Broox Peterson, Esq.

The CARD Act's Impact on State Gift Card Laws

brooxp@bwplawyer.com (Broox Peterson) — Tue, 16 Feb 2010 22:04:00 GMT

The CARD Act amended the Electronic Funds Transfer Act(“EFTA”) to bring gift cards under federal law for the first time. The Federal Reserve proposed extending Regulation E, which implements the EFTA, to certain stored value cards as far back as 1996, but never adopted final rules. The Federal Reserve did extend Regulation E to encompass payroll cards, effective July 2007. Regulation E is now being amended to implement the gift card requirements of the Card Act, effective August 22, 2010.

Amended Regulation E will preempt a significant number of pre-existing state gift card laws, i.e. those that are inconsistent with the federal standard. There is an exception for those state gift card laws that are more protective than the federal standard. Setting a minimum level of federal consumer protection that the states can exceed is common to much federal consumer protection legislation, and is acknowledgment of the traditional responsibility of states for consumer protection under this nation’s system of federalism. In practice this sort of federalism can be messy.

In many cases it is easy to determine if a state gift card requirement is more protective. For instance, if a state requires that cards cannot expire before 2 years, this is shorter than the federal standard of 5 years and is preempted by the federal requirement. A state standard requiring a longer expiration date than the federal standard (or as in some states, a total ban on expiration dates) will take precedence over the federal standard. Similarly, if a state bans service fees altogether, as several do, or impose limits on the amount of total fees as others do, those requirements will survive. A state law that permits service fees before 12 months of inactivity will be superseded by the federal standard, but one requiring a greater period of inactivity will survive.

It is more difficult to gauge the effect of the Card Act disclosure requirements on certain existing state disclosure requirements. The federal standard requires “clear and conspicuous” disclosure of expiration dates and fees and circumstances in which they will apply. The Federal Reserve states in its Proposal to amend Regulation E that disclosures are clear and conspicuous if they are “readily understandable” and the location and type size of the disclosures are “readily noticeable to consumers”. The Federal Reserve did not require a specific font size for disclosures in its Proposal, reasoning that it would not be workable in all disclosure contexts (but did request comment from the public whether a minimum font size nonetheless should be imposed). Several states with disclosure requirements for service fees do impose minimum font requirements, typically 10-point type. If a disclosure in 8-point type is clear and conspicuous satisfying the federal standard it is not entirely clear whether state requirement that it be in 10-point type is inconsistent with the federal requirement or more protective. On the one had, one could argue that if 8-point is good, 10-point is better. On the other hand, if 10-point type causes overcrowding of the disclosures required by the Card Act to be on the card, maybe it is worse. This seems too subjective, and will have to be clarified by the Federal Reserve at some point.

First published on GetDebit.com. See GetDebit.com for more prepaid debit card newsand information.

The CARD Act Was No Gift

brooxp@bwplawyer.com (Broox Peterson) — Tue, 16 Feb 2010 21:46:00 GMT

The Federal Reserve is required under the Card Act to publish final regulations for gift cards before February 22, 2010. The effective date for the rules will be six months later, August 22, 2010. The comment period on the proposed rules published in November 2009 closed at the end of December.

The Federal Reserve’s initial proposal was well thought out and cognizant of the complex realities of the prepaid card market, although constrained by the contents of the CARD Act itself, for which the same claim can’t easily be made. Seemingly simple in concept, the gift card requirements of the CARD Act require bright line distinctions that the Federal Reserve struggled to implement in its proposed rules.

For instance, one of the several exclusions from coverage under the CARD Act is for reloadable cards, codes or devices that are not marketed as gift cards. Recognizing that there are many uses for reloadable prepaid cards, the proposed rules and accompanying official commentary would deny the exclusion in any instance where any party in the marketing and distribution chain of the prepaid product even hinted that the card could be given as a gift. For instance, celebratory graphics or other indication that the card could be given to others could constitute such a“hint”, even if the primary purpose of the card was, for instance, health care expenses or a general-purpose transaction account for the unbanked.

Thinking this through, the Federal Reserve realized that issuers or program managers would be at the mercy of other parties in the distribution chain, so tried to create a safe harbor in the proposed rules and official commentary. Issuers or other affected parties can preserve the exclusion for reloadable cards, codes or devices if they implement reasonable procedures to prevent the cards from being marketed as gift cards. This includes enforcement of contractual provisions with retail sellers requiring procedures designed to avoid the marketing of the prepaid cards as gift cards. Unfortunately, the examples given of what qualifies and does not qualify for the safe harbor are problematic.

The example given of a qualifying procedure is having sales displays for gift cards physically separated from displays for other prepaid cards. The example given for a non-qualifying procedure is having all prepaid cards, gift cards and otherwise, on one kiosk with a sign reading “gift cards.” Aside from the difficulty for many retailers in allocating more valuable selling floor space to two different types of prepaid cards, it is also not clear whether one kiosk with two different signs appropriately placed would qualify for the safe harbor, as perhaps it should.

There will be many other indistinct lines that participants in the prepaid card marketplace will need to grapple with once the proposed rules become effective. The prepaid card regulatory environment will be more complicated than ever.

Originally published on GetDebit.com. See GetDebit.com for more prepaid debit card news and information.

CFPA Legislation Passes the House - An Analysis

brooxp@bwplawyer.com (Broox Peterson) — Sat, 12 Dec 2009 16:35:00 GMT

After months of lobbying, discussion, amendment and general puffery the House adopted yesterday H.R. 4173 which, among other things, would create the Consumer Financial Protection Agency. Although most of the press reports recently have focused on amendments to the CFPA provisions that restore much of the favored regulatory treatment received by federally-chartered institutions under federal preemption principles, the rest of the CFPA provisions reported out of the House Financial Services Subcommittee and adopted Friday by the full House survived more or less intact. In an article published in Aspen Publishers Banking and Financial Policy Report in November I analyzed the House Financial Services Subcommittee version. A copy of the publication with my article can be downloaded from my website at www.bwplawyer.com. Some of the analysis will necessarily be moot due to amendments during the legislative grind, but the article is still a useful overview of the CFPA.

The discussion in the article of the preemption issues will of course be somewhat out of date, given the amendments to those provisions adopted by the House The preemption amendments proposed by Representive Melissa Bean of Illinois and included in the final legislation give the national bank and federally-chartered savings institution regulators the power to preempt state consumer protection laws from application to their charges if the law is discriminatory or it "prevents, significantly interferes with, impairs, or hampers the ability of [a federally-chartered institution] to engage in the business of banking". However, the federal regulator must justify any preemption decisions with findings on the record, including a finding that there exists an adequate federal consumer protection standard applicable to federally-chartered institutions, and a majority of the states can require the federal regulator to initiate a rule-making to consider toughening any federal standard. These requirements prevent the recurrence of the federal regulators' current preemption rules, which simply dismiss the application of any state consumer protection regulation against federally-chartered institutions with a peremptory wave of the hand.

