In This Issue:

  • Swipe Fee Settlement Yields More Litigation

  • Eleventh Circuit: Bank Directors Can Assert Defenses Against FDIC, but Business Judgment Rule Questionable

  • New on the Hill: More Prepaid Card Disclosures, Settlement Transparency

  • Bank to Pay $1.2M Fine Over Online Payday Loans; More Suits to Come?

  • Facing Scrutiny, Banks Drop Deposit Advance Loans

Swipe Fee Settlement Yields More Litigation

Although the parties reached a $7.25 billion class action settlement of the antitrust suit brought by merchants against Visa and MasterCard over swipe fees, the case is far from over.

The protracted legal battle centers on allegations by merchants that Visa and MasterCard engaged in a price-fixing conspiracy to set interchange fees and then imposed restrictions upon retailers not to disclose the charges to consumers or offer cheaper, alternative forms of payment. The settlement agreement – reduced to $5.7 billion after a large faction of class member merchants opted out of the deal – was meant to be the end of the road.

Instead, U.S. District Court Judge John Gleeson’s approval only triggered another round of litigation, including the following:

  • Dozens of class members have filed a notice of appeal of the federal court’s settlement approval – the largest antitrust settlement in U.S. history – to the Second Circuit Court of Appeals. The National Retail Federation, for example, characterized the settlement as “deeply flawed,” arguing that it “does nothing to reform the price-fixing payments system.” Opponents of the settlement have expressed concern that the deal failed to provide a permanent solution for merchants, many of whom are unwilling to pass swipe fees directly on to customers via surcharges or will be unable to take advantage of the new ability to pass these fees on to consumers because some states prohibit it, as it does not stop swipe fees from increasing in the future. In addition, opponents are concerned that the agreement includes an overly broad waiver of legal rights that may limit the ability of merchants to litigate future issues against Visa or MasterCard relating to fees and card network rules.

  • American Express waded into the dispute, filing its own notice of appeal. A spokeswoman for the company said Amex is focused upon the class definition. “In our case, we are objecting to being included in the settlement because, in our primary business, we are not a merchant, but a card network, card issuer and merchant acquirer in which we are a competitor to Visa, MasterCard and their issuing and acquiring banks,” Sanette Chao told Law360. “The language of the release that Visa and MasterCard required in their settlement is so broad that defendants in that case could argue that it applies to claims of competitors, not just merchants.”

  • After opting out of the settlement, a group of approximately 30 major retailers – including Hewlett-Packard and Toys-R-Us – filed a new complaint against Visa and MasterCard. The suit alleges that the payment processors colluded with banks to manipulate swipe fees and impose illegal prohibitions on the merchants that ensured the card companies would not compete against each other for customers. The alleged conspiracy “has unreasonably restricted competition . . . and has allowed Visa and MasterCard to extract supracompetitive, artificially inflated interchange fees from each plaintiff,” the complaint alleged.

  • Visa filed a declaratory relief action seeking an order that, among other things, any claims national retailer The Home Depot might assert against it have been released in earlier litigation. Beginning with a lawsuit filed by Home Depot against Visa and MasterCard in 2002, Visa said the parties have battled over interchange fees for more than a decade. Home Depot has “publicly opposed and denigrated” the merchant settlement, opting out of the deal to file its own antitrust suit, Visa claimed. “A declaration in Visa’s favor and against The Home Depot is necessary to prevent the continuation of endless, wasteful litigation between the parties,” according to the complaint. “Put simply, Visa seeks finality in its dispute with The Home Depot.”

  • In another order, Judge Gleeson approved attorney’s fees to the tune of $544.8 million for class counsel as well as an additional $27 million in costs. Noting that the case “stands out in size, duration, complexity, and in the nature of the relief afforded to both the injunctive relief and damages classes,” Judge Gleeson emphasized the “enormous” risk taken by the plaintiffs in pursuing the “enormously complex” case. Using a multifactor analysis checked by a lodestar calculation, the court concluded that “the settlement must be labeled a significant success” and approved the “generous but well-deserved fee.”

To read the National Retail Federation’s notice of appeal, click here.

