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On Tuesday the Federal Reserve published proposed amendments to Regulation J (Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire) which are intended to clarify and simplify certain provisions of Regulation J that no longer aligned with Regulation CC (Availability of Funds and Collections of Checks) following its amendments, after it was amended in 2017.

The proposed Regulation J amendments align the regulation with the distinction made in the Regulation CC amendments, and established in Article 3 of the UCC, between checks (which by definition must be reduced to writing) and electronically-created items, or ECIs.  Under the proposed amendments, the Reserve Banks would require senders of ECIs to provide certain warranties and indemnities, in an effort to shift liability to the sending parties who are in a position to know whether they are sending an electronic check (which enjoys standard check warranties) or an electronically created item (which does not).

The proposed amendments additionally smooth out some bumpiness financial institutions may have experienced in moving Fedwire payments to the ISO 20022 financial messaging standard.  ISO 20022 is the global financial messaging standard for SWIFT (the Society for Worldwide Interbank Financial Telecommunication), and its adoption for Fedwires is necessary for “straight through processing” of a payer instruction from a non-US bank to a US bank. Put another way, unified financial messaging standards don’t require translation, and are therefore faster.  Concerns were raised that certain terms used in the ISO 20022 standards (such as “agent”, “creditor”, and “debtor”) would create certain legal obligations. The proposed amendments clarify that usage of any term in the financial messaging standard does not confer or connote any specific legal status, or responsibilities.

On November 28, 2017, the Federal Reserve Board announced a Consent Order with Peoples Bank (Peoples) in Lawrence, Kansas.  The Order charges Peoples with violating Section 5 of the Federal Trade Commission Act (FTCA) by engaging in deceptive mortgage origination practices between January 2011 and March 2015.  According to the Order, Peoples “often” gave prospective borrowers the option of paying discount points (an amount calculated as a percentage of the loan amount) at the time of closing, in order to obtain a lower interest rate.  According to the Fed, this “regularly” led borrowers to pay thousands of dollars for discount points, but did not always result in a lower interest rate.  Peoples denies the charges, but has agreed to pay $2.8 million to a settlement fund for the purpose of making restitution to the affected borrowers.  Also, while not a part of the Order, Peoples has ceased taking new mortgage applications, and is in the process of winding down its mortgage lending operation.

Section 5 of the FTCA proscribes “unfair or deceptive acts or practices in or affecting commerce.”  Here, the Federal Reserve found that Peoples’ misrepresentations were deceptive because they were likely to mislead borrowers to reasonably conclude that they obtained a lower interest rate through the payment of discount points, when in fact, many did not receive a reduced interest rate, or received a rate that was not reduced commensurate with the price they paid for the discount points.  This was found to be material because it “relate[s] to the cost of the loan paid by the borrowers.

The Consent Order notes that Peoples’ loan disclosures “gave an accurate quantitative picture of the loans’ costs.”  But according to the Fed, Peoples (which had no written policy regarding discount points) misrepresented and/or omitted the nature of the discount points, which led many reasonable consumers to incorrectly assume they were receiving a rate based on the discount points they paid, when they actually received no benefit (or not the full benefit) from their payment.  This illustrates the need for mortgage lenders to ensure they are painting an accurate picture of their mortgage products at all stages of the origination process – including advertising, loan disclosures, and communications with prospective borrowers.

The CFPB, Fed, and OCC have published notices in the Federal Register announcing that they are increasing three exemption thresholds that are subject to annual inflation adjustments.  Effective January 1, 2018 through December 31, 2018, these exemption thresholds are increased as follows:

The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

  • Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.
  • Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.