acts and regulations

The Board of Governors of the Federal Reserve System is requesting comment on its proposal to repeal its Regulation AA, which for nearly 30 years has prohibited banks from engaging in specified unfair and deceptive credit practices.

In the Federal Trade Commission Act (the FTC Act), Congress directed the Federal Trade Commission (FTC) and the Federal Reserve Board to promulgate rules to define and prevent unfair and deceptive acts and practices. The Federal Reserve Board’s rulemaking authority under the FTC Act was limited to banks. Pursuant to this authority, the Federal Reserve Board adopted Regulation AA in 1985, closely following the FTC’s rule adopted a year earlier.

Regulation AA had prohibited banks from obtaining or using:

  • Cognovits and advance confessions of judgment;
  • Waivers of state law exemptions of property (other than collateral for a loan) from attachment;
  • Most assignments of consumers’ wages; and
  • Non-possessory security interests in household goods, other than purchase-money security interests.

In addition, Regulation AA prohibited banks from:

  • Misrepresenting the nature or extent of liability of co-signers;
  • Obtaining a co-signer unless certain disclosures were made; and
  • Imposing a late payment fee when the only delinquency is attributable to the failure to pay late payment fees on earlier installments (i.e., “pyramiding” of late charges).

Why is the Federal Reserve Board getting out of the business of regulating such practices? The answer lies in the Dodd-Frank Consumer Financial Protection Act of 2010 (the Dodd-Frank Act).

Deep in the 800+ pages of the Dodd-Frank Act, Congress repealed the FTC Act’s provision which had given the Federal Reserve Board its rulemaking authority (though the Federal Reserve Board retains its supervisory and enforcement authority with respect to unfair and deceptive acts and practices). Moreover, the Dodd-Frank Act did not include the FTC Act among the enumerated “Federal consumer financial laws” for which rulemaking authority transferred to the Consumer Financial Protection Bureau (the Bureau). Consequently, Regulation AA lost its legal underpinnings.

As a practical matter, the repeal of Regulation AA is very unlikely to have any effect on banks’ contract provisions and business practices. The D0dd-Frank Act gave the Bureau broad authority to regulate and prosecute “unfair, deceptive and abusive” acts and practices (UDAAP). Also, the Federal Reserve Board, the Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of Comptroller of the Currency will be issuing interagency guidance stating that the activities prohibited by former Regulation AA could violate the Dodd-Frank Act’s prohibition of UDAAP.