December 02, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Banking Law

NYDFS Issues Industry Letter Addressing Climate Change and Financial Risks

By Jeffrey Barringer, McGlinchey Stafford PLLC

On October 29, 2020, the New York Department of Financial Services (“NYDFS”) issued an Industry Letter highlighting the risks of climate change, the impact of climate change on regulated entities and setting forth the NYDFS’s expectations regarding how regulated entities should begin addressing those risks and impacts. The Letter was issued thirteen months after the NYDFS joined the Network of Central Banks and Supervisors for Greening the Financial System and five and a half months after the NYDFS hired its first Director of Sustainability and Climate Initiatives, Dr. Yue (Nina) Chen. The Letter also indicates that the NYDFS is in the process of developing a “strategy for integrating climate-related risks into its supervisory mandate” and that the NYDFS will work with other financial regulators, both domestic and international, in developing its climate change supervisory practices. 

While the Letter recognizes that managing the risks posed by climate change “entails complex and challenging issues,” the NYDFS clearly sets forth an expectation that regulated entities begin addressing those risks now. Those expectations differ based on whether an entity is a Regulated Organization or Regulated Non-Depository, as defined in the Letter.

“Regulated Organizations” are defined to include New York regulated banking organizations, licensed branches, agencies of foreign banking organizations, mortgage bankers, mortgage servicers, and limited purpose trust companies. These entities are expected to:

  1. Begin “integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies”; and
  2. Begin “developing their approach to climate-related financial risk disclosures and consider engaging with the Task Force for Climate-related Financial Disclosures framework and other established initiatives when doing so.”

“Regulated Non-Depositories” are defined to include other New York regulated entities, including money transmitters, licensed lenders, sales finance companies, premium finance companies and virtual currency companies. These licensed or regulated entities are expected to conduct a risk assessment of the physical and transition risks of climate change, which should take into account both direct and indirect impacts of climate change.Regulated Non-Depositories are also expected to begin “developing strategic plans, including an outline of such risks, the impact on their balance sheets, and steps to be taken to mitigate such risks.”

The Letter includes links to available resources addressing climate-related financial risks that regulated entities can reference as they begin to address the NYDFS’s expectations.    

OCC Amends Licensing Rules

By Emily J. Honsa Hicks, McGlinchey Stafford PLLC

The Office of the Comptroller of the Currency’s (“OCC”) final rule amending licensing policies and procedures related to the corporate activities and transactions, which applies to all national banks and federal savings associations (“FSAs”), including community institutions, was issued on November 16, 2020 and will be largely effective January 1, 2021.  The rule makes a number of revisions to definitions: notably, it harmonizes the definition of “well managed” across filing types and changes the definition of “troubled conditions” related to national bank directors surrounding enforcement actions to be consistent with OCC supervisory practices.  Moreover, the rule provides procedures surrounding director citizenship and residency requirements for national banks.  In addition to permissive changes surrounding operating subsidies’ activities and non-controlling investments as well as requests for reduction in capital, the rule permits national banks and FSAs to follow state bank or savings association procedures in certain circumstances, and eliminates the filing requirements for those FSAs adopting the OCC’s model or optional bylaws without change.

Consumer Finance

Merchant’s Failure to Truncate Credit Card Number Does Not Establish Standing

By Devin Leary-Hanebrink, McGlinchey Stafford, PLLC

On October 28, 2020, the United States Court of Appeals for the Eleventh Circuit (the Eleventh Circuit) held in Muransky v. Godiva Chocolatier, Inc. that a merchant’s failure to properly truncate a customer’s credit card number on a transaction receipt does not, by itself, constitute concrete injury to bring suit. Basing its opinion on Spokeo, Inc. v. Robbins (Spokeo), the court held that a bare procedural violation is not enough to support standing. The Eleventh Circuit now joins the Second, Third, and Ninth Circuits, which have all considered violations involving improperly truncated credit card numbers and concluded that a violation alone does not create harm or a material risk of harm.

The Fair and Accurate Credit Transactions Act (the FACT Act) amended the Fair Credit Reporting Act to require, among other things, that merchants accepting credit or debit cards as payment at the point of sale print no more than the last five digits of the customer’s card number or the card’s expiration date) on any receipt provided to the cardholder. In Muransky, a consumer filed a( class action against Godiva Chocolatier, Inc. (Godiva), alleging that his transaction receipt included too many digits from his account number. Early last year, the Eleventh Circuit held that the heightened risk of identity theft (stemming from the inclusion of too many digits from a cardholder’s account number on a transaction receipt) constitutes a concrete injury that provided standing to bring suit against Godiva. However, in October 2019, the court agreed to reconsider its decision.  In an en banc rehearing, the Eleventh Circuit held that, based on Spokeo, a mere procedural violation is not enough to support standing.

