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S.D.N.Y. Holds TILA Short-Form Credit Card Notice Violations Subject to Statutory Damages
On November 4, the U.S. District Court for the Southern District of New York held that credit card holders may pursue statutory damages for alleged violations of Regulation Z’s short-form credit card notice requirement, even though the short-form notice requirement is contained in a section of Regulation Z that is not enumerated under TILA’s statutory damages section. Zevon v. Dept. Stores Nat’l Bank, No. 12-7799, 2013 WL 5903024, (S.D.N.Y. Nov. 4, 2013). A credit card holder filed a putative class action alleging that the monthly short-form notice provided by the issuer was incomplete and omitted provisions required by Regulation Z’s model form provision. The court rejected the card issuer’s argument that because TILA only provides card holders with a cause of action for statutory damages for specifically enumerated statutory provisions, and because the short-form notice provision is not enumerated in the statute but is set only by Regulation Z, the card holder is not entitled to statutory damages. The court explained that following the card holder’s reasoning would immunize card issuers from statutory damages for even the most egregious short-from notice violations. Instead, the court held that because the allegedly violated Regulation Z provision was promulgated pursuant to an enumerated statutory provision—TILA’s long-form notice requirement—card holders are permitted to bring claims for statutory damages for short-form violations. The court rejected the card issuer’s motion to dismiss for these reasons, but granted its motion to limit statutory damages to $500,000, holding that the Dodd-Frank Act’s increase to a $1 million cap cannot be applied retroactively to violations that allegedly occurred prior to the Act’s passage.
Federal Court Holds Email Addresses Are PII Under California Credit Card Act
On October 21, the U.S. District Court for the Eastern District of California held that email addresses are personal identification information (PII) under California’s Song-Beverly Credit Card Act. Capp v. Nordstrom, Inc., No. 13-660-MCE-AC, 2013 WL 5739102 (E.D. Cal. Oct. 21, 2013). In this case, a customer sued a retailer on behalf of a putative class after the retailer sought the customer’s email address in connection with a credit card transaction to provide the customer with an electronic receipt. The customer alleged that the retailer subsequently used the email address to send unsolicited marketing materials. Following the California Supreme Court’s ruling in Pineda v. Williams Sonoma, in which the court held that a ZIP code is part of a person’s address and constitutes PII, the court here predicted that the state supreme court also would hold that an email address constitutes PII. Citing the statute’s broad terms and its overarching objective to protect the personal privacy of consumers who make purchases with credit cards, the district court held that the alleged conduct directly implicated the purposes of the statute. The district court also rejected the retailer’s argument that, if email addresses constitute PII, then the customer’s claim would be preempted by the CAN-SPAM Act, which regulates unsolicited commercial electronic mail, i.e. “spam.” The court held that the Song-Beverly Act claims were not subject to the CAN-SPAM Act’s express preemption clause because the Song-Beverly Act applies only to email addresses and does not regulate the content or transmission of email messages.
S.D.N.Y. Dismisses Putative TILA Class Action Based on Credit Card Billing Practices
On October 18, the United States District Court for the Southern District of New York dismissed a putative TILA class action alleging that a bank made improper interest rate disclosures on credit card bills and assessed incorrect late fees and interest. Schwartz v. HSBC Bank USA, N.A., No. 13-cv-00769, 2013 WL 5677059 (S.D.N.Y. Oct. 18, 2013). The card holder asserted that despite his timely payments the bank assessed him late fees and incorrectly disclosed the annual interest rate and balances on his monthly statements. The court first rejected the card holder’s disclosure claim, characterizing the alleged violations as “hypertechnical” disclosure defects that did not provide a basis for plaintiff to recover. The court held that, while the applicable TILA rule mandates the disclosure of the applicable rate, the balance to which the rate applied, and the nominal APR, the card holder did not properly allege how his statements lacked or misstated any of these required disclosures. The court also held that dismissal was warranted because the bank had refunded the alleged improper late fees before plaintiff commenced the lawsuit, and therefore plaintiff sustained no actual damages.
CFPB Credit Card Report Identifies Practices For Further Scrutiny
On October 2, the CFPB released its first review of the consumer credit card market. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) requires the CFPB to prepare a report every two years to examine developments in the consumer credit card marketplace, including (i) the terms of credit card agreements and the practices of issuers, (ii) the effectiveness of disclosures, and (iii) the adequacy of UDAP protections. The CFPB also must review the impact of the CARD Act on (i) the cost and availability of credit, (ii) the safety and soundness of issuers, (iii) the use of risk-based pricing, and (iv) product innovation. In connection with this initial report, the CFPB hosted a credit card field hearing in Chicago, IL, at which Director Cordray reviewed the report’s findings and industry representatives and consumer advocates discussed the current state of the credit card market.
