Payment Processing & Cards

After a botched $172.5 million initial public offering, CPI Card Group Inc. shareholders will receive an $11 million cash settlement, according to a proposed settlement reached on December 31.  The shareholders alleged that CPI oversold its chip-enabled credit cards ahead of its IPO. 

The shareholders claimed that CPI shipped more than 100 million extra cards to its customers before its October 2015 IPO without telling investors.  As an alleged result of the bloated inventory at financial institutions, stock prices dropped from $10 per share to $4.70 a share when the suit was filed in June 2016.  In their suit, the shareholders claimed that the registration statement and prospectus used for CPI’s IPO were false and misleading for representing the true state of demand for the cards, as well as failing to disclose significant risks.  

The proposed settlement followed a September denial of class certification. 

CPI produces 35 percent of all payment cards in the United States and serves top U.S. debit and credit card issuers, including JPMorgan Chase, American Express, Bank of America, and Wells Fargo. 

According to the terms of the settlement, funds will be distributed to class members based on their “recognized loss” as calculated by a federal statutory formula for damages.


Who should decide the “gateway” issue of arbitrability? That is, should a court or an arbitrator decide whether a particular issue is subject to arbitration?  According to the Fourth Circuit, it depends on the agreement to arbitrate.  

On January 4, the Fourth Circuit issued an opinion in Novic v. Credit One, No. 17-2168, 2019 WL 103878 (4th Cir. 2019), holding that the “delegation clause” in a credit card agreement dictated that the “gateway” issue of arbitrability was itself subject to arbitration.  Specifically, the arbitration provision of the agreement contained a clause that stated “[c]laims subject to arbitration include disputes related to enforceability or interpretation of this Agreement.”  

The case concerned a consumer, Charleene Novic, who obtained a credit card from Credit One.  After she accrued a past-due balance, Credit One sold the account to a debt collector.  Novic, however, argued that the past-due balance was the result of fraudulent charges.  The debt collector sued over the outstanding balance and Novic eventually prevailed.  Novic then turned her sights on Credit One, suing the company for alleged violations of the Fair Credit Reporting Act resulting from reporting of the past-due balance.  Credit One moved to compel arbitration under the cardholder agreement.  

The district court denied Credit One’s motion to compel, concluding that the company had lost its right to compel arbitration after it assigned Novic’s account to a debt collector.  Credit One appealed, arguing that an arbitrator should decide the “gateway” issue of whether Novic’s claims should be arbitrated as well as the actual merits of the case.  

The Fourth Circuit agreed with Credit One and vacated the district court’s ruling.  In its opinion, the Court held that parties may agree to arbitrate the threshold issue of arbitrability, which allows the arbitrator to determine his or her own jurisdiction. The Court cautioned, however, that any delegation of issue of arbitrability must be set out in “clear and unmistakable” language in the parties’ agreement.  After applying that standard to the card holder agreement at issue, the Court concluded that it “unambiguously require[d] arbitration of any issues concerning the ‘enforceability’ of the arbitration provisions .”  

The Fourth Circuit’s decision represents another affirmation of the strong federal policy favoring arbitration, and serves as a reminder that the “gateway” to a favorable result when compelling arbitration is the use of “clear and unmistakable” language in arbitration agreements.


After months of negotiations, on December 12, Congress overwhelmingly passed the Agricultural Improvement Act of 2018, which is also known as the “Farm Bill.”  For banks and payment processors, the Farm Bill’s passage is an important development because the bill includes language removing hemp from the list of prohibited substances under the federal Controlled Substances Act.

Hemp is a variety of the cannabis plant, but it does not produce a psychological “high.”  Instead, it’s used in manufacturing, including production of textiles, rope, and carpets, and for medicinal purposes.  Most states permit hemp’s use for both manufacturing and medicinal purposes.

But, for years, hemp has been classified as a controlled substance under the federal Controlled Substances Act, (21 U.S.C. ch. 13 § 801 et seq.), which created a federal law barrier to banks and payment processors working with hemp producers or merchants.

With the passage of the Farm Bill, however, that may be about to change.  Section 10113 of the Farm Bill removes hemp from the list of controlled substances under the federal Controlled Substances Act and amends the Agricultural and Marketing Act of 1946 to allow states to manage hemp production as long as hemp produced contains no more than a 0.3% concentration of tetrahydrocannabinol, or THC.

