California Consumer Finance Litigation

Fed Proposes New Interest Rate and Fee Rule

Daniel O'Rielly — Thu, 04 Mar 2010 09:51:09 -0800

The Federal Reserve yesterday announced that it has issued a new proposed rule amending Regulation Z to change regulations regarding late payments and penalty fees charged by credit card issuers and to require card issuers to reconsider increases in interest rates. The new rule comes on the heels of the recent effective date of Regulation Z amendments implementing the Credit CARD Act.

Among other things, the proposed rule announced yesterday would:

Prohibit credit card issuers from charging penalty fees (including late payment fees and fees for exceeding the credit limit) that exceed the dollar amount associated with the consumer's violation of the account terms. For example, card issuers would no longer be permitted to charge a $39 fee when a consumer is late making a $20 minimum payment. Instead, the fee could not exceed $20.
Ban inactivity fees, such as fees based on the consumer's failure to use the account to make new purchases.
Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of the account terms.
Require credit card issuers to inform consumers of the reasons for increases in rates.
Require issuers that have increased rates since January 1, 2009 to evaluate whether the reasons for the increase have changed and, if appropriate, to reduce the rate.

The 30-day comment period for the proposed rule will begin when the proposed rule is published in the Federal Register.

Rules Implementing the Credit CARD Act Effective Today

Daniel O'Rielly — Mon, 22 Feb 2010 11:46:51 -0800

The Federal Reserve’s final rules amending Regulation Z to implement the significant revisions to laws governing credit cards pursuant to the Credit CARD Act of 2009 are effective today.
Among other things, the final rules will:

limit the application of increased rates to existing credit card balances.
require credit card issuers to consider a consumer’s ability to make the required payments.
establish special requirements for extensions of credit to consumers who are under the age of 21. 
limit the assessment of fees for exceeding the credit limit on a credit card account.

Last week, the Federal Reserve announced a Credit Card website to help consumers better understand the credit card rules that take effect today. Two interactive features on the site enable consumers to learn more about credit-card offers’ terms and fees and about the new features on monthly statements. The Fed has also posted a summary of the rule changes for consumers.

Surveying Developments in Consumer Finance Regulation

Daniel O'Rielly — Wed, 20 Jan 2010 06:00:00 -0800

A number of significant legislative changes occurred in 2009 related to consumer finance regulation.

The most significant potential change—the Consumer Financial Protection Agency Act—is still in flux as it moves through the U.S. Senate. However, the version of the CFPA passed by the U.S. House contains several provisions of which every practitioner should be aware. New regulations governing credit card products and overdraft fees will also significantly impact consumer finance practice.

See a summary of recent developments in consumer finance regulation.

Fed Issues Final Credit Card Rule

Daniel O'Rielly — Mon, 18 Jan 2010 09:35:45 -0800

The Federal Reserve has issued its final rules amending Regulation Z, which implements the Truth in Lending Act, pursuant to the Credit CARD Act of 2009. Previous legislative efforts to expedite the effective date of the CARD Act resulted in no changes.

Among other things, the final rule, effective February 22, 2010, will:

• limit the application of increased rates to existing credit card balances;
• require credit card issuers to consider a consumer’s ability to make the required payments;
• establish special requirements for extensions of credit to consumers who are under the age of 21; and
• limit the assessment of fees for exceeding the credit limit on a credit card account.

The Fed has posted a summary of the rule changes for consumers.

Revised RESPA Mortgage Disclosures Take Effect

Daniel O'Rielly — Mon, 04 Jan 2010 06:08:00 -0800

New regulations promulgated by the U.S. Department of Housing and Urban Development in November 2008 to revise RESPA disclosures took effect on January 1, 2010. Among other things, the new RESPA final rule requires mortgage issuers to use a new HUD-1 settlement statement and a new Good Faith Estimate. To assist compliance, HUD has issued a list of answers to frequently asked questions as well as new instructions for HUD-1 and GFE forms. HUD has also issued a revised settlement booklet to educate consumers about mortgage products and the financial impact of buying a home.

A Closer Look: Arbitration Under House Version of CFPA

Daniel O'Rielly — Mon, 28 Dec 2009 07:43:53 -0800

The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, passed by the U.S. House on December 11, 2009, contains provisions that could have a significant limiting effect on the enforcement of consumer arbitration provisions.

