SACRAMENTO, Calif. – Federally-chartered credit unions rang in the New Year with some relief from a potentially onerous credit card disclosure law, but state-charters have no such resolution. Judge Frank Damrell of the U.S. District Court for the Eastern District of California ruled that the California law did not apply to federally-chartered card issuers, whether they be credit unions, banks, monolines, or any federal institution that issues cards. That was the good news of the case. "It's wonderful for federal charters, but ambiguous at best for state charters," said Eric Richard, CUNA's General Counsel. Richard said it could be interpreted that the stay of the statute is in effect for state-charters, or that it doesn't apply to them at all and they must comply with the July 1 deadline for the law's enactment. The problem is that the judge did not address the state-charter argument at all. "The issue was squarely before the court. It's not as if they rejected the argument for the state charters – they didn't comment on it one way or the other," said Richard. The question is what happens now. Gill Schwartz, a partner with the law firm Schwartz, Ballen in Washington said there are a number of ways things can go. "Do you go back to the judge and perhaps jeopardize the previous ruling? Clearly if another lawsuit was brought and assigned to the same judge, there likely wouldn't be anything new in his ruling," said Schwartz. Schwartz said it could be handled by the regulators. "I think the attorney general and the banking commissioner could announce they're not enforcing the law," said Schwartz. NAFCU SVP and General Counsel Bill Donovan said in the interest of parity and equality to state and federal charters, the law should not apply to the state charters. "I believe there are a range of options that could be available, anywhere from a simple administrative action by the department of financial institutions or an interpretive ruling by the attorney general, all the way to judicial action or further legislation in this area," said Donovan. Schwartz said the argument the plaintiffs brought for the law not applying to state charters was centered around the dormant commerce clause, which says the power to regulate interstate commerce is vested in Congress. It's dormant or sleepy said Schwartz because it's less about giving the power to Congress, and more about not giving it to states. "It means states can't interfere and pass their own (interstate commerce) laws," said Schwartz. It's an argument NAFCU made very early on said Donovan. He said that the case, beyond the far reaching precedent implications, affected credit unions in many areas of the country not just California. In fact in its very first filing, NAFCU highlighted the example of Campus FCU in Baton Rouge, Louisiana. At the time the CU had just 65 members that held credit cards in the state of California, and if the law went into effect it would have been cost prohibitive for the CU to continue offering the cards. Aside from the law's requirements that billing statements clearly state how making minimum payments affect how much a person would have to pay back to clear their balance, it also required that each issuer establish a toll-free line staffed by representatives who could answer questions regarding the costs of just paying the minimum balance. That line would have to be available seven days a week for 13 hours each day. Those were the kind of costly requirements that had so many financial organizations up in arms. NASCUS maintained that California law gives the state room to maneuver on the question. "The California Credit Union Act does call for equal opportunity for state and federal credit unions, and may provide relief for state charters," NASCUS noted in a statement, adding that the California Department of Financial Institutions may be able to rely on the relevant sections of State law to allow state-chartered credit unions to issue the same disclosures as federal credit unions. California's DFI might be motivated to do this because of sensitivity it might have to burdening its own state chartered institutions while federally-chartered ones face fewer requirements, said Brian Knight, NASCUS' Director of Legal and Policy Analysis. "On its face, I think the California statute was a good-faith effort to try to introduce a disclosure requirement," Knight said, adding that it remains "unclear" whether the state will be interested in burdening California institutions with mandates regulations that their competitors would not have to face. "Our sense in previous discussions with DFI has been that they have been interested in something that applied to everybody." NASCUS expects to consult with California authorities again soon to see where the state might be headed in the wake of the Court decision. As for where the ruling was clear, it is just one more case where the federal pre-emption of state law was upheld. "It's consistent with a long line of cases that suggest the federal courts are not going to allow states to interfere with federal rules," said Schwartz. NAFCU, which was among the very first batch of plaintiffs, said it had a stake in this case on both the federal and state sides. "NAFCU does represent predominantly federal credit unions, but we also have state charters in our membership. Many credit unions have a once-a-member-always-a-member policy, and NAFCU has a similar policy," said Donovan. Donovan said NAFCU was set to work with the other plaintiffs to look for options for state charters. Richard said CUNA wants to work more intimately with some state-chartered banks on this one. "There's actually room for cooperation between state-chartered credit unions and state-chartered banks," said Richard. [email protected]

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