In accordance with the Farm Bill, a state that wants to manage hemp production within its borders must submit a plan for regulation and monitoring to the U.S. Secretary of Agriculture for approval.  However, a hemp producer in a state that does not submit a plan to the Secretary of Agriculture may still produce hemp as long as its production complies with the amended section 297C of the Agricultural and Marketing Act.

The Farm Bill further mandates that hemp producers complying with section 297C, as opposed to a state plan, must maintain information about the land on which the hemp is produced, test the hemp’s THC levels, establish procedures for disposing of any non-compliant hemp or hemp product, and submit to annual inspections.  Hemp producers operating under either an approved regulation-and-monitoring plan or section 297C are subject to licensing requirements as well as potential federal auditing.  Moreover, under the Farm Bill, states maintain authority to limit hemp’s production and marketing within their borders.  Thus, hemp producers, depending on where they operate, may still be restricted by state law.  States cannot, however, limit the transportation of hemp.

The Farm Bill creates an opportunity for banks and payment processors.  Banks and payment processors can now work with hemp producers and merchants without the looming threat of a federal law enforcement action.

The Farm Bill’s passage does not mean, however, that banks and payment processors can forego their regulatory compliance efforts.  A bank or payment processor must still ensure that any hemp producer or merchant is complying with the Farm Bill’s licensing requirement and TCH-level restriction.  In addition, a bank or payment processor that works with a hemp producer or merchant must still ensure that the producer or merchant is complying with any federally approved regulation-and-monitoring state plan or section 297C.  Indeed, those compliance efforts are critical, as violations can leave a hemp producer or merchant as well as its bank and payment processor subject to severe penalties, including a law enforcement action by the U.S. Attorney General.

President Trump signed the Farm Bill on December 20.

On December 10, the Bureau of Consumer Financial Protection issued proposed revisions to its 2016 Policy on No-Action Letters and proposed a BCFP Product Sandbox.

The proposed new policy has two parts: Part I is a revision of a 2016 policy on No-Action Letters, and Part II is a description of the BCFP Product Sandbox. The revised No-Action policy would eliminate the data-sharing requirement of the 2016 Policy, which required applicants to commit to sharing data about the product or service. The revisions to the 2016 Policy would also speed up the time in which the BCFP would grant or deny an application for a No-Action Letter to 60 days.

The BCFP Product Sandbox would grant companies similar relief under Part I of the proposed rule but would also provide two forms of additional exemption relief: “1. Approvals by order under three statutory safe harbor provisions (approval relief); and 2. Exemptions by order from statutory provisions under statutory exemption-by-order provisions (statutory exemptions), or from regulatory provisions that do not mirror statutory provisions under rulemaking authority or other general authority (regulatory exemptions).” The Product Sandbox approval relief and exemption relief would be for a period of two years; however, to take advantage of the Product Sandbox, applicants are required to commit to sharing data with the BCFP with respect to the products or services offered.

The proposed policy has the following goals: “1. Streamlining the application process; 2. Streamlining the BCFP’s processing of applications; 3. Expanding the types of statutory and regulatory relief available; 4. Specifying procedures for an extension where the relief initially provided is of limited duration; and 5. Providing for coordination with existing or future programs offered by other regulators designed to facilitate innovation.” The Product Sandbox will help foster innovation and gain insight into how regulations may need to adapt to allow pro-consumer innovation.

This proposed policy may be of particular interest to the fintech world in the business-to-consumer context, given the innovation and energy to adapt delivery of products and services over the Internet and the sometimes awkward fit between the remote delivery model and some regulations. Comments on the revised policy are due no later than 60 days after the proposals are published in the Federal Register.

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency of 90 or more days rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”

As Congress’ emboldened majority has sought to lessen the federal government’s regulatory footprint, the states have not always been quiet, as one summertime example amply shows.

