A Number of Card Issues May Be Headed For Regulators as Fed Consumer Advisory Committee Airs Card Concerns

WASHINGTON – The Federal Reserve’s Consumer Advisory Committee meeting on October 23 discussed two emerging card related issues, the need for greater regulation and disclosures of information on so called “convenience checks” that are often used in card marketing and how regulations should treat the so called “payroll cards.” The CAC is a way for financial industry executives, consumer advocates, and consumer and industry lawyers to alert the Federal Reserve about pending or growing consumer issues. Board staff and Federal Reserve Governors attend the meetings and often the meetings have an influence on the Board’s regulatory agenda. A number of the consumer advocate CAC members decried the lack of disclosures in “convenience checks,” which many credit card marketers, including some credit unions, use when attracting new card accounts or spurring existing cardholders to take advantage of credit line increases Pat McCoy, a law professor at the University of Connecticut school of law, laid out the advocates’ concerns by pointing out that the so-called “convenience checks” did not carry any disclosure to consumers that transactions using the checks did not carry the same levels of protection as transactions using their cards. Consumers generally do not understand that if they use a convenience check to purchase a television set, and the set proves to be faulty, they don’t have the same level of chargeback protection that they do with cards, she explained. She also said most consumers don’t realize that that they are liable for the full amount of the loss should the checks fall into the wrong hands and be used fraudulently. Most cards, by contrast, limit the losses to the cardholders in the case of a lost or stolen card. Other CAC members countered with observations that the checks were very good marketing tools for credit cards and that the incidence of fraud was extremely low. Some also expressed concerns that if the checks began to be considered to be cards that they would lose some of their attraction for merchants. Discussion of the growing acceptance of so-called payroll cards centered around almost universal approval of the cards as a good product, particularly for workers who do not have relationships with depository financial institutions. Some CAC participants pointed out that there were weaknesses in the cards however, because they were not regulated under Regulation E, the Federal Reserve regulation that generally governs transactions to and from depository accounts. Ronald Reiter, CAC Chair and Deputy Attorney General for California laid out instances from California where firms which used the cards to pay employees had closed up shop in bankruptcy, leaving cardholders with cards without any value. There are also issues of where the cards can be used, since some cards which do not carry the VISA or MasterCard brand were only allowed to be used in certain ATMs in check cashers for example, he said. The problem would be how to craft a regulation for the payroll cards, which would seem to need to be tied to an account of some sort, and the sorts of prepaid cards upon which firms put their per diem or other payments and which did not need an account. As is often the case, the CAC did not achieve any consensus about the issues discussed but trusted that airing them in front of the Federal Reserve Board governors would help bring them onto the agenda. “This is the place where the regulatory agenda tentatively, slowly, begins to take shape,” said Ruhi Maker, senior attorney with the Law office of Rochester, based in Rochester, New York. [email protected]