Saturday, December 03, 2005

Credit card solicitations

People v. Applied Card Systems, Inc., --- N.Y.S.2d ----, 2005 WL 3204376 (N.Y.A.D. 3 Dept.)

Though better-known for pursuing investigations against Wall Street and major record companies, Attorney General Eliot Spitzer also goes after more run-of-the-mill violations of New York’s consumer protection laws. Cross Country Bank offers credit cards to consumers who have difficulty getting credit; Applied Card Systems services the bank’s accounts and collects from delinquent accounts. The state alleged that the respondents engaged in deceptive representations about how much credit would be available (representing that the credit limit would be up to $2500 when often the limits were less than $400); charged $150 in fees immediately on opening the account (further decreasing the available credit); led consumers into a downward spiral of interest, late fees and over-limit penalties; enrolled consumers into virtually useless third-party membership programs for additional fees without properly letting them know that they didn’t have to enroll to get the credit card and that the programs didn’t offer many of the described benefits to New Yorkers; and harassed consumers with delinquent accounts by, among other things, lying about callers’ identities to get consumers on the phone, calling consumers at work after having been told not to do so, using obscene and abusive language, and making unauthorized debits from consumers’ checking accounts.

The appellate court upheld an injunction against these activities. The ruling on the advertised credit limits is a standard application of the principle that advertising should reflect likely or ordinary results rather than unusual results, at least in the absence of disclosure that results are unusual. Cross Country Bank’s attempt to solve the problem with disclosure was unavailing since the disclosure was on the second page of its terms and conditions, in the same (presumably teensy) typeface as the rest of the text, and in any event respondent’s telemarketers deliberately obfuscated in their pitches to consumers. Respondents submitted an affidavit a private consultant who reviewed the terms of the solicitation from December 2001, categorizing the disclosure as "unsurpassed in the industry," but the court was unimpressed by the industry’s standards, since reasonable consumers would be misled to believe that the “up to $2500” prominently displayed on the solicitation was representative of what consumers would receive.

The most interesting aspect of the case to me is the claim that the Federal Truth-in-Lending Act (see 15 USC § 1601 et seq.) preempts consumer protection claims because the adequacy of Cross Country Bank’s disclosures is within the exclusive province of TILA. The implementing regulations state that state-law disclosure requirements are preempted to the extent inconsistent with TILA, see 12 C.F.R. 226.28[d], except that state laws prohibiting unfair or deceptive acts or practices aren’t preempted. Does that mean that any characterization of a disclosure as unfair or deceptive is enough to avoid preemption? In that case, why can’t states just put their inconsistent disclosure requirements in their UCLs? Or would preemption only be avoided if the state proceeded under the general “unfair or deceptive” provision and not under a law conclusively finding that specified disclosures/failures to disclose are unfair and deceptive? In any event, the court found that the deceptive conduct here fell under the UCL, which was not preempted.

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