In 2017, two congressmen introduced two bills which, if enacted, would expand the scope of federal preemption to include non-bank entities. Introduced by Rep. Patrick McHenry (R-N.C.), the first of these two bills – the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299) – states that bank loans with a valid rate when made will remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. A second bill known as the Modernizing Credit Opportunities Act of 2017 (HR 4439), championed by Rep. Trey Hollingsworth (R-Ind.), strives “to clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” Perhaps most significantly, it would establish federal preemption of state usury laws as to any loan to which an insured depository institution is the party, regardless of any subsequent assignments. In so doing, both bills amend provisions of the Home Owners’ Loan Act, Federal Credit Union Act, and/or Federal Deposit Insurance Act. Such an amendment would invalidate a long-line of judicial precedent barring a non-bank buyer’s ability to purchase a national bank’s right to preempt state usury law, which culminated in the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, and thereby provide non-originating creditors with a potent – and until now nonexistent – shield against liability under certain state consumer laws.

On June 27, 2018, the attorneys general of twenty states[1] and the District of Columbia stated their opposition to both bills in a letter to Congressional leadership. Beginning with an historically accurate observation – “[t]he states have long held primary responsibility for protecting American consumers from abuse in the marketplace” – the A.G.s attacked these legislative efforts as likely to “allow non-bank lenders to sidestep state usury laws and charge excessive interest that would otherwise be illegal under state law.” The cudgel of preemption, they warned, would “undermine” their ability to enforce their own consumer protection laws. The A.G.s went on to argue many non-bank lenders “contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ right to preempt state usury limits”; indeed, “[t]he loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting, and servicing of the loans.” For their small role, the banks “receive only a small fee,” with the “lion’s share of profits belong[ing] to the non-bank entities.” In support of this position, the A.G.s cite to a 2002 press release by the Office of the Comptroller of the Currency (“OCC”) and the more recent OCC Bulletin 2018-14 on small dollar lending, the latter announcing the OCC’s “unfavorabl[e]” view of “an[y] entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).

The A.G.s concluded by arguing that the proposed legislation would erode an “important sphere of state regulation,” state usury laws having “long served an important consumer protection function in America.”

We will continue to monitor this legislation and other developments in the preemption arena, and will report on any further developments.

[1] The signatories come from California, Colorado, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Washington.

Some merchants prefer their customers to pay for their purchases with cash so they can avoid transaction fees associated with credit card purchases Transaction fees can be either passed along to the consumer or absorbed by the merchant.  To encourage payment in cash, many merchants post prices reflecting increased rates for credit card users, and states have long been closely regulating this method of pricing.  In New York, the “no credit card surcharge” law (N.Y. Gen. Bus. Law § 518) made its way to the United States Supreme Court in Expressions Hair Design v. Schneiderman two terms ago.  

The Supreme Court’s opinion in Expressions Hair Design was widely regarded as a preliminary victory for business, holding that § 518 regulated speech and therefore fell under First Amendment scrutiny.  The Supreme Court remanded the case to the Second Circuit for further proceedings consistent with their opinion that § 518 regulates speech.

Over the past eight months, the remanded Expressions Hair Design case has been stalled over the interpretation of § 518.  The Second Circuit certified the question of statutory interpretation to the New York court.  Finally, on October 26, the New York Court of Appeals issued an interpretation of § 518 concluding that if a store chooses to post lower prices for cash customers, it must also post the price charged to credit card customers.  This interpretation prohibits merchants from posting a single cash price for items while indicating an additional amount will be added to credit card purchases.  The Second Circuit will now decide whether § 518 as interpreted by the New York Court of Appeals is a valid restriction on commercial speech.

If the Second Circuit upholds § 518, the case could well make a return to the Supreme Court to resolve the burgeoning circuit split.  Recent cases in the Ninth and Eleventh circuits struck down almost identical statutes as unconstitutional under First Amendment scrutiny.  If the Second Circuit strikes down § 518 as an inappropriate regulation on speech, there would appear to be consensus on how states can draft regulation of credit card surcharge policies.


As America’s check collection system continues to move away from being paper-based, the Federal Reserve Board is updating the liability provisions of Regulation CC to reflect this reality.  After receiving comments on its proposed rule from financial institutions, trade associations, clearinghouses, and others, the Board published a final rule that amends Subpart C of Regulation CC to address situations where there is a dispute between banks as to whether a check has been altered or was issued with an unauthorized signature, when one bank has transferred an electronic or substitute check to the other bank and the original paper check is not available for inspection.  The risk of liability under the old rules were split – the paying bank was responsible for forged checks and the depositary bank was responsible for altered checks.

