Legislative Update

October – December 2009

Financial Reform Bills

On December 11, the House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173).¹ The bill, which was proposed by Rep. Barney Frank (D-Mass.) on December 2, proposes numerous changes to the United States' financial regulatory framework that could have a tremendous impact on the industry. It includes provisions that would heighten supervision of systemically important firms and credit rating agencies, change compensation rules for financial firms, require over-the-counter derivatives to be cleared on exchanges, create a Consumer Financial Protection Agency, and create a Federal Insurance Office.

On November 10, Senate Banking Committee Chairman Christopher Dodd (D-Conn.) released a discussion draft of the "Restoring American Financial Stability Act of 2009." This bill, which has yet to be reported out of committee, addresses the same issues as the passed House bill but proposes some different provisions.

Consumer Financial Protection Agency Act

Title IV of the bill, the Consumer Financial Protection Agency Act, would establish a new, independent Consumer Financial Protection Agency (CFPA) to regulate the provision of consumer financial products and services. These include, among other activities, taking deposits; providing consumer credit products such as mortgages, personal loans, and credit card loans; servicing loans; engaging in payday lending; collecting debts; leasing property; and offering financial advice. The director of the CFPA would be appointed by the president to a five-year term.

All consumer financial protection functions from the Federal Reserve, the OCC, the OTS, the FDIC, the Federal Trade Commission (FTC),² the NCUA, and the Department of Housing and Urban Development (HUD) would be transferred to the CFPA, creating a single central agency that would be tasked with "promot[ing] transparency, simplicity, fairness, accountability, and equal access in the market for consumer financial products [and] services." It would curb unfair, deceptive, or abusive acts or practices by standardizing and enhancing disclosure requirements and by performing background checks on and licensing financial service providers. To directly assist consumers, the CFPA would provide consumer financial education, license financial educators, and be responsible for fielding all consumer complaints. It would have primary enforcement authority over any violations of its regulations.

The CFPA's authority to regulate consumer financial products would not apply to credit extended directly by a merchant, retailer, or seller of nonfinancial services to a consumer, nor to the collection of such a debt directly by the merchant. However, if the credit is transferred, including for purposes of collection, the CFPA's regulations would apply. They would also apply if the value of the credit extended were to significantly exceed the market value of the nonfinancial product or service. The authority would also not apply to accountants, tax preparers, attorneys, real estate licensees, and auto dealers. The CFPA's regulations would not preempt any rules of the SEC, the CFTC, the FHFA, or state insurance regulators.

The CFPA would be able to prohibit or regulate mandatory arbitration agreements in consumer financial contracts. However, it would not be able to impose any usury limits, nor could it require anyone to offer a specific product or service. It would also be required to develop risk-based programs to supervise nondepository financial institutions.

Federal Regulation

The Board of Governors of the Federal Reserve

Final Rule Requires Debit Card Users to Opt-In to Overdraft Protection

On November 12, the Board of Governors of the Federal Reserve issued a final rule (74, Federal Register, pp. 59033-56) that amends Regulation E to prohibit banking institutions from charging overdraft fees on debit card or ATM transactions unless customers have opted in to the overdraft protection service. The rule goes into effect for new accounts on July 15, 2010; existing customers have until August 15, 2010, to opt in to the coverage. The rule was required by the Credit Card Accountability Responsibility and Disclosure Act, which was enacted in May 2009. For more details on the Credit CARD Act, see Banking Legislation and Policy, Volume 28, Number 2.

Proposed Rule to Restrict Fees on Gift Cards

On November 16, the Board of Governors of the Federal Reserve issued a proposed rule (74, Federal Register, pp. 60986-61012) that would restrict expiration dates and fees applied to prepaid cards, gift cards, and gift certificates. Comments on the proposed rule were due by December 21, 2009. The rule was required by the Credit Card Accountability Responsibility and Disclosure Act, which was enacted in May 2009. For more details on the Credit CARD Act, see Banking Legislation and Policy, Volume 28, Number 2.

Final Rule on Risk-Based Pricing Notice

On December 22, the Board of Governors of the Federal Reserve System and the Federal Trade Commission issued a final rule (75, Federal Register, pp. 2724-84) that requires a creditor to provide a consumer with a risk-based pricing notice when, based on the consumer's credit report, the credit is offered at significantly less favorable terms than what is offered to other consumers. The rule, which implements section 311 of the Fair and Accurate Credit Transactions Act of 2003, was first proposed in May 2008 and will take effect on January 1, 2011. For more information on the rule, see Banking Legislation and Policy, Volume 27, Number 2.

Judicial Rulings

Circuit Court Rulings

Plaintiffs Must Prove Detrimental Reliance to Recover Actual Damages Under TILA

On December 31, the U.S. Court of Appeals for the Third Circuit affirmed a lower court's ruling that a plaintiff seeking actual damages under the Truth in Lending Act (TILA) must prove that reliance on a deficient disclosure by a lender caused him to receive a worse deal than he could have sought elsewhere (Vallies v. Sky Bank, 3rd Cir., No. 08-4160, 12/31/09). The lender provided the plaintiff with a faulty disclosure that lumped a fee for debt cancellation insurance in with other finance charges, rather than as part of an itemized list. However, the court found that the plaintiff had received adequate information through other disclosures, and that he could not prove detrimental reliance as required under the TILA to recover actual damages. This opinion affirms decisions by other circuit courts that have considered similar cases.

¹ This bill replaces several other bills by incorporating their language into a single piece of financial reform legislation. The absorbed bills were H.R. 2609, H.R. 3126, H.R. 3269, H.R. 3795, H.R. 3817, H.R. 3818, H.R. 3890, and H.R. 3996.
² The FTC would maintain some of its consumer protection functions as prescribed in the Credit Repair Organizations Act, Section 5 of the FTC Act, and the Telemarketing and Consumer Fraud and Abuse Prevention Act.