To read American Express’s notice of appeal, click here.

To read the complaint in Progressive Casualty v. Visa, click here.

To read the complaint in Visa v. Home Depot, click here.

To read the order on attorney’s fees, click here.

Why it matters: Despite judicial approval of the settlement of In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, the battle over swipe fees appears likely to continue for quite some time, from the multiple appeals to the Second Circuit for review of the deal to outgrowths like Visa’s suit against Home Depot, American Express’s foray into the case, and the new complaint filed against Visa and MasterCard by class members that opted out of the original case. These litigations ensure a long delay of any refund checks that are to be paid out to affected retailers.

Eleventh Circuit: Bank Directors Can Assert Defenses Against FDIC, but Business Judgment Rule Questionable

Can the former directors and officers of a failed bank assert affirmative defenses against the Federal Deposit Insurance Corporation as receiver of the bank based upon the agency’s conduct postclosure?

The Eleventh U.S. Circuit Court of Appeals recently answered that question in the affirmative.

Integrity Bank of Alpharetta, Georgia, closed in August 2008 and the FDIC took over as receiver. The agency filed suit against members of the bank’s Director Loan Committee, alleging that they negligently pursued an unsustainable growth strategy, engaged in high-risk lending practices, and approved loans that resulted in losses exceeding $70 million. The complaint also claimed that the defendants breached their fiduciary duty.

In defense, the directors and officers argued that Georgia’s business judgment rule protected them against claims of ordinary negligence and breach of fiduciary duty. The defendants also presented an affirmative defense based on the FDIC’s own actions – specifically, failure to mitigate damages, reliance, and estoppel.

The three-judge panel first tackled the application of the business judgment rule to bank directors and officers.

“Based on our reading of the pertinent statutory language, it appears to us that a bank director or officer who acts in good faith might still be subject to a claim for ordinary negligence if he failed to act with ordinary diligence,” the court wrote. Two state appellate courts, however, have held that the business judgment rule forecloses liability against officers and directors for ordinary negligence in discharging their duties. Federal courts in California have held that officers are not entitled to the benefits of California’s business judgment rule, even where the officers also were directors.

Given the conflict, the court punted and certified the following questions to the Georgia Supreme Court: “Does a bank director or officer violate the standard of care established by [Georgia statute] when he acts in good faith but fails to act with ‘ordinary diligence,’ as that term is defined [by state law]?” and “In a case like this one, applying Georgia’s business judgment rule, can the bank officer or director defendants be held individually liable if they, in fact as alleged, are shown to have been ordinarily negligent or to have breached a fiduciary duty, based on ordinary negligence in performing professional duties?”

The court then turned to the directors’ affirmative defenses. The FDIC asserted that it owed no duty to bank directors and officers, but the court disagreed. The Financial Institutions Reform, Recovery, and Enforcement Act is silent on the issue, and the court could not find a preexisting “no duty” rule under federal common law, distinguishing the case law cited by the FDIC.

“In asking this court to apply a ‘no duty’ rule – which bars tort actions brought by a bank’s directors and officers against the FDIC – to bar affirmative defenses asserted against the FDIC when it is the one advancing claims, the FDIC is asking us to extend a purported federal common law rule to a new and significantly different context,” the panel wrote.

Ruling that “[f]ederal common law is basically complete and closed,” the court refused to create it. “Because the FDIC has failed to demonstrate the existence of an established and long-standing common law rule barring defendants’ affirmative defenses, and because we must decline to create a barring rule, the FDIC is unentitled to partial summary judgment,” the court concluded.

To read the complaint in FDIC v. Skow, click here.

Why it matters: The Eleventh Circuit’s decision presents a mixed bag of results for bank directors and officers. On a positive note, the federal appellate panel ruled that such parties can assert affirmative defenses against the FDIC based on its postclosure conduct. On the other hand, the panel questioned whether the protections of the state’s business judgment rule could properly be applied to bank directors and officers. If the Georgia Supreme Court determines that the rule does not apply – as one federal district court judge in the state recently suggested (see our previous newsletter, here) – bank directors and officers will have a lot more to be concerned about.