The rule adopts a rebuttable presumption of alteration, rather than forgery, in disputes between banks over whether a substitute check or electronic check contains an alteration or an unauthorized signature.  The presumption shifts the burden to the bank that warrants that a check has not been altered, which could be a depositary bank or collecting bank. In order to overcome the presumption, a depositary bank or collecting bank must prove by a preponderance of evidence that either (1) the substitute check or electronic check does not contain an alteration, or (2) the substitute check or electronic check is derived from an original check that was issued with an unauthorized signature of the drawer.  Under the rule, the presumption shall cease to apply if the original check is made available for examination by all parties involved in the dispute.

As with existing rules under Regulation CC, parties may, by mutual agreement, vary the effect of the amendments’ provisions.  The Board noted that it “expects that depository institutions will benefit from a uniform rule when there is an absence of evidence over whether a check has been altered or forged and may have reduced litigation and dispute resolution costs.”  The presumption applies only to disputes between institutions; it does not apply to disputes between a bank and a customer. The amendments to Regulation CC become effective January 1, 2019.


The states of most complaint, you ask?  – California, Florida, Texas, New York, and Georgia.

In October, the Consumer Financial Protection Bureau released its Complaint Snapshot, which supplements the Consumer Response Annual Report and provides an overview of trends in consumer complaints received by the Bureau.

The Snapshot revealed that the CFPB has received 1.5 million complaints since January 1, 2015.  Of those complaints, the most come from consumers in California, Florida, Texas, New York, and Georgia.  Conversely, the CFPB received the fewest number of complaints from consumers in Wyoming.

In general, U.S. consumers complain more to the CFPB about credit or consumer reporting (i.e., that there is incorrect information on the report) and debt collection (i.e., that there are attempts to collect on debt allegedly not owed) than any other issues.  The top complaints in the top states are as follows:

State Top Complaint
Georgia Credit or consumer reporting
Florida Credit or consumer reporting
Texas Debt collection
California Credit or consumer reporting
New York Credit or consumer reporting

The report also highlights the financial products that result in the largest number of complaints to the CFPB.  They include student loans, money transfers or services, virtual currency, prepaid cards, payday loans, and credit repair.

Click here to download the full report.

We will continue to monitor and report on developments in this area of consumer financial services and compliance.

The subject of marijuana and banking has garnered more and more attention as an increasing number of States decriminalize or legalize its use, medicinally and recreationally.  Still, no matter what State law might say about the matter, a wide array of commercial and banking activity remains criminal insofar as it is connected with marijuana.  This a consequence of federal laws including the Controlled Substances Act, money laundering statutes, the unlicensed money transmitter statute, and the Bank Secrecy Act.  Of course, there are also inchoate crimes in connection therewith.   

The U.S. Attorneys of the ninety-four federal districts have been advised to weigh the charging of such violations under the DOJ’s well-established Principles of Federal Prosecution.  It is not clear how charging decisions would be made with respect to financial institutions that service the marijuana trade in States where it is permitted under State law; however, this question has grown more pronounced: Will Congress act to accommodate States’ differing policies toward marijuana? 

The Proposed STATES Act 

Several members of Congress have proposed such an accommodating approach through the “Strengthening the Tenth Amendment Through Entrusting States Act” (the “STATES Act”), S. 3032; H.R. 6043. 

If enacted, this legislation would generally withdraw the Controlled Substance Act’s application to persons manufacturing, producing, possessing, distributing, dispensing, administering, or delivering marijuana if doing so in compliance with applicable State law or applicable Tribal law (if within a federally-recognized Tribal jurisdiction located within a State that, itself, permits such marijuana activity). 

The STATES Act would also remove “industrial hemp (as defined in . . . the Agricultural Act of 2014” from the Controlled Substance Act’s coverage. 

Certain applications of the Controlled Substances would remain with respect to marijuana, such as those related to transportation safety and non-medicinal distribution to persons under twenty-one years of age. 

