers with arrest and lawsuits. FTC v. AMG Servs, Inc. No. 12-536 (D. Nev.). The agreement does not include any monetary resolution of the claims, but (i) prohibits the defendants from certain collection practices, (ii) prohibits the defendants from conditioning the extension of credit on preauthorized electronic fund transfers, and (iii) requires the defendants to implement enhanced compliance policies that are subject to new reporting requirements. The settlement follows a report and recommendation issued last week by the magistrate judge assigned to the case in which he concluded that the FTC has authority under the FTC Act to regulate “Indian Tribes, Arms of Indian Tribes, employees of Arms of Indian Tribes and contractors of Arms of Indian Tribes” with regard to the payday lending activities at issue in the case. Relying on Ninth Circuit precedent, the magistrate judge held that while the FTC Act does not expressly apply to Indian Tribes, it is a statute of general applicability with reach sufficient to cover the Tribal entities. Further, the magistrate judge concluded that “both TILA and EFTA provide the FTC the power to enforce the statutes without regard for any jurisdictional limitations contained in the FTC Act.” The FTC will continue litigating other charges against the defendants, including allegations that they deceived consumers about the cost of their loans by charging undisclosed charges and inflated fees.
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 Funds 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.
On April 30, the CFPB issued a revised final rule to amend regulations applicable to consumer remittance transfers of over fifteen dollars originating in the United States and sent internationally. Generally, the rule requires remittance transfer providers to (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds, as well as the amount of funds the recipient will receive, and (ii) investigate consumer disputes and remedy errors. The revised rule makes optional the original requirement to disclose (i) recipient institution fees for transfers to an account, except where the recipient institution is acting as an agent of the provider and (ii) taxes imposed by a person other than the remittance transfer provider. Instead, the revised rule requires providers to include a disclaimer on disclosures that the recipient may receive less than the disclosed total value due to these two categories of fees and taxes. The revised rule exempts from certain error resolution requirements two additional errors: (i) providing an incorrect account number or (ii) providing an incorrect recipient institution identifier. For the exception to apply, a remittance transfer provider must (i) notify the sender prior to the transfer that the transfer amount could be lost, (ii) implement reasonable measures to verify the accuracy of a recipient institution identifier, and (iii) make reasonable efforts to retrieve misdirected funds. In addition, the revised rule provides institutions more time to comply with the new remittance transfer standards. The final regulations, as revised by this rule, take effect on October 28, 2013.
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.
On March 26, the CFPB published a final rule to conform Regulation E to an amendment to the Electronic Fund Transfer Act enacted by Congress in December 2012 that removed the requirement that ATMs have an attached placard disclosing fees. The final rule removes the corresponding regulatory language and official commentary, and retains the remaining statutory requirement that fees be disclosed only on the ATM screen.
On December 21, the CFPB proposed revisions to the remittance transfer rule it finalized earlier this year and already once modified. The proposed revisions follow a November 2012 bulletin from the CFPB in which it stated its intent to pursue a fast-track rulemaking to delay the effective date of the rule while addressing certain industry-raised concerns. The proposed revised rule would (i) provide increased flexibility and guidance with respect to the disclosure of taxes imposed by a foreign country’s central government, as well as fees imposed by a recipient’s institution for receiving a remittance transfer in an account, (ii) require disclosure of foreign taxes imposed by a country’s central government, but would eliminate the requirement to disclose taxes imposed by foreign regional, provincial, state, or other local governments, and (iii) require a provider to attempt to recover funds without bearing the cost of funds that cannot be recovered, when the provider can demonstrate that the consumer provided an incorrect account number and certain other conditions are met. The proposed rule also would push back the effective date of the remittance transfer rule from February 7, 2013, to 90 days after the revised rule is finalized. The CFPB is accepting comments on the delayed effective date for 15 days following publication in the Federal Register, and it is accepting comments on the substantive revisions for 30 days following publication in the Federal Register.
On November 29, FinCEN and the Federal Reserve Board announced that they are seeking comments on a proposed rule to amend the definitions of “funds transfer” and “transmittal of funds” set forth in the regulations implementing the Bank Secrecy Act. The proposed rule explains that the changes are designed to ensure that the current scope of the definitions is not expanded, following recent related amendments to the Electronic Fund Transfer Act. Comments on the proposed rule are due by January 25, 2013.
On November 27, the CFPB issued a bulletin announcing that it intends to delay the effective date of the new remittance transfer rule finalized earlier this year and already once modified. Per Bulletin 2012-08, the CFPB plans to pursue a fast-track rulemaking next month to alter provisions of the final rule relating to: (i) situations in which incorrect account numbers are provided by senders of remittance transfers, and (ii) the disclosure of certain foreign taxes and fees charged by financial institutions receiving remittance transfers. The rulemaking also will propose an extension of the February 7, 2013 effective date of the rule until 90 days after the CFPB finalizes the rulemaking. The CFPB’s Bulletin follows pleas from industry groups and Members of Congress to change the rule and the implementation timeline. The CFPB action also follows an announcement this week by the Federal Home Loan Bank of New York (FHLBNY) that it plans to stop processing international wire transfers for its members on December 31, 2012, based on its concern that the CFPB rule would create potential risks that are too great for what the FHLBNY considers a non-core service.
On October 16, the CFPB will host a webinar on the new requirements for remittance transfer providers. The CFPB issued a final remittance rule at the beginning of this year, and subsequently modified the rule to exempt certain institutions from its disclosure requirements. To further assist industry stakeholders with implementation of the remittance rule, the CFPB has also released a list of countries that qualify for the safe harbor exception to the rule’s disclosure requirements. Under the exception, providers may disclose estimates of the amounts to be received in a foreign currency, fees, and taxes for transfers to Aruba, Brazil, China, Ethiopia, and Libya, in lieu of exact amounts. The remittance rule, and its safe harbor exception, becomes effective February 7, 2013.