California card suit heats up as deadline nears; trades remain split

ARLINGTON, Va. – CUNA and NAFCU remain split over a pending lawsuit between the California Attorney General and a coalition of national financial trade associations and credit card issuers, even as the pace of briefs flying between the litigants has picked up in advance of the U.S. District Court’s decision. The Court is anticipated June 28 to either stay a California law affecting credit card practices or allow it to go into effect July 1. Under the law any bank or credit union with customers or members holding credit cards in California will have to either require its California card holders to pay 10% of their balances each month or post lengthy and expensive disclosures of what their credit card line costs. The disclosures include a number of generic statements as well as individual calculations. The measure would also require credit unions and banks with cardholders in California to set up phone centers to take toll-free calls from them about their credit card costs. These centers would have to be set up on Pacific time regardless of whether or not the credit union is in that time zone. In addition to NAFCU, the plaintiffs in this case include the American Bankers Association, America’s Community Bankers, Consumer Bankers Association and Independent Community Bankers of America. The large card issuers include Chase Manhattan Bank N.A., Citibank (South Dakota) N.A., First USA Bank N.A., Household Bank (SB), N.A. and MBNA America Bank, N.A. The Consumer Federation of America (CFA) has gone on record supporting the law. NAFCU has received criticism because of its participation in the proceeding but NAFCU CEO Fred Becker has gone on record pointing out that the law’s precedent setting and constitutional aspects, as well as the damage it would bring to some NAFCU members, demanded the association join the suit (see sidebar on this page). For its part CUNA has declined to join the litigation since it was introduced, telling the trade press on one hand that the association’s consumer protection subcommittee had conducted a cost benefit analysis of the suit and concluded that, since there had been several big issues lately on which CUNA had parted company with consumer groups, joining the suit would bring more cost than benefit. The CFA praised CUNA’s not entering the “anti-consumer suit” in a June 19 letter. In the letter CFA executive director Steve Brobeck said that CFA “recognizes that, given the position of many other financial institutions and the costs that the new law would impose on credit unions,” CUNA’s decision to refrain from joining the suit was difficult. But on the other hand CUNA told the American Banker on June 25 that supporting the suit would contradict its support of the currently stalled bankruptcy legislation. In that story, a CUNA spokesperson said the current law pending before Congress has a “less draconian” provision that would accomplish the same ends as the California law and which made CUNA’s supporting the suit incompatible. The CFA opposes the pending bankruptcy reform legislation. Brobeck was unavailable for comment at press time. Contacted by Credit Union Times about the apparent confusion, CUNA spokesperson Pat Keefe said that both reasons are behind CUNA’s decision to decline joining the suit, but he added that CUNA chose to explain the issue to the trade press in terms of the cost-benefit analysis because it considered that reason more specific to credit unions and more suitable for the credit union press. “The Banker has a broader focus,” Keefe said. Bill Donovan, NAFCU’s senior vice president and general counsel, said NAFCU’s review of the pending bankruptcy reform bill had found a few places where it differed from the California law, but added that the “outstanding” substantive difference between the two was that the California law is scheduled to go into effect July 1. “We believe the California law is clearly unconstitutional,” Donovan said. In a June 14 filing in support of the law, California Attorney General Bill Lockyer defended the pending statute, arguing that the National Bank Act did not leave California “bereft” of its interest in passing and enforcing consumer protection laws. Because the law mandates disclosures, Lockyer argued to the Court in Sacramento, the national statutes that the associations cited in their challenge do not pre-empt it. But in a 50-page response the associations attacked the Attorney General’s positions vigorously. “Defendants rely on the wrong pre-emption standard in arguing that the National Bank Act does not pre-empt the California statute,” the associations argued. “Defendants erroneously contend that the National Bank Act must specifically pre-empt the state law in question, and that only state laws which are impossible to comply with or would put a bank out of business are pre-empted. To the contrary, under well-established Supreme Court authority, the National Bank Act, which created national banks as federal instrumentalities, pre-empts all state laws that impose undue burdens on or impair the efficiency of a national bank’s exercise of its federally created powers. Neither textual pre-emption nor impossibility is required.” The associations were especially dismissive of the Attorney General’s attempts to minimize the projected impact of the law on their associations. “Defendants concede for present purposes that Plaintiffs will incur enormous expenses in complying with the statute, but they never bother to explain why such expenses do not constitute irreparable harm,” the associations wrote. “Instead, Defendants attempt to minimize the expenses of compliance by restating them on a per-customer basis. See Def. Br. at 40-41. Although this demonstrates that Defendants are capable of simple arithmetic, it does nothing to advance their position.” A number of different California legal sources familiar with the case would not speak for the record but were uniform in their assessment that the Courts were unlikely to let the law go into effect. “It’s fairly remarkable that anyone in the legislator thought that [the law] would stand,” remarked one Sacramento lawyer. But David John, long-time banking analyst with the politically conservative Heritage Foundation in Washington D.C. and former legislative director for NAFCU, commented that California had a “long history of trying to set different standards for financial institutions, almost all of which have been struck down,” in court. John recalled the previous attempt of San Francisco to try to ban any ATM fees in the city, “I won’t say that was laughed out of court,” John said, “but they were certainly unsympathetic to the city’s position.” [email protected]