Payments

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In a January 4 posting, Colorado’s outgoing Attorney General, Cynthia Coffman, issued an administrator’s opinion as to whether Section 5-2-214 of the Uniform Consumer Credit Code prohibits supervised lenders from utilizing post-dated checks, debit authorizations, and other forms of up-front payment authorization, as security for payment of “alternate charge” consumer installment loans. Alternate charge consumer loans under the UCCC allow supervised lenders to charge, among other things, acquisition charges and monthly installment handling charges, when the amount financed is not more than one thousand dollars. The AG expressed that holding a post-dated check –even if that check corresponds to a future regularly-scheduled installment payment — would be strictly prohibited. The AG opined, on the other hand, that the use of up-front payment authorizations — if limited to regularly scheduled payments and revocable by the consumer — would be permissible.

In analyzing the issue, the AG considered whether post-dated checks and up-front payment authorizations would constitute prohibited “collateral” – a term undefined by the UCCC – under C.R.S. § 5-2-214(7). The AG supplemented the UCCC with definitions of “collateral” and “security interest” as drawn from the Uniform Commercial Code. Doing so, the AG concluded that post-dated checks would constitute collateral under all circumstances while up-front payment authorizations would not constitute collateral under certain circumstances. The AG further bolstered her analysis by considering various courts’ interpretation of the federal Truth in Lending Act’s disclosure requirements, as pertaining to post-dated checks and certain debit authorizations.

Supervised lenders should take heed of the administrator’s opinion, and how it may impact the making and administration of alternate charge consumer installment loans under the watchful eye of Colorado’s new Attorney General, Phil Weiser. In particular, those supervised lenders who routinely utilize debit authorizations should be mindful that their written loan agreements expressly state that the consumer may revoke a debit authorization at any time, and should instruct their officers not to utilize debit authorizations to make a debit from the consumer’s bank account should the consumer fail to make a regularly-scheduled installment payment.

This afternoon, Pew Charitable Trusts will host an event in Washington, D.C. focusing on Ohio’s Fairness in Lending Act.  Enacted in July 2018, the Act places new limitations on payday loans including an interest rate cap, a limit on the total cost of a loan, and other structural restrictions.  The Act is viewed as a significant victory for consumer advocates with the potential to be followed through legislation in other states or through ballot initiatives.  (Last week, Colorado voters passed a ballot initiative that places a 36 percent APR cap on payday loans.)

At the event, Ohio legislators from both sides of the aisle, business leaders, advocates, and researchers will discuss the Act.  According to Pew’s description of the event, the topics will include a discussion of strategies “to advance meaningful reform in other states with payday loans.”

 

 

Earlier this month, the Federal Reserve invited comment on actions it can take “to promote ubiquitous, safe, and efficient faster payments in the United States by facilitating real-time interbank settlement of faster payments.”  Comments are due by December 14, 2018.

More specifically, the Fed is seeking comment on two potential actions.  One action is the Fed’s development of a service for real-time interbank settlement of faster payments 24 hours a day, seven days a week, 365 days a year.  The second action is the creation of a liquidity management tool that would enable transfers between Federal Reserve accounts on a 24x7x365 basis to support services for real-time interbank settlement of faster payments, regardless of whether those services are provided by the private sector or the Federal Reserve Banks.

According to a Federal Reserve Board Governor, there is a growing gap between the transaction capabilities in the digital economy for payments that are fast, convenient, and accessible to all and the underlying settlement capabilities.  There is a growing demand for payments to be as instantaneous as the apps on smartphones, but these payments currently rely on a patchwork of systems that can result in inefficiencies and delays, as well as uneven access.  Faster payments would allow consumers and businesses to send and immediately receive payments at any time of the day and on any day of the year, and provide funds recipients the ability to use the funds anywhere they choose.  In many circumstances, the underlying infrastructure cannot ensure that a fast payment is fully complete before the recipient seeks to use the funds.

Interbank settlements can be performed on a deferred basis or in real-time.  Most settlement arrangements for faster payments currently settle funds between banks on a deferred basis, a buildup of obligations results, presenting risks to the financial system in times of stress.  A 24/7 payment-by-payment interbank settlement in real-time, referred to as “real-time gross settlement,” offers clear benefits in minimizing risk and maximizing efficiency.  It would provide banks with access to a settlement system that settles each payment as soon as it is sent.  It would also provide important benefits to households and small business owners who face cash flow constraints.

While membership in a payment system can offer benefits to participating financial institutions such as meeting customer desires for faster, more convenient, or cross-border payment methods, it can also entail risks.  The OCC issued a 2017 interpretive letter that required a bank seeking to enter into membership in a payment system to submit a written notice to its examiner-in-charge providing relevant information regarding the proposed membership and engage in on going monitoring to ensure its involvement can be conducted in a safe and sound manner.

In addition to the Fed’s request for comment, there were two other recent noteworthy payments-related developments.  Last month, the Fed published final amendments to Regulation CC (Availability of Funds and Collections of Checks) to update the liability provisions of Reg. CC to address the nearly-complete conversion of the nation’s check collection system from a paper to an electronic environment. The amendments are effective on January 1, 2019.

Also last month, the National Automated Clearing House Association (NACHA) announced that its members has approved the following three new rules to expand the capabilities of Same Day ACH for all financial institutions and their customers:

  • Effective September 18, 2020, same-day ACH transactions can be submitted to the ACH Network for an additional two hours every business day.
  • Effective March 20, 2020, the same-day ACH per-transaction dollar limit is increased to $100,000.
  • Effective September 20, 2019, the speed of funds availability for certain same-day and next-day ACH credits is increased by making funds from same-day ACH credits processed in the existing first window available by 1:30 p.m. local time and funds from certain other ACH credits available by 9 a.m. local time by the receiving bank.

I am pleased to announce that Chris Ford, an attorney who has led some of the country’s largest and most innovative Fintech and payment systems transactions, has joined Ballard Spahr as a partner in the firm’s Consumer Financial Services Group.  He will be based in the firm’s Washington, D.C. office.

Chris advises clients on large-scale commercial transactions, particularly those involving financial services, payments, technology, and outsourcing.  He also provides strategic counsel to clients on co-brand and private-label card transactions, card processing and network-related deals, merchant acquisition, and information technology and business process outsourcing.

Chris’ clients include Fortune 100 companies, merchants, and financial institutions.  His work includes representing one of the world’s largest financial institutions in its global, retail, commercial, and small business credit card processing agreements; assisting a global finance company in the issuance of a credit card in the United States; assisting one of the largest merchant-acquiring companies in a strategic partnership with a major credit card issuer; and advising a major grocery retailer in its merchant-acquiring and payment processing arrangements.

To learn more about our new colleague, read our firm’s announcement.