There are a couple of other amendments of interest to some Web 2.0 business models I will mention. Person-to person lending operators will be subject to CFPA jurisdiction. Private organizations offering educational loans will be required to be certified first by the educational institutions, but it is not clear whether this applies to person to person educational loan models as well.

The Senate is considering its own version of legislation creating a CFPA, and it has been reported that opposition is stronger in that body. A vote in the Senate could be as late as May of next year, so we can look forward to possibly 5-6 months of legislative grinding before we know the fate of the CFPA in the Senate, with even more time for reconciliation if the Senate adoptes a version that differs significantly from the House version.

In the spirit of holiday season charity I have to acknowledge the committment and endurance of our legislators in pursuing their duties. It is my observation that no business negotiation, however difficult and complex, can match the tedium and aggravation of the legislative process. My favorite moment during the markup of the legislation in the House FInancial Services Subcommittee was when Barney Frank observed late in the evening, after listening to an apology by a Representive for mis-citing the source of a biblical homily in a previous soliloquy, that the book of the Bible he was most interested in at that moment was Exodus.

Note to Congress re: CFPA Legislation - Clean Up Your Act

brooxp@bwplawyer.com (Broox Peterson) — Mon, 12 Oct 2009 18:16:00 GMT

I have just submitted an article analyzing in detail the latest version of the legislation in the House (H.R. 3126) that would create the Consumer Financial Protection Agency, to be published in the November edition of the Banking and Financial Services Policy Report by Aspen Publishers. A copy of the article will be available on my website (www.bwplawyer.com) when it is published. However, the House Committee on Financial Services will begin mark-up on Wednesday of H.R. 3126, so now is the time to point out a couple of flaws in the bill I hope are fixed during the mark-up. I am not advocating for or against creation of the CFPA, just expecting Congress to make the effort to draft legislation that does not lead to unnecessary confusion and bad policy.

My first complaint about the bill is that it is nearly impossible to read and determine definitively who is a "covered person" subject to the rule-making and enforcement authorities of the CFPA. I attempt to parse the definition of "covered person" in my article, but after hours of trying to make sense of the various inter-linked definitions in the bill can only claim to have a plausible interpretation. It appears to me that the entities that are going to have the most trouble figuring out where they fall under the bill will be transaction processors, data communication providers, and value-added processing intermediaries. However, the CFPA is also given the express power to determine that activities and entities that do not strictly fall within the definition of covered person are nonetheless subject to its jurisdiction, so perhaps the rest of the definitions are actually irrelevant. Sorry, but this seems rather arbitrary and, frankly, lazy lawmaking.

There are very few restrictions in the bill on the power of the CFPA to engage in rule-making, and it appears to have the power to go beyond the scope of the enabling statutes adopted by Congress that the CFPA will have authority to interpret and enforce.
if this is not the intent of Congress now is the time to clarify.

Perhaps irony is overrated, but contrast the authority granted to states in the bill to adopt more protective legislation than any scheme adopted by the CFPA against the broad and otherwise nearly unrestricted powers that would be granted by Congress to the CFPA. This is the "preemption" issue that is the subject of intense lobbying, for and against, reported in the press. The preemption rules in the bill will be applicable only to rules adopted by the CFPA not based on currently existing consumer financial protection legislation such as the Truth in Lending Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act and other statutes responsibility for which is transferred to the CFPA in the bill. Most of these existing statutory schemes have their own preemption rules and the bill expressly does not supersede them. In the Truth and Lending Act and the Fair Credit Reporting Act there are certain aspects that the states can alter with more protective legislation, but the states are totally preempted by and cannot alter other aspects. In the latter cases either Congress or the regulatory agency responsible for adopting rules to enforce the statutes determined that the benefits of nationwide standards were more important than allowing states to alter the rules to make them more protective. In future rule-making the CFPA will not have the ability to make a similar determination since the ability of the states to adopt more protective legislation is absolute in the bill. This seems to be short-sighted at best, and it would seem better to give the CFPA the right to preempt state legislation if it determines that to do so would best achieve the goal of effective consumer financial protection. In its current form the preemption provision in the bill reflects a federalism victory by the states, but federalism is a two way street for good reasons, and the bill's preemption provisions are bad public policy.

Common Sense and the Proposed CFPA - Barney Frank's 9-23-09 Memo to House Democrats

brooxp@bwplawyer.com (Broox Peterson) — Fri, 11 Sep 2009 15:27:00 GMT

Reuters reports that Barney Frank has proposed some revisions to H.R. 3126 to address concerns about that legislation that would create the Consumer Financial Protection Agency. These proposed revisions include eliminating the requirement that "vanilla" products be offered by financial institutions, and clarifying that the CFPA would not have authority to require sellers of financial products to assure that consumers understand the features and risks of the products they are buying. The CFPA instead would focus its efforts on ensuring meaningful and comprehensible disclosures. These are helpful revisions given the nearly unlimited authority that the original legislation seemed to impart. The proposed revisions also would give the existing regulators a seat on a Consumer Financial Protection Oversight Board that would advise the Director of the CFPA. This would help the coordination effort with other regulators with potentially conflicting safety and soundness regulatory concerns, and the revision would further create an independent body to which institutions subject to conflicting regulatory demands could appeal for relief. These revisions are clearly a response to criticisms that bifurcating consumer protection responsibiities from prudential and safety and soundness regulation will create turf wars with the regulated in the middle. Other proposed revisions would require that the CFPA coordinate its examination activities with respect to an entity with other regulators that have examination authority, and would address CFPA funding fairness issues that have been raised by the banking industry. Finally, the proposed revisions would clarify the standards applied by the CFPA to non-bank financial institutions subject to its jurisdiction. The good news, I guess, is that the regulation can be no more strict than that applied to banks.

In an important respect the proposed revisions seem quite inadequate, and that is in clarifying the scope of jurisdiction of the CFPA - in other words, who is subject to CFPA jurisdiction (and why)? The Frank memorandum states an intent that the CFPA would not have authority over non-financial businesses and their billing activities (the corner butcher can now relax), and further lists a number of proposed express exclusions from coverage under H.R. 3216, such as lawyers, accountants, tax preparers, retirement plan providers, realtors, auto dealers, and communications providers.