Section 4208 of the Act, entitled "Authority to Restrict Mandatory Predispute Arbitration," gives the Director of the proposed Consumer Financial Protection Agency the power to issue regulations to "prohibit or impose conditions or limitations on" a pre-dispute arbitration provision if the Director "finds that such a prohibition or imposition of conditions or limitations are in the public interest and for the protection of consumers." This provision mirrors the arbitration limiting provisions of the Arbitration Fairness Act, and could effectively prohibit the enforcement of mandatory arbitration provisions in consumer finance agreements.

House Passes Consumer Financial Protection Agency Act

Daniel O'Rielly — Mon, 14 Dec 2009 09:10:04 -0800

On December 11, 2009, the U.S. House of Representatives passed the “Wall Street Reform and Consumer Protection Act of 2009,” H.R. 4173. This sweeping legislation—a combination of several bills, including a modified version of the Consumer Financial Protection Agency Act, formerly HR 3126—includes broad new regulation of derivatives, executive compensation, systemic risk, investor rights, mortgages, credit-rating agencies, hedge funds and private equity, insurance, and consumer financial protection.

Title IV of the Act (sections 4001 – 4901) provides for the creation of a Consumer Financial Protection Agency (section 4101 – 4703), a new, independent federal agency to oversee virtually every aspect of consumer financial services, including mortgages, credit cards, debit cards, car loans, gift cards, credit reporting agencies, debt collectors, and financial advisers. Certain merchants, such as auto dealers and pawnbrokers, would be exempted.

Consumer financial protection functions would be transferred (section 4601) to the new Consumer Financial Protection Agency from the Federal Reserve Board of Governors, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, the Federal Trade Commission, the National Credit Union Administration, and the Secretary of Housing and Urban Development. Among other powers, the Consumer Financial Protection Agency would be responsible for enforcing laws governing consumer credit.

The Act also provides for the creation of a Consumer Financial Protection Oversight Board (section 4103), to ensure consistent consumer financial protection regulations, and a Consumer Advisory Board (section 4106) to advise and consult with the CFPA regarding consumer laws and industry practices.

Significantly, the Act calls for changes to current laws and regulations regarding preemption of state law (sections 4401 - 4410) and pre-dispute arbitration provisions (section 4208).

Separately, the U.S. Senate is working on its own version of consumer financial protection legislation.

Fed Launches Credit Card Education Campaign

Daniel O'Rielly — Mon, 30 Nov 2009 06:00:00 -0800

As part of an effort to encourage consumer awareness about selecting and using credit card products, the Federal Reserve Board is engaging in a public information campaign designed to educate consumers about the appropriate use of credit cards. The Fed has launched a series of public service announcements, aimed at consumers, to be aired at movie theaters during the 2009 holiday season. The Fed has also launched a website with “Resources and Tools” to assist consumers to choose and to manage credit card accounts, and to inform consumers about the importance of credit ratings.

The Fed’s materials also include a credit card repayment calculator and a Consumer Handbook for Credit Protection Laws, summarizing the credit application process, consumer credit ratings, and consumer rights related to credit card products.

Fed Approves Mortgage Sale Disclosure Rule

Daniel O'Rielly — Thu, 19 Nov 2009 08:35:07 -0800

On November 16, 2009, the Federal Reserve Board approved an interim final rule amending Regulation Z, 12 CFR 226, establishing a new requirement for notifying consumers of the sale or transfer of their mortgage loans. Specifically, the rule amends Section 131(g) of the Truth in Lending Act (TILA), to implement Section 404(a) of the 2009 Helping Families Save Their Homes Act, and requires a purchaser or assignee that acquires a mortgage loan to provide the required disclosures to the consumer in writing no later than 30 days after the date on which the loan is sold or otherwise transferred or assigned. The new disclosure requirements apply whether the acquisition occurs as a result of a purchase or other transfer or assignment, but a person is covered by the rule only if the person acquires legal title to the debt obligation.

Significantly, Section 404(a) and the interim final rule apply to persons that acquire mortgage loans without regard to whether they also extend consumer credit by originating mortgage loans. However, the interim final rule applies only to persons that acquire more than one mortgage loan in any 12-month period. The interim final rule is effective immediately, but compliance is optional for 60 days from the date of publication.

