A federal court here delivered credit unions and all federally (nationally) chartered financial institutions an important victory here just before Christmas by permanently barring the state from enforcing a new law requiring card credit card issuers to make comprehensive disclosures to people wanting to make minimum payments on their cards.
In his ruling, Judge Frank Damrell, Jr., found that the Federal CU Act, National Bank Act and the Truth In Lending Act all preempt efforts by states and others to regulate the activities of federally chartered institutions, like credit unions. Similar preemption arguments have succeeded in striking down state and local bans on ATM surcharges in recent years. The judge's ruling, however, leaves in question whether the decision will be applied to state-chartered credit unions and banks, as well.
NAFCU, CUNA and the California league were all working last week to determine how the decision will affect state charters. The new disclosure law, passed just last year, is aimed at discouraging card issuers from allowing monthly payments less than 10% of their bills by adding disclosure requirements on credit unions and other card issuers that allow holders in California to pay less than 10% of their monthly balance.
Among the requirements are an estimate as to how long it will take the cardholder to pay off the balance, what the total cost will amount to by paying the minimum balance, and that the disclosures be made in eight-point type. The law would also require card issuers to include a toll-free telephone hotline, staffed 13 hours a day, 365 days a year, that will allow cardholders to get an estimate of the total cost and the amount of time it will take to pay off their debt while making the minimum payment.
Costs & Disruptions
Fred Becker, president of NAFCU, one of the original plaintiffs in the case, said his group signed on to the suit because of the costs and disruptions it would have on federally chartered credit unions. "We got involved with it because of the impact it would have on our members," he said.
NAFCU believed the law clearly veered into areas of regulation that the courts have traditionally declared solely under the authority of federal administrators for federally chartered credit unions and nationally chartered banks.
"For me this was a no-brainer from the start," said Becker.
The federal courts, he noted, have traditionally sided with federal regulators on the issue of preemption. California lawmakers passed the law last year with the intent of helping credit card borrowers have a clearer picture of what impact paying the minimum payment will have on their long-term debt.
In defending the law, the California attorney general argued that low- and middle-income borrowers and college-age individuals are less likely to understand the consequences of making only minimum monthly payments while continuing to accrue additional charges. This works to the benefit of card issues, they said, who continue to earn interest and principle when borrowers only make minimum payments. The judge did not rule on the credibility of this reasoning, just that the state did not have the authority to regulate federally chartered institutions.
NCUA lent its hand in the case by issuing a legal opinion letter stating that the Federal CU Act preempts the California law which affects the terms of repayment by placing "additional burdens on credit card issuers (credit unions) that do not require minimum monthly payments of at least 10%. "NCUA's longstanding position is that state laws affecting terms of repayment are preempted," the agency said in its legal opinion letter.
Issues For State Charters
The judge's ruling in the case leaves open whether state-chartered credit unions and banks in California and those in other states with customers (members) in California will be required to abide by the disclosure law. Eric Richard, general counsel for CUNA, said the group is talking with other parties to the suit to determine a course of action.
"We need to clarify what the court thought, as well as what the regulators think," he said.
Becker said NAFCU is still concerned with the effects because of a number of state credit unions that remain NAFCU members after converting from federal charters.
The other plaintiffs in the suit were: the American Bankers Association, America's Community Bankers, Independent Community Bankers Association, and the Consumer Bankers Association, and four banks-J.P. Morgan Chase, Citibank, Household Bank, and MBNA America Bank.