Two additional exclusions merit discussion. The memorandum proposes that consumer reporting agencies would now expressly be excluded and continue to be regulated by the Federal Trade Commission. However, the language in H.R. 3126 that makes entities engaged in credit reporting activities a "covered person" covers not only collection of "consumer report information" but also the collection of "other account information". Unless this is further pared back when the revised bill is actually drafted, the CFPA apparently will have jurisdiction, as an example, over entities creating and maintaining transactional databases not amounting to consumer reports under the Fair Credit Reporting Act and providing them to third parties for use in behavioral marketing or for other purposes. In fact, this would not be inconsistent with the transfer to the CFPA of authority under existing privacy laws, such as Gramm-Leach-Bliley.

The other proposed exclusion is for service providers that provide strictly ministerial and support services to financial institutions. This raises many questions, since the definition of a "covered person" subject to CFPA jurisdiction in H.R. 3126 currently includes providers of processing services and products that support consumer financial transactions. Perhaps the intent of the memorandum was lost in the reporting by Reuters, but it is not clear if that coverage is proposed to be eliminated. If not, then it would be helpful if the legislation was clearer about what aspects of a third party processor's or product supplier's business will be subject to CFPA jurisdiction. The Federal Trade Commission has had to postpone effectiveness of its Red Flag Rules several times due to confusion about what businesses are covered under the enabling legislation, so perhaps Congress can be more helpful this time.

What the Frank memorandum does not address are concerns about the interplay between regulations adopted by the CFPA and activities of the various States (the "preemption" issue) or the broad grant of rule-making powers to the CFPA with no clear requirement that there be express Congressional authority for the rules that are adopted.

I am addressing these questions and others in much more detail in an article I am writing for publication in November in the Banking and Financial Services Policy Report, from Aspen Publishing.

Common Sense and the Proposed CFPA - Will Consumer Protection Enforcement Be More Effective?

brooxp@bwplawyer.com (Broox Peterson) — Sat, 05 Sep 2009 13:06:00 GMT

It is not a foregone conclusion that the CFPA will be established, at least in its current proposed form, and as the memory of the recent financial debacle fades with economic recovery, the impetus to do something dramatic about consumer financial regulation may be tempered by second thoughts. This is not to say that there was not a serious regulatory failure in the past decade or more. I spent much of the last week trying to help an acquaintance about to lose her house to foreclosure, a house acquired in 2006 with first and second loans from IndyMac Bank totaling $30,000 more than the purchase price of the house.

The CFPA as a concept was originally promoted in 2007 by Professor Elizabeth Warren of Harvard, a passionate advocate for consumer protection, and she continues to be a vocal proponent. Her argument that existing regulators failed to protect consumers from the excesses of the last boom is unassailable, but her claim that a CFPA dedicated to consumer protection will prevent the the kinds of recent widespread harm to consumers and their families may be wishful thinking.

Regulators are an arm of the Executive Branch of our government, but are created by Congress. They are staffed by civil servants, but the leadership is appointed, and thus attuned to the prevailing politics. In the past decade or more, both political parties embraced the hope of academic free market economics as the proper regulatory (read deregulation) model. The regulatory bodies climbed on-board that platform and regulated accordingly. The OCC bragged that it did not adopt regulations but rather relied on the examination process to guide national banks' (in that case) behavior.

When the bubble suddenly popped Congress was shocked, just shocked, to find out that there was gambling occurring in the establishment, and the regulators responded with a revitalized vigor. One result was the banning of certain credit card industry practices that had been extant for decades, albeit pursued with increasing eagerness and rapaciousness by issuers during the boom. Regulators were also criticized for permitting the sub-prime bubble to inflate, although the federal government had encouraged the practice for years to extend the benefits of home-ownership to lower income families, which likely constrained the regulators from acting aggressively. Most of those excesses of wishful thinking or worse have also now been addressed by Congress and the regulators.

Proponents of the CFPA argue that existing regulators were distracted from their consumer protection responsibilities by their other responsibilities for safety and soundness of their financial institutions, which the CFPA would not have been. The CFPA would also consolidate efforts and resources, and have a renewed Congressional mandate to protect consumers. The theory is that a focused and dedicated CFPA will raise the alarm and protect consumers next time. Have no doubt there will be a next time.

I wonder if it will matter whether there is one dedicated consumer protection regulator like the CFPA or many multi-function regulators with consumer protection responsibility (the current model) if the political winds shift again, as they inevitably will. Under Elizabeth Warren or her equivalent the CFPA will likely be very active, but the CFPA will not be immune from the influence of successor administrations and philosophies of regulation, and cannot be made so. Of course, in the long run politicians and their appointees move on with their resumes enhanced, and short-term thinking is pretty common in government, and probably won't itself hurt the prospects for the CFPA in Congress.

Common Sense and the CFPA - Foreseeable Consequences?

brooxp@bwplawyer.com (Broox Peterson) — Wed, 02 Sep 2009 15:07:00 GMT

The debate over the proposed Consumer Financial Products Safety Commission has essentially been claims from both sides arguing the hazards of unintended consequences. Those in favor of creation of the CFPA point to recent consumer financial distress as an unnecessary consequence of less than full attention to consumer protection concerns by current regulators, which they claim would be remedied by the CFPA and its exclusive focus on those concerns. Those in opposition raise concerns about the consequences of separating prudential regulation from consumer protection regulation and the effect of excessive regulation on innovation and availability to consumers of financial products. By definition the actual unintended consequences are impossible to foresee, but there are probably inevitable consequences from the creation of the CFPA, some of which which the enabling legislation itself tries to address.

A large portion of the proposed legislation specifies the structure of the CFPA and authorizes the transfer from existing regulators of personnel and responsibilities for existing law and regulation, as well as amends existing law to conform to the new regulatory structure. The more substantive provisions of the legislation specify the mandate and mission of the agency and other powers and obligations, such as rule-making and examination powers, information gathering and sharing responsibilities, adoption of disclosure and fair practices standards, creation of consumer friendly "vanilla" product specifications, and new state/federal preemption rules relative to consumer protection regulation.

The CFPA mandate is to ensure simplicity, transparency, fairness, accountability and access in the market for consumer financial services. In doing so, the CFPA is required to ensure that sustainable growth and innovation in the marketplace is not hindered, and that underserved consumers and communities have access to consumer financial services. In adopting rules the agency will be required to balance the costs and benefits of those rules to consumers and to providers, and to consult with other regulatory agencies concerning the consistency of proposed rules with prudential, market or systemic objectives of those other regulatory agencies. However, with limited exceptions the CFPA will have primary authority for all matters involving consumer protection.

Future installments in this series will examine whether there are foreseeable consequences from creation of the CFPA in the following areas:

Innovation in the consumer financial products marketplace and availability of innovative products to consumers
The nature of providers in the financial products marketplace
The kinds of rule-making activities the CFPA is likely to engage in
Responsiveness of the CFPA to consumer and Congressional concerns and general effectiveness in protecting consumers
The relationship between the CFPA and the prudential regulatory bodies
Anything else that occurs to me along the way.