Range of Support 

At this stage, there are indications of bipartisan support for the STATES Act. 

Senator Elizabeth Warren (D-Mass.) sponsored and introduced S. 3032.  Original cosponsors included Sen. Cory Gardner (R-Colo.), Sen. Rand Paul (R-Ky.), Sen. Catherine Cortez Masto (D-Nev.), Sen. Lisa Murkowski (R-Alaska), Sen. Cory A. Booker (D-N.J.), and Sen. Michael F. Bennett (D-Colo.).  Two senators have since joined their ranks: Sen. Jeff Flake (R-Ariz.) and Sen. Amy Klobuchar (D-Minn.). 

The House bill was sponsored and introduced by Rep. David P. Joyce (R-Ohio), and the original cosponsors included Rep. Earl Blumenauer (D-Ore.), Rep. Carlos Curbelo (R-Fla.), Rep. Jared Polis (D-Colo.), Rep. Ken Buck (R-Colo.), Rep. Barbara Lee (D-Cal.), Rep. Walter B. Jones, Jr. (R-N.C.), Rep. Rod Blum (R-Iowa), Rep. Diana DeGette (D-Colo.), Rep. Steve Cohen (D-Tenn.), Rep. Matt Gaetz (R-Fla.), Rep. Eleanor Holmes Norton (D-D.C.), Rep. Tom McClintock (R-Cal.), Rep. Luis J. Correa (D-Cal.), Rep. Jason Lewis (R-Minn.), Rep. Ro Khanna (D-Cal.).  Having since added their names are Rep. Justin Amash (R-Mich.), Rep. Charlie Crist (D-Fla.), Rep. Dana Rohrabacher (R-Cal.), Rep. Dina Titus (D-Nev.), Rep. Mike Coffman (R-Colo.), Rep. Jacky Rosen (D-Nev.), Rep. Thomas Massie (R-Ky.), and Rep. Ed Perlmutter (D-Colo.). 

Further, President Trump has indicated that he will sign the STATES Act if passed by Congress.  The day after the bills were introduced, President Trump was asked, “Do you support Senator Gardner’s marijuana federalism bill?”  He answered, “I really do.  I support Senator Gardner.  I know exactly what he’s doing.  We’re looking at it.  But I probably will end up supporting that, yes.” 

Current Status 

After introduction, H.R. 6043 was “[r]eferred to the Committee on the Judiciary, and in addition to the Committee on Energy and Commerce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.”  It remains in committee. 

No action has been taken on S. 3032 since its introduction. 

Other Bills Pending 

The STATES Act is not the only legislation pending in Congress which may affect marijuana banking. 

Addressed most directly to the issue of marijuana and banking is the proposed “Secure and Fair Enforcement Banking Act” or “SAFE Act,” S. 1152 (sponsored by Sen. Jeff Merkley [D-Ore.]); H.R. 2215 (sponsored by Rep. Ed Perlmutter [D-Colo.]).  Other pending bills of note include the “Respect State Marijuana Laws Act,” H.R. 975 (sponsored by Rep. Dana Rohrabacher [R-Cal.]), the “Ending Federal Marijuana Prohibition Act,” H.R. 1227 (sponsored by Rep. Thomas A. Garrett, Jr. [R-Va.]), the “Regulate Marijuana Like Alcohol Act,” H.R. 1841 (sponsored by Rep. Jared Polis [D-Colo.]), the “Responsibly Addressing the Marijuana Policy Gap Act,” S. 780 (sponsored by Sen. Ron Wyden [D-Ore.]); H.R. 1824 (sponsored by Rep. Earl Blumenauer [D-Ore.]), the “Marijuana Justice Act,” S. 1689 (sponsored by Sen. Cory A. Booker [D-N.J.]); H.R. 4815 (sponsored by Rep. Barbara Lee [D-Cal.]), and the “Marijuana Freedom and Opportunity Act,” S. 3174 (sponsored by Sen. Charles E. Schumer [D-N.Y.]).  And there are others. 

To date, no votes have been held on these bills.  They remain in committee. 


It will remain to be seen how the STATES Act, and other bills affecting marijuana banking, may fare in the 115th Congress.  We will monitor for further developments.