House Approves Accleration of CARD Act Effective Date

Daniel O'Rielly — Thu, 05 Nov 2009 08:41:53 -0800

The U.S. House of Representatives yesterday voted 331-92 to pass H.R. 3639, the Expedited CARD Reform for Consumers Act of 2009, which would accelerate the effective date of the Credit CARD Act of 2009.

The provisions of the Credit CARD Act become effective in three stages: the first provisions took effect in August 2009; the remaining provisions take effect in February 2010 and August 2010. The Expedited CARD Act would make all provisions effective immediately on enactment, with the exception of small card issuers with fewer than 2 million cards and gift cards, which would be subject to the February 2010 effective date. The Expedited CARD Act also permits card issuers that adopt a moratorium on interest rate increases on current balances and new balances incurred before February 22, 2010, to be exempt from the earlier effective date for a provision that requires an issuer to apply customer payments to the highest rate balance.

CARD Reform Acceleration Moves Forward

Daniel O'Rielly — Tue, 27 Oct 2009 07:39:42 -0800

Efforts to move up the effective date of the Credit CARD Act of 2009, to December 1, 2009 from February and July 2010 are moving forward, approved by the House Committee on Financial Services. In a unanimous vote, the Committee approved HR 3639, the Expedited CARD Reform for Consumers Act of 2009. Under the version approved by the Committee last week, prepaid gift cards would retain the February 2010 effective date, as would credit card issuers with fewer than 2 million accounts.

Financial Regulatory Reform Moves Out of Committee

Daniel O'Rielly — Fri, 23 Oct 2009 08:07:21 -0800

The House Financial Services Committee on Thursday voted to approve the Consumer Financial Protection Agency Act, HR 3126.

The legislation is changing in significant ways as it moves through the legislative process. Among the revisions from the administration's original plan, the Committee's approved version would vest authority over the proposed Consumer Financial Protection Agency in a single director, as opposed to a 5-member board. The approved version of the legislation also includes a compromise on federal preemption, which permits the federal regulator to preempt state consumer financial protection laws only after a written finding that the state law “prevents or significantly interferes” with a federally regulated bank or thrift’s exercise of its powers.

Push Is On to Accelerate CARD Reform

Daniel O'Rielly — Tue, 20 Oct 2009 07:08:26 -0800

The U.S. House Committee on Financial Services is considering recently-introduced legislation, called the Expedited CARD Reform for Consumers Act of 2009, to accelerate the effective date of the Credit CARD Act of 2009. Certain provisions of the CARD Act became effective in August 2009. The Expedited CARD legislation would amend the effective date of the remaining provisions of the CARD Act to December 1, 2009 from February and July 2010.

The Expedited CARD legislation also identifies specific CARD Act provisions to accelerate, including: reviews of past interest rate increases under Section 148(d) of the Truth in Lending Act (15 U.S.C. 1665c(d)); the requirement that penalty fees be reasonable and proportional to the violation, Section 149(b) of the Truth in Lending Act (15 U.S.C. 1665d(b)); and gift card consumer protection provisions.

Powers of the Proposed Consumer Financial Protection Agency

Daniel O'Rielly — Thu, 08 Oct 2009 14:09:43 -0800

Subpart F, sections 161 through 166, of the Consumer Financial Protection Agency Act of 2009 (HR 3126, July 8, 2009) provides for the transfer of broad areas of power to regulate consumer financial protection functions from a variety of federal agencies and the Federal Reserve to the proposed Consumer Financial Protection Agency.

In general, the CFPA would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws, including mortgages, credit cards, student loans, auto loans, payday loans, and more. The Act would transfer functions and personnel to the new CFPA and provide for interim powers for the Secretary of Treasury pending the establishment of the CFPA and the completion of the transfer of powers and people.

Financial Regulatory Reform Moving Forward

Daniel O'Rielly — Mon, 05 Oct 2009 10:11:51 -0800

Legislation for federal financial regulatory reform, introduced by the Obama administration in June, is moving forward through the legislative process. Treasury Secretary Geithner testified before the House Financial Services Committee on September 23.