Common Sense and the Proposed CFPA Legislation - A Series

brooxp@bwplawyer.com (Broox Peterson) — Fri, 28 Aug 2009 14:32:00 GMT

As summer winds down and Congress returns from recess (sadly diminished by the loss of Senator Kennedy) the swarm of lobbyists fighting or advocating the proposed Consumer Financial Products Safety Commission (CFPA) will keep temperatures high in Washington D.C.. The legislation has many flaws, and is rife with potential for unintended consequences, particularly when the idealistic teflon that has coated the proposal (and protected it from any serious policy analysis in Congress) has worn off in the day to day fray of agency operations and practical politics.

The issues implicated by the CFPA legislation are many, and deserve consideration before the agency is authorized with the powers that are proposed. Most of the public debate so far has concerned the removal of consumer protection responsibilities from existing regulators into the CFPA, involving questions of whether it is possible or advisable to isolate prudential regulation of financial institutions from consumer protection regulation. Actually, this is not a question with a clear answer, and the fact that the question is raised loudest by the existing regulators and the regulated financial institutions makes it easy for a politician to ignore if so inclined.

In the coming few weeks I will provide here a disinterested analysis of the proposed CFPA legislation and suggestions for improvement where appropriate. I am no one's lobbyist and do not expect that my life will be impacted one way or the other if the CFPA is created or not (which is not to say that others less fortunate will not be). My only interest here is in furthering the application of common sense to law-making and policy creation. I am no genius, but then common sense is not rocket science. Or economics, but don't get me started on that ...

Vanilla Preemption?

brooxp@bwplawyer.com (Broox Peterson) — Wed, 08 Jul 2009 17:26:00 GMT

I was mulling over the proposed legislation that would create the Consumer Financial Protection Agency, torn between admiration and scepticism, when I received a comment from Bruce Cundiff from Javelin Research. He was responding to an earlier entry about the Cuomo vs. Clearinghouse Association case (posted before it was decided) discussing the importance of federal preemption for the prepaid card industry. He wonders whether companies issuing payroll cards will qualify as agents of a national bank and thus be insulated from state prepaid card regulation as was found in SPGGC v. Ayotte 488 F.3rd 525 (1st Cir. 2007), or whether the employers will be considered issuers themselves, separately regulated under those state laws. Nothing in Cuomo changed my usual answer to that question, which is that if the issuing bank retains control over the terms and conditions of the card issuance and the allocation of any fees that are charged then the company distributing the cards will likely be viewed as merely the agent of the bank. In the case of payroll cards this test would seem pretty easy to satisfy. However, as lawyers like to say, all that is probably moot in the near future.

The proposed Consumer Financial Protection Agency (CFPA) enabling legislation contains amendments to the National Bank Act that will significantly reduce the current federal preemption protection national banks (and their subsidiaries, affiliates and agents) enjoy from state consumer protection regulation. These amendments subject national banks to non-discriminatory state consumer protection laws and regulations that are not inconsistent with applicable federal laws, although, as in Cuomo, enforcement is permitted only by state attorneys general through the courts. The prepaid card industry is upset with the prospect of losing federal preemption protection, arguing that having to comply with a patchwork of differing state laws will stifle innovation and reduce consumer availability. There is truth to this claim, since many state laws applicable to prepaid cards were originally adopted to regulate gift certficates, and then gift cards, but they can apply as well to reloadable payroll and network-branded repaid cards (e.g. Amex, Discover ,MasterCard or Visa prepaid cards). These are quite different products and some of the state restrictions adopted in connection with gift certificates/cards such as prohibition of activation fees, dormancy fees, monthly service fees or expiration dates may in fact be essential to the viability of reloadable prepaid products. In the Ayotte case cited above one of the issues was enforceability of a New Hampshire law prohibiting expiration dates on prepaid cards. The prepaid cards in question were Visa-branded prepaid cards, and by Visa rule these cards were required to have an expiration date (for fraud control purposes), which meant that the cards could not be issued to New Hampshire residents if New Hampshire's law applied to the federally-chartered financial institution-issued cards. Federal preemption saved the program in that case, but that precedent will be overturned by the CFPA legislation.

I do love irony, and think that there is plenty of opportunity for it with the proposed CFPA. Limiting myself to the prepaid card issue discussed here, I see vanilla as the flavor that will save the prepaid card industry's bacon (or something like that). The CFPA will have the mandate to ensure that consumers are enabled to make informed choices in utilizing consumer financial products. One of the tools to do so is defining by regulation "vanilla" products that are easily explained and understood and which can be the benchmark against which to measure more complicated products. While credit cards and overdraft facilities are likely to get first attention due to the current noteriety of those products, the prepaid card industry may want to get itself on the agenda as soon as possible. Whatever else you may want to say about federal regulatory agencies, when they adopt a rule, they really grind through a process in doing so and try to balance competing interests. If the CFPA adopts a vanilla prepaid card product rule, it is going to be one that is economically and practicably viable since that is the only way they will be complying with their mandate. If certain terms and conditions and fees are truly essential to the viability of prepaid cards then the vanilla product will have to permit them. The fun part follows, although its possible only a laywer would think so. Although the CFPA legislation expressly provides that states may adopt more restrictive rules in areas where the CFPA has regulated, those rules cannot be inconsistent with the federal regulation. Once a vanilla product has been defined by the CFPA, wouldn't any state restriction on a feature contained in the vanilla product be inconsistent and thus preempted? The legislation is silent on this, but to find otherwise would undermine the purpose of defining vanilla products in the first place, so I expect the agency would find preemption appropriate and necessary.

Cuomo vs Clearinghouse Association Decided

brooxp@bwplawyer.com (Broox Peterson) — Mon, 29 Jun 2009 19:04:00 GMT

The U.S. Supreme Court today struck down part of the regulation that the Office of the Comptroller of the Currency (OCC) adopted in 2004 to define the extent of preemption of state action under the National Bank Act. I have written before about this case (Federalism and Consumer Protection - Cuomo v. The Clearinghouse Association). The decision today (5 Justices on majority opinion, 4 on opinion concurring in part and dissenting in part) holds that state attorneys general can enforce non-preempted state laws against national banks, contrary to the position of the OCC that such enforcement constituted preempted "visitation" under the National Bank Act. The majority opinion dismissed the OCC arguments in pretty strong terms (as lacking credibility), finding that earlier Supreme Court decisions clearly distinguish visitation from enforcement of state laws otherwise applicable to national banks. In this case, the OCC had acknowledged that Congress did not preempt the state antidiscrimination laws in question, but argued that the state had no right to enforce its non-preempted laws, a position that the majority characterized as "bizarre".