U.S. Supreme Court to Hear Oral Arguments on Three Cases Affecting the Consumer Financial Services Industry this Month

By Alan Ritchie, Pilgrim Christakis LLP

The U.S. Supreme Court is slated to hear oral argument on several cases affecting the consumer financial services industry this month. Here’s a quick look at some of the issues to be decided:  

  • In Facebook Inc. v. Duguid, No. 19-511, the Supreme Court is poised to resolve a circuit split over what constitutes an automatic telephone dialing system (“ATDS”) under the Telephone Consumer Protection Act (“TCPA”). Specifically, the Court will consider whether the TCPA’s definition of ATDS encompasses a device that can “store” and “automatically dial” phone numbers, even if that device does not “use a random or sequential number generator.” Oral argument is schedule for December 8th.
  • In Henry Schein Inc. v. Archer and Sales Inc., No. 19-963, the Supreme Court will consider whether a provision in an arbitration agreement that exempts certain claims from arbitration (e.g., claims for injunctive relief) negates an otherwise clear and unmistakable delegation of questions of arbitrability to an arbitrator. This is the second time this case has come before the Supreme Court. In January 2019, the Court held that under the Federal Arbitration Act, courts must enforce agreements to delegate gateway questions of arbitrability to an arbitrator. See Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019). This time, the Court will specifically consider the interplay between carve-out and delegation provisions in an arbitration agreement. Oral argument is schedule for December 8th.
  • In Collins v. Mnuchin, No. 19-422, the Supreme Court will consider a constitutional challenge to the structure of the Fair Housing Finance Agency (“FHFA”), the executive agency that oversees Fannie Mae and Freddie Mac. The petitioners argue that the FHFA’s structure—as an independent agency with a single director, removable only for cause—violates the separation of powers because the agency’s director is too insulated from presidential control. Earlier this year, the Supreme Court struck down a similar agency leadership structure in Seila Law LLC v. CFPB, 140 S. Ct. 2183 (2020). Oral argument is scheduled for December 9th.

Courts Rule on Constitutionality of TCPA Robocall Restriction

By Gregg D. Stevens, Aaron Kouhoupt, and Joseph A. Apatov, McGlinchey Stafford, PLLC

When Congress passed an amendment to the TCPA in 2015 and added an exception to the Robocall Restriction (47 U.S.C. § 227(b)(1)(A)(iii)) for those collecting debts owed to or guaranteed by the United States (the Government-Debt Exception), it rendered the entire Robocall Restriction unconstitutional and unenforceable. Because  courts lack jurisdiction to enforce unconstitutional laws, the Robocall Restriction is not enforceable for any calls made between November 2, 2015 (when the Government-Debt Exception was added) and July 6, 2020 (when the Government-Debt Exception was severed from the TCPA by the Supreme Court). At least, that is what two U.S. District Court Judges have recently found.

A few weeks ago, in Lindenbaum v Realgy LLC, the Chief Judge of the U.S. District Court for the Northern District of Ohio dismissed a putative TCPA class action because “the [Robocall Restriction] was unconstitutional at the time of the alleged violations,” and therefore the Court lacked subject matter jurisdiction over the claim. In reaching this conclusion, the Court agreed with Creasy v. Charter Communications Inc., in which Judge Feldman found that the Robocall Restriction was unconstitutional and unenforceable for any calls made between November 2, 2015 and July 6, 2020. Both Judges reached this conclusion in reliance upon Barr v. American Association of Political Consultants, Inc., a fractured opinion in which the Supreme Court held that the Government-Debt exception created an unconstitutional content-based restriction on speech and severed it from the rest of the statute. However, as the Chief Judge explained, “the Court cannot wave a magic wand and make that constitutional violation disappear.”

NY Bill Requires Mortgage Servicer’s Identifying Information on Foreclosure Documents

By Amier Shenoda, McGlinchey Stafford PLLC

On November 11, 2020, Governor Cuomo signed Senate Bill S4190 into law, which became effective immediately. In a mortgage foreclosure action involving a one-to four-family residential property, the notice of pendency, the order of reference and the judgment of foreclosure and sale, must include the name and telephone number of the mortgage loan servicer for the foreclosing plaintiff.  The new law has amended the Real Property Actions and Proceedings Law (RPAPL), Sections 1321 and 1351, and rule number 6511 of Civil Practice Law and Rules (CPLR) to create this new requirement.   No guidance has been provided as to the effect of the new law upon motions or applications which are currently pending before the courts for an order of reference or judgment of foreclosure and sale which do not include this additional information. Nevertheless, any such motions or applications made on or after November 11, 2020 must include the new information required by these statutes.