The proposed financial regulatory reform legislation in the U.S. House is the Consumer Financial Protection Agency Act of 2009 in the House (HR 3126). The Financial Services Committee has issued a section-by-section summary of the proposed legislation as well as a September 25 discussion draft.

Track the progress of the legislation at the administration's Financial Stability website.

Portions of Credit CARD Act Go Live

Daniel O'Rielly — Thu, 20 Aug 2009 08:21:56 -0800

Although most provisions of the Credit CARD Act of 2009 become effective in February and July 2010, pursuant to an interim final rule announced by the Fed to amend Regulation Z as phase one of the Act's three implementation periods, certain provisions of the Act are effective today:

* Creditors must provide written notice to consumers 45 days before the creditor increases an annual percentage rate on a credit card account or makes a significant change to the terms of a credit card account;
* Creditors must inform consumers in the same notice of their right to cancel the credit card account before the increase or change goes into effect. If a consumer does so, the creditor is generally prohibited from applying the increase or change to the account; and
* Creditors generally must mail or deliver periodic statements for credit cards and other open-end consumer credit accounts at least 21 days before payment is due.

FTC Clarifies FDCPA-FACTA Conflict

Daniel O'Rielly — Mon, 03 Aug 2009 17:02:59 -0800

In an Advisory Opinion, the Federal Trade Commission has clarified a statutory conflict between the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692 et seq., and its regulations implementing the Fair and Accurate Credit Transactions Act of 2003 ("FACTA"), which added new sections to the Fair Credit Reporting Act, ("FCRA"), 15 U.S.C. § 1681 et seq.

Specifically, the the FDCPA provides that "if a consumer has notified a debt collector in writing that 'the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate with the consumer with respect to such debt' (with some exceptions not applicable here)." 15 U.S.C. § 1692c(c). Separately, FTC regulation implementing FACTA "requires furnishers of information to CRAs to report the results of a direct dispute to the consumer, 16 CFR § 660.4(e)(3), or notify the consumer if the furnisher determines the dispute is frivolous or irrelevant, 16 CFR § 660.4(f)(2)."

As written, a furnisher of credit information that contacts a debtor regarding a credit dispute investigation, as required by FTC FACTA regulations, could violate the cease-communication rules of the FDCPA. The FTC Opinion eliminates this conflict, providing:

a debt collector does not violate Section 805(c) of the FDCPA if the consumer directly disputes information after sending a written “cease communication” to the collector, and the collector complies with the Rule by means of a communication that has no purpose other than complying with the Rule by stating (1) the results of the investigation or (2) the collector’s belief that the communication is frivolous or irrelevant.

Court of Appeal Rejects Litigation Privilege Under Rosenthal

Daniel O'Rielly — Wed, 22 Jul 2009 06:00:00 -0800

In Komarova v. National Credit Acceptance, Inc., the First District California Court of Appeal considered several issues of first impression involving the California Robbins-Rosenthal Fair Debt Collection Practices Act, Civil Code § 1788 et seq.

in Komarova, defendant sought to collect a debt from plaintiff that she did not owe; defendant had mistaken plaintiff for a credit cardholder with a different, but similarly spelled name. Defendant began collection calls to plaintiff's workplace in February 2005. In March 2005, defendant initiated arbitration proceedings against plaintiff. Defendant obtained a default award against plaintiff in June 2005, which defendant later sought to confirm in a judgment. Defendant's collection calls to plaintiff continued through January 2006.

Plaintiff filed a complaint against defendant in October 2006. Only plaintiff's causes of action for violations of the Rosenthal FDCPA and for intentional infliction of emotional distress survived summary judgment. Plaintiff filed a second amended complaint alleging violations of six provisions of the Rosenthal Act: Civil Code § 1788.11(b), (d), and (e); Civil Code § 1788.12(a); and Civil Code § 1788.15(a), (b). A jury returned a verdict for plaintff on three sections of the Rosenthal Act and intentional inflication of emotional distress, and awarded plaintiff actual damages, noneconomic damages, punitive damages, and attorneys' fees. Defendant appealed.

On appeal, the Court of Appeal held: (1) conduct violating the Rosenthal Act is not protected by the litigation privilege, Civil Code § 47(b)(2); (2) the continuing violation doctrine permits recovery for violations of the act (here, a pattern of harassing collection calls) beyond the statute of limitations period; and (3) a multipler may be used in calculating attorneys' fees under the Rosenthal Act. Signficantly, the Court held that the litigation privilege barred plaintiff's claim for intentional infliction of emotional distress for alleged acts committed after the commencement of litigation.