The significance of this case for state consumer protection law enforcement will be favorable, although perhaps shortly will be overshadowed by developments in Congress. According to Barney Frank, the enabling legislation for the proposed and probably inevitable Consumer Financial Protection Agency will contain express protections enabling state consumer protection regulators (not just state attorneys general) to enforce local consumer protection law. I expect that preemption questions under the National Bank Act will only increase in future as the states begin to exercise that authority.

An Advance in Consumer Financial Protection?

brooxp@bwplawyer.com (Broox Peterson) — Tue, 16 Jun 2009 22:50:00 GMT

The Obama Administration began talking up its proposals for regulatory reform Wednesday afternoon, and consumer protection is an important part of the plans that will be presented to Congress for approval. Despite recent speculation that the Administration was cool to the idea of a stand-alone consumer financial protection regulatory body, such an agency is being proposed, a Financial Consumer Protection Agency.

The few details available now describe a powerful agency much like the Federal Trade Commission with authority to decide which financial products and terms for those products can be provided to consumers. Perhaps revealing is the requirement that financial institutions offer "plain vanilla" credit cards, mortgages and other financial products, and obtain approval of the Agency for any more sophisticated versions of those products. Does this reflect a bias towards commoditization of those products? I have seen reports that the proposal will require in some cases that a consumer be given the opportunity to "opt out" of the standard product before a more sophisticated product could be offered to the consumer. Other details include an emphasis on clear disclosure and simple explanation of terms of financial products, which may be further pressure towards simple, commoditized products, since, frankly, the more complicated a financial product is, the less comprehensible any attempt to explain it in writing becomes.

The Agency would assume from existing regulatory agencies their current consumer protection responsibilities, making it the primary federal regulator for consumer financial protection, with authority to impose fines and penalties for violations. However, states would be permitted to enact more stringent consumer protections than adopted by the Agency.

Business interests, not surprisingly, oppose the proposal for an independent consumer protection agency. Their arguments include the concerns that the new regulator will not know the financial institutions as well as the existing regulators do, and that the effect of the creation of the Agency will be to make the existing regulators less concerned with consumer protection. Advocates for the Agency argue that the existing regulators have not placed a high enough emphasis on consumer protection and were subject to "regulatory capture" by the financial institutions they regulated.

As is the case with these kinds of debates, both sides have good points, and some say that the fight in Congress against the proposal will be intense. My guess is that the proposal will pass, since the need of our leaders to appear to be doing something, anything, in response to the carnage in consumers' (read voters) lives is overwhelming. After that, time will tell if there is a big change in consumer financial protection enforcement. Maybe the biggest benefit of the requirement for approval of new products will be that the more egregious practices that have occurred in the past will simply never get off the drawing boards of the financial institutions.

What Will Be the Impact of the Credit Card Reform Legislation?

brooxp@bwplawyer.com (Broox Peterson) — Tue, 12 May 2009 14:45:00 GMT

Congress seems ready to adopt legislation that will eliminate or regulate many of credit card industry practices that seem noxious to those outside the industry (and some inside). The bills under consideration will, for the most part, replicate what has already been adopted by the federal regulators responsible for credit card regulation, and be effective a few months earlier than the regulations. One additional provision, a compromise in the Senate version of the legislation with the Republicans, would require issuers who raise interest rates on an account for late payments to wait 60 days before doing so and to reset the rate back to the original rate if the cardholder subsequently makes payments on time for 6 months. The Senate bill would also require that the cardholder be told how long it will take to pay off the balance and how much interest will be paid in doing so if only the minimum required payment is made. Press reports on this legislation can be found on PaymentsNews.com (if you do not subscribe you should, as Scott Loftesness provides a tireless chronicle of industry news).

The industry is predicting less availability of credit to some segments of society if the legislation passes, but may secretly be thankful that the included "reforms" are not fundamental to the credit card business model. Dow Jones reports that there is an amendment to the credit card legislation being considered by Senators Durbin and Kitt that would have a more fundamental impact. This amendment would permit merchants to steer customers away from using credit cards that are more expensive for the merchant to accept, such as rewards and other "premium" cards with high interchange fees. Currently merchants can give discounts to cardholders if they use cash, but cannot distinguish, for instance, between one Visa card and another. This so-called "Honor All Cards Rule" has been a fundamental principle for the card industry and an underpinning of the payment brands, but recently has been used to increase interchange fee revenues on premium cards at the expense of merchants. This amendment may be too late for the current legislation, but my belief is that the credit card industry will face legislative challenges to interchange fee practices at some point.

Financial Products Safety Commission - Over It's Head?

brooxp@bwplawyer.com (Broox Peterson) — Fri, 08 May 2009 15:36:00 GMT

The New York Times reports that the gun lobby has persuaded Senators to attach an amendment to the credit card reform legislation permitting carrying of firearms in national parks. Perhaps bankers opposing the credit card legislation should adapt the old NRA marching cry: "credit cards don't kill people, people do." Well, probably not, but the point should be a part of the debate over credit cards.

Popeye cartoons feature a character named Wimpy who is always proposing that he would gladly pay Popeye Tuesday for a hamburger today, and a whole industry has been built on that impulse. Barbara Kiviat writes in Time Magazine about findings from studies of credit card behavior. "They [show] a systematic psychological breakdown — as a species we're just really bad at understanding costs that come later on." She describes proposals that would make future costs more salient to consumers, essentially better disclosure methods. Whether better disclosure will thwart the human impulse towards immediate gratification is not clear.

Another amendment that Senator Durbin would like to attach to the credit card legislation would create a Financial Products Safety Commission. A separate bill already in the hopper that would do so is alive and attracting interest in the Senate (S. 566).

The proposed Financial Products Safety Commission would have the authority to prohibit certain credit card practices that cause financial difficulty for consumers. Professor Elizabeth Warren, who originally proposed the idea, has stated with respect to the purview of the Commission "[i]t’s not the role of government to say someone can’t go to the mall and charge too much or that a credit card company can’t ding them for being late on payments. The point is focused on the tricks and traps and that this should not be about hiding things."

This sounds good, I guess, but let's try to apply the distinction between hidden tricks and traps on the one hand and on the other hand areas the government should not be concerned with. Some common characteristics of credit card products that bankruptcy theorists believe increase the risk of consumer financial distress and bankruptcy include teaser introductory rates, no annual fees or introductory waiver of these fees, low monthly minimum payment requirements, and rewards for use of the credit card, and once the cardholder is carrying a balance, penalty fees and interest rate increases for late payments and overlimit charges. To these I would add widespread availability of credit cards to most economic levels of society, high credit limits, and transfer of the transactional costs of credit cards to merchants.

Some of these practices are already the subject of credit card regulatory changes and the reform legislation in Congress requiring more transparency and restricting unilateral changes to credit card terms. What additional tricks and traps lie in credit cards that the proposed Financial Products Safety Commission would concern itself with? Credit cards can be risky in the wrong hands, and to the extent that the features of credit cards encourage usage and accumulation of debt, it becomes difficult to separate tricks and traps from personal responsibility.