In its review of the post-CARD Act market, the CFPB found that the CARD Act largely accomplished its intended goals. The CFPB reports that: (i) the total cost of credit declined by two percentage points between 2008 and 2012; (ii) overlimit fees and repricing actions have been effectively eliminated; (iii) the size of late fees has decreased; (iv) there is sufficient available credit, notwithstanding the impacts of the financial crisis, but less than in 2007; and (iv) the CARD Act’s ability-to-repay provisions have protected young consumers.
However, the CFPB identifies numerous concerns it has about the credit card market, including “practices that may pose risks to consumers and may warrant further scrutiny by the Bureau.” Those concerns include:
- Add-on products: The CFPB remains concerned about the ways these products are marketed and will continue to pursue allegedly deceptive practices. All of the CFPB’s major enforcement actions to date have involved add-on products, most of which related to credit cards.
- “Fee harvester” cards: The CFPB recognizes that some upfront fees that exceed 25% of the initial credit limit have been held not to be covered by the CARD Act because a portion of the fees are paid prior to account opening. Still, the CFPB plans to monitor the use of application fees in connection with account openings to determine if it should take action under its available authorities.
- Deferred interest products: The CFPB intends to study the risks and benefits of private label cards that finance purchases without interest for a period of time but then assess interest retroactively if the balance is not paid in full by a given date.
- Online disclosures: The CFPB intends to assess the methods by which card issuers provide consumers with disclosures when they access their accounts online.
- Rewards products disclosures: The CFPB will review whether disclosures for “highly complex” rewards products are being made in a clear and transparent manner and whether “additional action” is warranted.
- Grace period disclosures: The CFPB believes it may need to take action to ensure that disclosures sufficiently inform consumers that once they carry a credit card balance into a new billing cycle, they no longer enjoy the grace period on new purchases.
CFPB, OCC Announce Add-On Product Actions, Other Non-Mortgage Enforcement Action
On September 19, the CFPB and the OCC announced parallel enforcement actions against a national bank to resolve allegations that the bank engaged in the unfair and deceptive marketing, sale, and billing of “add-on products” across multiple consumer products, and the OCC announced a separate order that resolves claims related to the bank’s non-home loan debt collection litigation practices and compliance with the SCRA.
Under the CFPB’s consent order, the bank will pay a $20 million penalty to resolve allegations that over a seven year period ending in March 2012, the bank, through its vendor, enrolled customers in credit monitoring and identify theft products, and charged some customers for these products without or before having received written authorization to perform the monitoring services. The CFPB order also requires restitution to affected customers, and numerous requirements to enhance compliance, including with regard to vendor oversight. Under the OCC’s parallel action, the bank entered a consent order similar to the one entered with the CFPB, and consented to pay a $60 million penalty.
The CFPB order acknowledges the bank’s representations that it no longer offers the scrutinized products and that it already has credited or refunded affected customers. The bank’s press release also reaffirms its commitment to holding its vendors to high standards.
In a separate action announced by the OCC on the same day, the bank also entered a consent order to resolve allegations of unsafe or unsound practices with regard to its non-mortgage debt collection litigation practices and its non-mortgage SCRA compliance. As the bank pointed out in a press release, the consent order relates to only a slight percentage of credit card, student loan, auto loan, business banking and commercial banking customers who defaulted on their loan or contract and the resulting collections litigation that followed several years ago. The press release explains that the bank uncovered the issue in internal reviews that began in 2010 and took several steps in response, including: (i) halting new credit card collections litigation in 2011, (ii) dismissing the impacted lawsuits, and (iii) improving SCRA controls.
Next CFPB Field Hearing to Focus on Credit Cards
On September 16, the CFPB announced a field hearing on credit cards to be held on October 2, in Chicago, IL. The event, which is open to members of the public who RSVP, will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups and industry representatives.
In the past, the CFPB has made policy announcements in connection with field hearings. In this case, the hearing could be related to the CFPB’s study of credit card issues, as required by the 2009 Credit CARD Act. Section 502 of that act requires the CFPB to prepare a study every two years on: (i) the terms of credit card agreements and the practices of credit card issuers; (ii) the effectiveness of disclosure of terms, fees, and other expenses of credit card plans; (iii) the adequacy of protections against unfair or deceptive acts or practices relating to credit card plans; and (iv) whether or not, and to what extent, the implementation of the act has affected cost and availability of credit, the safety and soundness of credit card issuers, the use of risk-based pricing, or credit card product innovation.