New on the Hill: More Prepaid Card Disclosures, Settlement Transparency

Federal lawmakers started the new year by proposing legislation geared toward greater transparency, with bills mandating more disclosures for prepaid cards as well as information about companies that reach settlements with government agencies.

Introduced by Sen. Mark Warner (D-Va.), the Prepaid Card Disclosure Act of 2014 would amend the Electronic Fund Transfer Act to require that any application, offer, or solicitation must include a table of any fees that may be charged in connection with the account.

The information must be “easily understood by the consumer,” “clearly and conspicuously displayed to the consumer before purchase,” and include, at a minimum, the amount and a description of each fee that may be charged in connection with the account by the financial institution.

Consumers must also be provided with a toll-free number and a website where they can access the fee disclosure.

The bill grants rulemaking authority to the Consumer Financial Protection Bureau to create a format for the fee table and the possibility to mandate the use of a QR code or other technology allowing electronic access to the disclosure information.

Certain types of cards would be exempt from the legislation, including nonreloadable, general-use prepaid cards with a value below $250 and store gift cards, among others.

Sen. Warner’s bill largely tracks the previously introduced Prepaid Card Consumer Protection Act, sponsored by Sens. Robert Menendez (D-N.J.) and Richard Blumenthal (D-Conn.). That legislation contains similar disclosure obligations but would additionally require a “wallet sized” summary for consumers.

The proposed law would provide FDIC insurance for the cards and prohibit certain fees, including charges for inactivity, account closures, balance inquiries, and overdrafts. Financial institutions would also be required to close accounts and refund any balance to consumers after 12 months of inactivity or upon request of the consumer.

Sens. Elizabeth Warren (D-Mass.) and Tom Coburn (R-Okla.) also introduced a law promoting greater transparency, albeit in a different setting. Criticizing the $17 billion in tax credits given to banks that reached a $25 billion national settlement in 2012 with federal and state officials, the lawmakers proposed to shine the light on the details of other government settlements.

Pursuant to the legislation, federal agencies would be required to post online in a searchable format a list of all settlement agreements – civil or criminal – where the defendant paid more than $1 million. The bill would mandate the listing to include information like the total settlement amount, a description of the claims, the names of the parties, and whether the payment amount was to be considered tax-deductible.

Public companies would need to describe in their annual and periodic Securities and Exchange Commission reports any claim filed for a tax deduction relating to a payment under a covered settlement.

The legislation does include an exception for deals subject to confidentiality agreements, but the relevant agency would still have to issue a public statement about why the confidential treatment is necessary.

To read S. 1903, the Prepaid Card Disclosure Act, click here.

To read S. 1867, the Prepaid Card Consumer Protection Act, click here.

To read S. 1898, the Truth in Settlements Act, click here.

Why it matters: If either of the prepaid card bills becomes law, financial institutions and prepaid card issuers would face a host of new requirements; similarly, if the settlement bill took effect, companies reaching deals with the government would face heightened scrutiny. For now, all of the proposed bills remain in the early stages of the legislative process and their chances of passage are unclear. Regardless of either bill’s passage, the CFPB is expected to write rules by the end of this year, setting forth industrywide standards on fee disclosures, overdrafts and limits of cardholders’ liability in the event a card is stolen.

Bank to Pay $1.2M Fine Over Online Payday Loans; More Suits to Come?

In the latest salvo fired by the Department of Justice in a nationwide effort targeting online payday loans, a bank in North Carolina has agreed to pay $1.2 million to settle allegations of facilitating fraudulent transactions.

According to the complaint filed by the DOJ against Four Oaks Bank & Trust Company, the financial institution turned a blind eye to $2.4 billion in loans made by online lenders and other alleged fraudulent transactions that were processed by a third-party payment processor that had contracted with the bank in violation of antifraud laws over a five-year period. The bank received more than $850,000 in gross fees for the transactions, the complaint said.

Four Oaks violated the Anti-Fraud Injunction Act and the Financial Institutions Reform, Recovery, and Enforcement Act, the DOJ said. Instead of functioning as a clearinghouse, the defendants allowed the processor direct access to the automated payments system and only reviewed transactions after they occurred, the government alleged, leaving the third party with direct access to consumer accounts.