I believe that a Financial Products Safety Commission would quickly find itself wrestling with issues of public policy that are beyond the competence of government bureaucracy and that, in my opinion, should be left to the legislative process.

Cuomo vs Clearinghouse Association-Why Preemption Cases are Important for the Prepaid Card Industry

brooxp@bwplawyer.com (Broox Peterson) — Sun, 03 May 2009 19:11:00 GMT

Arguments were heard last week in the U.S. Supreme Court in Cuomo vs Clearinghouse Association. As discussed in my previous

post on this subject, this case is the latest in a series that have addressed the scope of federal preemption of state regulation and oversight of nationally chartered financial institutions. With certain exceptions, states have no regulatory or supervisory authority over the banking business activities of nationally chartered financial institutions, and this has been clarified to include their operating subsidiaries in Watters v. Wachovia Bank, N.A. 127 S. Ct. 1559 (2007), their loan sales agents in State Farm, F.S.B v. Burke, 445 F. Supp. 2d 207 (D. Conn. 2006) and State Farm, F.S.B. v. Reardon, 539 F.3rd 336(6th Cir. 2008), and their prepaid card sales agents in SPGGC v. Ayotte, 488 F.3rd 525 (1st Cir. 2008). The significance of the latter case for payments is that the prepaid cards in question were found not subject to New Hampshire (or any state’s) gift card statutory restrictions on, among other things, expiration dates and fees. Start-up companies building innovative businesses on prepaid card platforms will therefore want to seek the uniformity of product terms and other compliance obligations they can achieve by finding an issuer that is nationally chartered.

However, the relationship with the issuer must be carefully structured. In SPGGC v. Blumenthal, 505 F.3rd 183 (2nd Cir. 2007) the court upheld a lower court decision finding that Simon Malls, the seller of the prepaid cards issued by Bank of America, was not an agent of the bank since Simon Malls set the fees and policies for the cards, collected maintenance and other fees associated for the cards, and bore the costs of administering the program. Bank of America had the right to approve materials and policies and received the interchange fee as its compensation, but that was not enough for the court to find that the bank was the principal and Simon Malls the agent. In the Ayotte case above, Simon Malls was also the seller of the cards but with different issuers and a contract that placed control of the program more clearly in the issuers' hands.

Cuomo vs Clearinghouse Association addresses another variant of the preemption issue. This case arises out of a request for documents from the New York Attorney General to national banks about their lending practices which the Attorney General thought might violate New York’s fair lending/anti-discrimination laws. The banks (and their federal regulator, the OCC) objected on the grounds that the Attorney General had no authority to require them to do so, or for that matter to enforce the state law against a national bank if there was a violation. Branches of a national bank in a state are required under federal law to comply with the state’s consumer protection and anti-discrimination laws (unless they are in conflict with applicable federal law), but the position of the banks and the OCC was that, according to that same federal law, only the OCC can enforce the state laws. Presumably agents of these banks would fall under the same umbrella.

The issue of federal preemption and states’ rights is highly politicized, but unlike Congress and often the press, the Supreme Court deals with highly politicized issues in a refreshingly quiet manner. The arguments [transcript here] last week touched on questions of Congressional intent in the federal statute that the OCC believes gives it exclusive authority, on the possible distinction between enforcement of laws by a law enforcement authority and supervisory visitation (the argument of New York being only the latter is prohibited), and questions about the feasibility of having overlapping and possibility conflicting enforcement if both state and federal authority is upheld. It is difficult and probably impossible to predict outcomes based on questions asked by Justices during argument, since often they are simply testing their own opinions and understanding with hypothetical and clarifying questions.

There is some additional precedent that might have a bearing on the outcome of this case. Decisions have permitted claims brought under state law by state authorities against nationally chartered financial institutions for unfair competition, fraudulent inducement, breach of contract, breach of the covenant of fair dealing, or misrepresentation where the claims did not involve compliance with lending regulations or the business of banking, but rather misconduct in dealing with customers. For clarity, these non-preempted claims are different than claims that loan terms are, for instance, unconscionable under state law, which would be preempted by federal law as involving the business of banking per se.

Is the conduct alleged or suspected in the Cuomo case the type that these prior decisions have exempted from preemption? In one sense it seems possible, since unfair lending could be the result of misconduct in the operation of lending operations. However, an unfair lending claim can arise even in the absence of misconduct if the lending program criteria, while non-discriminatory on their face, in operation result in discrimination.

The outcome of this case, one way or the other, will be important for the prepaid cards industry.

Behavioral Advertising Targeted By Congress, European Union

brooxp@bwplawyer.com (Broox Peterson) — Mon, 27 Apr 2009 14:23:00 GMT

The latest example of the reduced, if not lacking, confidence in U.S. regulators in these times is the apparent Congressional intent to legislate restrictions on targeting of advertising to users of the Internet utilizing information gleaned from analysis of that usage. Last week the House Subcommittee on Communications, Technology and the Internet held another round of hearings on the subject. This is an area in which the Federal Trade Commission (FTC) has been active for some time, adopting final Principles in February 2009 for use by the industry in self-regulation.

The four Principles governing behavioral advertising, discussed in detail in the FTC's Report,

require (i) notice of data gathering and consumer ability to opt out, (ii) reasonable security protections for collected data and limited term retention, (iii) express consent to a change to the use and protection of data already gathered, and (iv) express consent to the use of sensitive personal data.

The FTC has been monitoring behavioral advertising for the last decade and the Principles are the culmination of efforts that included Town Hall Meetings and a round of comments before finalizing the Principles. Although compliance with the Principles is voluntary, the FTC indicated that in the coming year it would investigate and monitor self-regulatory programs of industry participants and bring enforcement actions under Section 5 of the FTC Act for unfair and deceptive practices where appropriate.

The industry has embraced self regulation but apparently both the House and the Senate have not. There will be more hearings and possibly a bill or two later this Summer.

The United States has always been a laggard in personal privacy regulation compared to certain other regions, in particular the European Union. Behavioral advertising in the UK has also been in the news, with the European Commission threatening to sue the UK government if it does not modify its data protection laws to address new technologies such as behavioral advertising. BT (formerly British Telecom) conducted tests in 2008 of its "Phorm" covert behavioral advertising technology without notifying consumers or obtaining their consent, which is a violation of the EU Data Protection Directive. The EU Telecommunications Commissioner also separately expressed concern about use of RFID technology to monitor consumer behavior without their consent.