U.S. Supreme Court Decides Cuomo v. Clearing House

Daniel O'Rielly — Thu, 16 Jul 2009 16:26:57 -0800

In Cuomo v. Clearing House Association, LLC, former New York Attorney General Elliot Spitzer sent requests to several national banks, in lieu of subpoenas, seeking non-public information regarding whether the banks had violated the state's fair-lending laws. The U.S. Office of the Comptroller of the Currency ("OCC"), the federal regulator of national banks, and Clearing House Association, a banking trade group, sued to enjoin the New York Attorney General (later Andrew Cuomo, the petitioner here.)

The district court entered an injunction prohibiting the enforcement of state fair-lending laws against national banks through information requests or judicial proceedings. The Second Circuit affirmed. The U.S. Supreme Court granted certiorari to determine whether the OCC's regulations preempting state law enforcement against national banks (12 C.F.R. § 7.400) are a reasonable interpretation of 12 U.S.C. § 484(a), the National Bank Act of 1864.

In a 5 to 4 decision, the Supreme Court held that the OCC's regulations were not entitled to Chevron deference and concluded that states may enforce state laws against national banks despite the prohibition on state's exercising visitorial powers. After noting that there was "some ambiguity" in the definition of "visitorial powers" in Section 484(a), the Court held that the OCC's exclusive exercise of "visitorial powers" did not preclude law enforcement by the states. Thus, the Court drew a distinction between enforcement of non-preempted state law against a national bank and exclusive "visitorial powers" over that bank, which would include oversight, supervision, and regulation.

California Supreme Court Draws Setoff Boundary

Daniel O'Rielly — Tue, 30 Jun 2009 07:51:00 -0800

The California Supreme Court has refused to extend an earlier holding prohibiting a bank from setting off customer debts using funds in a deposit account from public benefits. In Miller v. Bank of America, NT and SA, the Court held that Bank of America could setoff overdraft fees and fees for insufficient funds "(NSF") charged to a checking account with funds in the account, regardless of whether those funds came from public benefits.

In Miller, plaintiff received Social Security Supplemental Security Income ("SSI") payments by direct deposit into a Bank of America checking account. In 1998, the Bank inadvertently credited his checking account, then reversed the credit to correct its error. The reversal of the credit caused plaintiff's account to have a negative balance, which depleted his SSI benefits payments for that month. Separately, plaintiff occasionally overdrew his account, and the Bank paid the overdraft and NSF charges, at least in part, with his SSI funds on deposit. Plaintiff filed a putative class action complaint against the Bank, alleging the Bank could not set off these charges with funds in his account from public benefits.

Plaintiff alleged fraud, negligent misrepresentation, intentional infliction of emotional distress, violation of Code of Civil Procedure section 704.080, violation of the Consumer Legal Remedies Act, violation of California's unfair competition law, Business and Professions Code section 17200, and violation of California's false advertising law, section 17500. The trial court granted the Bank's motion for summary adjudication of plaintiff's Section 704.080 claim and plaintiff's claim for intentional infliction of emotional distress, but denied the motion with respect to plaintiff's other claims. The trial court also certified a class of depositors who had accounts into which Social Security payments had been direct deposited. Plaintiff obtained a judgment after trial.

On appeal, the Court of Appeal reversed, holding the Bank's setoff of internal account charges was permissible, even against public benefit funds. The California Supreme Court agreed and affirmed the Court of Appeals. The Court held that its prior holding prohibiting a Bank from paying a customer's credit card debt with deposited public benefit funds did not extend to a Bank's payment of overdraft or NSF charges on the deposit account. The Court noted that California Financial Code Section 864, which governs a Bank's right to setoff from deposit accounts, expressly excludes overdrafts and bank charges from prohibited setoff items. The Court held that the text of the statute and its legislative history supported a distinction between setting off deposited public benefits funds for the payment of other debts and using deposited public benefits funds for internal account balancing, for example by paying overdraft and NSF fees.

Because of this interpretation of the statute, the Court did not reach the issue of federal preemption.