The hearing also could relate to the CFPB’s ongoing arbitration agreement study. Director Cordray testified last week that, in connection with that study, the CFPB “very recently” exercised its authority under Dodd-Frank Act Sec. 1022 to order “a number of companies” to provide template consumer credit agreements.
Fifth Circuit Restores Negligence Claim in Data Breach Case
On September 2, the U.S. Court of Appeals for the Fifth Circuit restored a group of financial institutions’ negligence claim against a payment processor in Lone Star Nat. Bank v. Heartland Payment Systems, No. 12-20648, 2013 WL 4728445 (5th Cir. Sept. 3, 2013). The restored claim relates to a 2008 data breach of a payment processor’s systems that exposed 130 million credit card numbers to cyberthieves. As a result of the breach, the institutions incurred costs to replace consumers’ compromised credit cards and to refund fraudulent charges. The ruling reversed the district court, which held that New Jersey’s economic loss doctrine barred the institutions’ negligence claim and limited them to seeking contractual remedies from the payment processor. The Fifth Circuit ruled that negligence claims for such losses are permitted where, as here, there is a distinguishable class of plaintiffs who are owed a duty and the defendant is not exposed to boundless liability.
Banking Industry Trade Groups Oppose CFPB Credit Card Arbitration Survey
On August 6, three banking industry trade groups submitted a joint comment letter pursuant to a proposal by the CFPB to conduct a survey of credit card holders in connection with its ongoing study of arbitration agreements. The survey — intended to evaluate “consumer awareness of dispute resolution provisions in their agreements with credit card providers” — will compile information relating to card holders’ perceptions and valuations of arbitration and litigation, but will not solicit impressions of such proceedings themselves. In the comment letter, the trade groups suggest that the survey’s design “is inconsistent with the Consumer Financial Protection Act (CFPA) mandate and is flawed in concept and execution.”
Section 1028 of the CFPA authorizes the Bureau to study, and potentially regulate, arbitration agreements. Any exercise of rulemaking authority under Section 1028 must be based on a finding —consistent with the study conducted — that the regulation is “in the public interest and for the protection of consumers.” The trade groups express concern that the proposed survey will not produce “meaningful” information about what regulation will best serve the public and protect consumers because complex questions about consumers’ “limited and uninformed assessments and preferences” will fail to offer useful information to evaluate the arbitration process. The trade groups suggest that, instead, the CFPB should pursue peer-reviewed research that compares various methods of consumer dispute resolution, such as litigation and arbitration, to meet its obligations under the CFPA.
Banking Industry Trade Groups Oppose Expansion of MLA Covered Loans
On August 1, six banking industry trade groups submitted a joint comment letter relating to a proposal by the Department of Defense (DOD) to revise protections under the Military Lending Act (MLA), which apply to consumer credit extended to members of the military and their families. Among other things, the MLA caps the annual interest on short-term, small-dollar loans — including certain payday, car title, and refund anticipation loans. The MLA does not currently include credit cards, bank loans secured by funds on deposit, installment loans, or open-end credit.
In June, the DOD issued an advanced notice of proposed rulemaking (ANPR) to solicit input on potential changes to the definition of “consumer credit” in the regulations that implement the MLA, which would significantly broaden its application. The ANPR sought comment on whether the definition of “consumer credit” should be revised to expand coverage of the MLA to additional small-dollar loan products. The trade groups suggest that expanding coverage would be redundant, costly, and confusing in light of the “well-established system of financial protections for consumers [that] exists beyond the [MLA].” In other words, there is no need to create an entirely separate class of credit products for servicemembers and their families not directly related to military service.
The trade groups specifically identify several potential negative consequences of expanded coverage, including reduced access to installment loans and other credit products, and inability to refinance existing credit. On balance, the trade groups view the current rules — adopted after plenary discussion and careful consideration by all stakeholders — to be effective in achieving the proper balance between protecting military families and ensuring their access to credit. Thirteen state attorneys general took an opposing view in a comment letter submitted on June 24.
For additional commentary on the ANPR, please see the recent article from BuckleySandler Partner Valerie Hletko.
CFPB Plans Study of Bundled Financial Products
Today, the CFPB published a notice indicating that it will review bundled financial products and services. The CFPB is seeking comments on its plans to survey “low-income, underserved consumers” about their savings, credit score, and size of their debt to income ratio for the purpose of understanding whether such bundled products and services have an impact on asset building and financial capability. The CFPB is accepting comments on the planned survey through September 30, 2013.