“The bank is required to acquire information sufficient to know the true identities of the entities to which it provides access to the national banking system, as well as the nature of their business activities,” according to the complaint. “Four Oaks Bank is failing to comply with these obligations and is ignoring red flags that signal unlawful practices by business account holders, including a third-party payment processor and its fraudulent merchant-clients.”

Examples of the red flags included loan agreements violating the Federal Trade Commission’s rule on limiting wage garnishments; some loans involving tribal, offshore, and other “choice of law” lenders that the DOJ asserted provided for interest at rates prohibited by the law of the states where the borrowers resided; and some entities that were subject to complaints of unauthorized transactions in excess of the threshold established by NACHA.

Under the terms of the consent order filed in North Carolina federal court, Four Oaks will pay $1.2 million and will no longer engage in certain practices. The bank agreed to restrict its dealings with third-party payment processors in the future, with limitations including not providing any banking services or bank accounts unless the third party is licensed as a money transmitter in the relevant states and registered as a money services business.

To conduct business with online payday lenders in the future, the bank must conduct due diligence and establish “in good faith and to the best of its ability” that the lender is not engaged in a false or deceptive business practice, or activity in violation of federal and state laws or NACHA Rules.

To read the complaint in U.S. v. Four Oaks Fincorp, click here.

To read the proposed consent order, click here.

Why it matters: The DOJ’s “Operation Choke Point” is a multiagency effort that is attacking the online payday industry by focusing on processors and banks that serve as the link between lenders and borrowers. The operation is raising significant issues, including whether it is forcing lenders that are in fact operating in compliance with applicable law to go out of business. Between the DOJ action and other financial regulators, such as the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, cautioning banks about the risks of processing such loans, however, financial institutions should use caution or face being the next target.

Facing Scrutiny, Banks Drop Deposit Advance Loans

With federal banking regulators warning that they will be looking into whether deposit advance loans violate consumer protection laws, several banks have decided to avoid potential problems and drop the product altogether.

Deposit advance loans are small-dollar, short-term loans that are automatically repaid when a direct deposit is made to the customer’s checking account or reloadable prepaid card.

Regions Financial Corp. was the first to announce that it would no longer offer deposit advance loans as of January 22. Although the bank did not specifically identify regulatory oversight as the basis for terminating its “Ready Advance” loan product, it did issue a statement indicating that the decision “was based on a number of industry developments.”

Days later, Regions was followed by Wells Fargo, U.S. Bancorp, and Fifth Third Bancorp, all of which similarly announced the decision to phase out their deposit advance loan products beginning in January. Explaining the decision, Fifth Third’s statement noted that the bank had been “monitoring industry developments,” while a spokeswoman for Wells Fargo said that recent guidance from federal agencies “favors a structure that is fundamentally different than our current service.”

U.S. Bank was more direct, stating that the move would “align” the bank with guidance from the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. Noting customers’ need for short-term, small-dollar credit, U.S. Bank indicated that in lieu of its Checking Account Advance product, the bank would be “finding new solutions that meet the needs of all of our customers and fit within the current regulatory expectations,” according to a statement from Kent Stone, vice chairman of consumer banking sales and support.

Given the increasing scrutiny on deposit advance products by both state and federal regulators, the moves do not come as a huge surprise. The Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency recently issued guidance about deposit advance loans, cautioning financial institutions about the “credit, reputational, operational and compliance risks” associated with the products (see previous newsletter, here).

The “Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products” advised banks to assess a customer’s ability to repay the loan with a six-month historical check, consider ongoing eligibility reviews on a six-month basis, and outlined a “cooling off” period of at least one monthly statement cycle after an advance loan has been repaid before another advance loan can be extended.

Why it matters: With major banks calling a halt to offering the products and phasing out existing customers, deposit advance loans appear to be fading away. Even with this trend, the Consumer Financial Protection Bureau is continuing its investigation into deposit advance loan products. The agency released a controversial white paper last April and has indicated that rules could be forthcoming in 2014.