European privacy legislation is likely to continue to be more stringent than anything adopted in the U.S., since the U.S. model generally favors "opt out" protection, which is much less onerous than European "opt-in" requirements. For many years European data protection laws have imposed restrictions on the cross-border transfer of personal information to a jurisdiction without legal protections equivalent to the "home country" protection. Since personal data originating in the EU has been transported across borders for processing for years, often to the U.S., there has for years been the question whether European law was being complied with, along with questions of extra-territorial jurisdiction. These questions are simply amplified with the Internet, although probably with no change in the general ignorance of the potential issues. As a practical matter, though, this will continue to be an area where the law is aspirational, but not enforceable.

Interchange and Slippery Slopes?

brooxp@bwplawyer.com (Broox Peterson) — Wed, 22 Apr 2009 20:17:12 GMT

The Credit Cardholders Bill of Rights Act (HR 627) passed out of the House Financial Services Committee after markup on a vote of 48-19. Several amendments that would have made the bill less stringent than the regulations already adopted by the federal regulatory agencies were defeated on smaller margins. The full House next takes up the bill and when passed, as it surely will be, will be reconciled with the companion, but tougher, Senate bill (S 414), assuming that bill passes, which is apparently more problematic, at least in its current form. Today credit card executives meet with the Obama administration, which strongly supports the Senate version of the bill, as it implements promises made by Obama during his election campaign. The Senate Bill also includes a requirement for a study by the OMB of interchange practices that seems a ringer if it ends up being part of any enacted law.

SEC. 501. STUDY AND REPORT.

(a) STUDY REQUIRED.—The Comptroller General (in this section referred to as the ‘‘Comptroller’’) shall conduct a study on interchange fees and their effects on consumers and merchants. The Comptroller shall review—

(1) the extent to which interchange fees are required to be disclosed to consumers and merchants, and how such fees are overseen by the Federal banking agencies or other regulators;
(2) the ways in which the interchange system affects the ability of merchants of varying size to negotiate pricing with card associations and banks;
(3) the costs and factors incorporated into interchange fees, such as advertising, bonus miles, and rewards, how such costs and factors vary among cards; and
(4) the consequences of the undisclosed nature of interchange fees on merchants and consumers with regard to prices charged for goods and services.

(b) REPORT REQUIRED.—Not later than 180 days after the date of enactment of this Act, the Comptroller shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives containing a detailed summary of the findings and conclusions of the study required by this section, together with such recommendations for legislative or administrative actions as may be appropriate.

Judge for yourself whether interchange fees in their current form will survive the current antipathy towards bank practices.

Bilski Defense Strikes CyberSource Patent Claims

brooxp@bwplawyer.com (Broox Peterson) — Wed, 22 Apr 2009 19:02:00 GMT

Scott Loftesness alerted me to CyberSource v. Retail Decisions, Inc. which may be the first use of last year's Bilski decision to invalidate a payments industry business method patent. A petition for certiorari by Bilski is on file with the US Supreme Court, but there has not yet been a ruling. There is quite a difference of opinion in the patent community whether Bilski is the right vehicle for the Supreme Court to review patentability of business methods, many feeling that the invention in Bilski suffers from obviousness, and as lawyers like to say, "bad facts make bad law."

The Court in the CyberSource decision took time at the end of its opinion to speculate on the future of business method patents.

"In analyzing Bilski, one is led to ponder whether the end has arrived for business method patents, whose numbers swelled following the decision in State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). Without expressly overruling State Street, the Bilski majority struck down its underpinnings. ... Although the majority declined say so explicitly, Bilski’s holding suggests a perilous future for most business method patents."

The Court further speculated on the possible interest of the US Supreme Court in reviewing Bilski.

"The observations of several Justices suggest that this issue may be expected to receive serious consideration by the Supreme Court. See eBay Inc. v. MercExhcange, LLC, 547 U.S. 388, 397 (2006) (Kennedy, J., concurring) (noting the “potential vagueness” and “suspect validity” of some business method patents); Lab. Corp. of Am. v. Metabolite Labs., 548 U.S. 124, 127, 136-137 (2006) (Breyer, J., dissenting from denial of certiorari) (questioning State Street’s adherence to Supreme Court precedent and observing, “Patent law seeks to avoid the dangers of overprotection just as surely as it seeks to avoid the diminished incentive to invent that underprotection can threaten. One way in which patent law seeks to sail between these opposing and risky shoals is through rules that bring certain types of invention and discovery within the scope of patentability while excluding others.”). The closing bell may be ringing for business method patents, and their patentees may find they have become bagholders."

The Politicization of Credit Cards

brooxp@bwplawyer.com (Broox Peterson) — Tue, 07 Apr 2009 16:36:00 GMT

The credit card industry has been receiving a lot of negative attention recently. The antipathy towards credit card issuers due to long-standing practices is high and long-standing complaints of consumer advocates are finding a welcoming audience in Washington DC. Despite the adoption in December 2008 of rules by the federal regulatory agencies that will prohibit or restrict the practices most complained about, Congress is proceeding with a bill (S. 3252) to accomplish the same thing because the new regulations do not take effect until July 2010. Most recently the Obama administration has signaled intent to pile into the issue as well. Credit card issuers are scheduled to meet with Treasury Secretary Geithner in the White House on Thursday.

One of the practices that has received much criticism recently is "universal default", in which experience of a cardholder with other creditors can be used by an issuer to raise interest rates and cut credit lines. There have been a lot of interest rate increases and credit line cuts going on recently given the deteriorating finances of consumers, and the pained outcry of cardholders has received widespread publicity. There is irony in this in one sense, and that is that banks are being roundly lambasted for poor credit underwriting practices in connection with their mortgage and other lending activities, but universal default practices are an attempt to control risk with what is an unsecured loan of indefinite duration. What the banks failed to realize, it seems, is that the credit card has become a consumer product rather than a loan product, and has thus become politicized. "Don't mess with my credit card."

Current credit card regulation under the Truth in Lending Act (TILA) and Regulation Z is disclosure-based, with certain practices prohibited by separate regulation, as was done in December 2008 by the federal regulators. Mortgage lending was similarly regulated until the adoption of amendments to Regulation Z prompted by passage of the Homeowners Equity Protection Act (HOEPA) in 2008. In a survey of HOEPA-inspired changes to Regulation Z by Jacqueline A. Parker, Jeffrey P. Naimon and Catherine M. Brennan published in the February 2009 edition of The Business Lawyer they noted that "[t]he final rules go a long way towards changing TILA, at least as it applies to residential mortgage loans secured by a consumer's principal dwelling, from a disclosure statute that relies on informed consumers to protect themselves to a source of substantive requirements and restrictions governing residential mortgage lending transactions." In particular, with respect to subprime mortgage lending, creditors are prohibited from lending without verifying the income and assets relied upon to determine repayment ability. Unsecured credit card lending is quite different in the sense that the cardholder cannot lose his or her house, at least directly, as a result of default, but the highly politicized nature of credit cards in the current climate conceivably could result in substantive restrictions on credit card lending that requires issuers to ensure that cardholders are able to repay the obligations incurred. Universal default tools would be unavailable, so that would likely mean smaller credit limits and higher APR's and probably less availability of credit cards to some people.

