WASHINGTON - The Federal Reserve Board and Federal Trade Commission are expected to issue a proposal as early as next week to close an unintended loophole in the newly minted Fair and Accurate Credit Transactions Act.
Though Congress said it meant to permanently reauthorize seven preemption provisions in the Fair Credit Reporting Act that expire Jan. 1, the 8-day-old measure does not explicitly repeal the sunset date or set an effective date for the renewal.
Instead it mandates that the regulators set the date to preserve the preemptions, which prevent states from establishing their own rules on how financial firms use consumer credit data and exchange information with affiliated companies.
"The way the effective dates ended up, the key FCRA preemption that expires [Jan. 1] might not be extended," Federal Financial Analytics reported last week in a note to clients.
Failure to correct the situation would create a "compliance and marketing headache, not a policy issue," said Karen Shaw Petrou, the firm's managing partner.
That is because the sweeping measure gave regulators two months from the date of enactment - Dec. 4 - to set effective dates for a number of provisions. If regulators waited until the Feb. 4 deadline to act, there would be a 35-day gap between it and the Jan. 1 expiration date.
If that happened, "a state could enact something and make it effective immediately," said L. Richard Fischer, a partner in Morrison & Foerster LLP. "If the federal law is not yet effective, then there would be this window where a state statute that was rushed in would be effective for at least a period of time.
"As a practical matter, we know what Congress intended and that any state law would be preempted as soon as the effective date is set. But you could have, at least theoretically, legal exposure for failure to comply with the state law in this little window. That would mean instant compliance obligations for financial institutions if a state were to do that."
To address the situation, the Fed and FTC - the lead agencies charged with implementing the new law - were said to have started the rule-writing process even before President Bush signed the measure. The proposal is expected to be released for public comment next week.Some lawyers identified other potential loopholes.
One involves a section that will require creditors to send consumers "risk-based pricing notices" if they are offering a loan at terms that are less favorable than their average customer receives.
Senate Banking Committee Chairman Richard Shelby "is to be commended for seeking to address this issue, but it would seem appropriate to revisit the details of the provision in the next session of Congress," said Jeremiah S. Buckley Jr., a partner in the firm Goodwin Procter LLP.
He said creditors that make only high-cost loans might be able to avoid giving the new risk-based pricing notices because the terms would not be less favorable than average. He recommended consumers should receive the notice before the terms and rates of a loan they applied for are set.
He also said the provision "perhaps inadvertently eliminates the existing right of consumers and state officials to sue for any violations of the adverse-action provisions of the FCRA" that require creditors to notify consumers if they are denied a loan because of a poor credit history.