Beware Swinging Pendulums? S. 566 and the Proposed Financial Products Safety Commission

brooxp@bwplawyer.com (Broox Peterson) — Thu, 19 Mar 2009 16:50:00 GMT

The current outcry in Washington and on Main Street is the sound of a pendulum swinging with increasing momentum. Prognostications are generally tricky since events are essentially unpredictable. However, one thing that is predictable with some certainty is human social behavior. Human humors are fickle and swing one way then the other with some regularity. Once the pendulum reverses course it is pretty easy to predict that the status quo will suffer.

Amidst the current climate of recrimination and retribution against purveyors of financial products and services of all types, Senators Durbin, Kennedy and Schumer have introduced S. 566, “The Financial Product Safety Commission Act of 2009”. http://www.govtrack.us/congress/bill.xpd?bill=s111-566 This bill would create a new regulatory agency (“FPSC”) with the following objectives:

“1) to minimize unreasonable consumer risk associated with buying and using consumer financial products;
(2) to prevent and eliminate practices that lead consumers to incur unreasonable, inappropriate, or excessive debt, or make it difficult for consumers to repay existing debt, including practices or product features that are abusive, fraudulent, unfair, deceptive, predatory, anticompetitive, or otherwise inconsistent with consumer protection;
(3) to promote practices that assist and encourage consumers to use credit and consumer financial products responsibly, avoid excessive debt, and avoid unnecessary or excessive charges derived from or associated with consumer financial products;
(4) to ensure that providers of consumer financial products provide credit based on the ability of the consumer to repay the debt incurred;
. . . ; and
(9) to take such other steps as are reasonable to protect users of consumer financial products.”

To achieve this, the new agency would be required (among other things) to adopt consumer financial product safety rules that:

(A) ban abusive, fraudulent, unfair, deceptive, predatory, anticompetitive, or otherwise anti-consumer practices, products, or product features;
(B ) place reasonable restrictions on consumer financial products, practices, or product features to reduce the likelihood that they may be provided in a manner that is inconsistent with the objectives in (A); and
(C) establish requirements for clear and adequate warnings or other information that will advance the objectives in (A).

This new agency would be the supreme regulatory authority in these matters, superseding any other regulators, state or federal, although these other regulators would be able to investigate and enforce the regulations against violators if the FPSC lets them. Violations of any of the regulations adopted by the FPSC would carry criminal and civil penalties and give rise to private causes of action.

This new regulatory agency is similar to a proposal made in the U.S. Treasury’s “Blueprint for Financial Reform” which I have described in a previous post. However, Professor Elizabeth Warren of Harvard first proposed the idea for this particular formulation in an article in the Summer 2007 Issue of Democracy entitled “Unsafe at Any Rate” http://www.democracyjournal.org/article.php?ID=6528

She argued pretty persuasively that consumers need as much protection in connection with financial products as they get from the Consumer Product Safety Commission in connection with toasters.

Fortunately or unfortunately, depending on your predilections, this is probably an idea whose time has come, in some form or another. There will be a House of Representatives counterpart to S. 566 from Representatives Delahunt (D, MA) and Miller (D, NC), although Barney Frank (D, MA) may have a different, yet unknown, approach in mind.

Ironically, a concern I have with an FPSC, if it is created, is the apparently limitless scope of its charter, and the possibility of “regulatory capture” by anti-business advocates. I say ironically, because regulatory capture by the regulated has been one of the charges against the existing financial regulators the FPSC would supplant. I fear regulatory capture of the proposed FSPC by its constituency due to the aforementioned pendulum and populist fervor that seems to be battering common sense out of many in Washington.

It is not unusual for Congress to delegate substantial and broad authority to regulatory agencies to create and enforce standards of safety and fairness. The Federal Product Safety Commission and the Federal Trade Commission are just two examples. However, as I read S. 566, the FPSC could decide to regulate pricing of financial products, and given the current climate and heavy lobbying by merchant associations (under the guise of consumer protection) might not payment card interchange and merchant discount rates be on the table? Payments products are not toasters, and involve network economics that are not popular even if understood. There is considerable antipathy towards credit cards in particular (see, for example, Charging Ahead, by Ronald J. Mann, Cambridge University Press 2007, in which he statistically links increases in consumer credit to consumer bankruptcy). If the payments industry is regulated into stagnation through pricing controls then we might as well just turn everything over to the Federal Reserve and let them run the payment system as a utility. On the other hand, maybe the pendulum will again reverse course before the middle ground of common sense is left too far behind, as it seemed to be for the last 10 or 15 years.

Maybe This is Why People Don't Like Banks?

brooxp@bwplawyer.com (Broox Peterson) — Sun, 22 Feb 2009 18:54:00 GMT

When I was managing Visa's Washington legislative activities in the early 90's I was struck at how easy it was for politicians to make hay against the banks, and how hard it was to fend off or make unfriendly legislation more friendly. It is not that the lobbying by banks was not first rate, but rather that too many legislators, or their friends, or staff, seemed to have some grudge against their bank, past or present. I have observed much of the same problem facing GM in its recent contacts with Congress - apparently too many people have owned Vega's, or Nova's (which interestingly means "does not go" in Spanish).

In today's paper there was an Associated Press story that elicited from me an utterance that has escaped my lips too often recently - "what were they thinking (this time)?" Apparently 30 states have agreements with the largest banks in this country to issue Visa or MasterCard prepaid cards to recipients of unemployment benefits, and in several states this is the only way that recipients can receive the benefits. While it is possible to cash out the entire balance at a bank branch free of charge, many recipients use the card like a credit or debit card (many billions of dollars have been spent by the banks and associations to ingrain that habit) , but since it is a prepaid card, incur transaction fees, overdraft fees, ATM fees and balance inquiry fees. Now I understand the nature of the prepaid card product and the economic rationale for these fees, but does anyone at these banks actually think ahead? The Associated Press article makes quite a bit of hay at the banks' expense over the gross unfairness of charging fees for unemployment recipients to use their benefits, and frankly there is nothing the banks (and don't forget the government agencies) can say that will refute this fundamental perception of unfairness. No va.

Over on the newly relaunched Payments Views site (www.paymentsviews.com), another excellent payments industry service from Scott Loftensness and Glenbrook Partners, there has been interesting discussion about the need for "New Banks". Should a banking institution be expected to make fairness, a non-quantifiable but very real part of the world, a business consideration?