Nebraska Ballot Initiative Imposes 36% Rate Cap

By Caleb Rosenberg, Hudson Cook LLP

Nebraska ballot initiative 428 ballot initiative 428 passed on Election Day with more than 82% support. Initiative 428 imposes a maximum interest rate of 36% for delayed deposit services licensees, prohibits evading that cap, and provides that any transaction violating that cap is void.

Under the current version of Nebraska's Delayed Deposit Services Licensing Act ("Act"), a licensee may charge a fee of $15 per $100 of the face amount of the check. Industry had opposed Initiative 428, arguing that it would force licensees to close in Nebraska and limit access to credit by effectively reducing that fee to $1.38 per $100.

Once the Nebraska State Canvassing board has certified the results, the governor has ten days to issue a proclamation stating that the measure is approved. The law is then immediately effective.

The Act was also amended in July when the governor signed L.B. 909. That amendment requires licensees to use NMLS for licensing purposes, imposes requirements for the licensing process, and provides for the operation of branches in addition to a licensee's principal place of business. L.B. 909 goes into effect January 1, 2021.

CFPB’s Office of Enforcement Launches New Enforcement Database as Part of Website Update

By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On November 25, 2020 the CFPB announced that it refreshed its public website to improve its overall layout and functionality.  Notable features of the new and improved website include: (i) a new webpage for petitions for rulemaking from interested parties, and the Bureau’s response to such petition; and (ii) more extensive archiving of older content (which will still be accessible on the website, but will be clearly marked as archived content). 

Perhaps the most significant aspect of the updated website is the addition of a new, interactive enforcement database.  The enforcement database includes data summarizing the Bureau’s enforcement activity and the amount of consumer relief and monetary penalties the Bureau has realized through the enforcement process (to the extent this information is public).  The charts that track enforcement actions over time suggest that enforcement activity in 2019 and 2020 reflected more continuity than change in the Bureau's enforcement regime.  In a blog post discussing the new database, the Bureau’s Office of Enforcement stated that future iterations of the database will include specific information about each public enforcement action.

Bureau Reportedly Abandons Planned Internal Restructuring

By Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On November 16, 2020 Bloomberg Law reported that the CFPB has halted the planned restructuring of its Division of Supervision, Enforcement, and Fair Lending (“SEFL”), which was announced in mid-October.  The reorganization would have created a new Office of Policy & Strategy within SEFL that would have centralized Bureau decisions on whether a particular matter should be addressed by Supervision or Enforcement.

The planned restructuring was met with immediate pushback from some CFPB Staff, and was condemned in a statement and a follow-up letter by Senator Sherrod Brown (D–Ohio), who expressed concern that the reorganization would undermine the Bureau’s Office of Enforcement.  Senator Brown’s letter sought a delay in the reorganization pending the election results, and noted that any changes made in the months ahead could be reversed in 2021.  In reversing the reorganization, SEFL Director Bryan Schneider reportedly told the Staff that "the feedback I received raised important concerns that warrant more considered thought and analysis."

Biden’s CFPB Transition Review Team Includes Key Personnel From Cordray Years

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

The Biden transition team has announced its agency review teams, including the team focused on the CFPB.  The CFPB team includes a number of former CFPB personnel who served under former CFPB Director Richard Cordray, including former Deputy Director Leandra English, Senior Advisor Brian Shearer, Deputy Assistant Director for Regulations Diane Thompson, Chief Information Officer Ashwin Vasan, Senior Spokesperson David Mayorga, and Enforcement Attorney (and now Commissioner of the California Department of Business Oversight) Manny Alvarez.  These choices strongly suggest that the Bureau's course will shift back towards the policies and priorities championed by Director Cordray.

Tax Law

No Partner / S-Corp Shareholder SALT Deduction Limit on Entity Income Taxes

By Douglas W. Charnas and Paul S. Leonard, McGlinchey Stafford, PLLC

The Internal Revenue Service has announced that it will be issuing proposed regulations clarifying that certain state or local income taxes imposed on and paid by a partnership and/or an S corporation will not be subject to the $10,000 limit on state and local taxes. Specifically, in Notice 2020-75, the IRS announced that it intends to issue proposed regulation to clarify that state and local income taxes imposed on and paid by a partnership or an S corporation are allowed as a deduction by the partnership or S corporation in computing non-separately stated taxable income or loss for the taxable year of payment.

The Tax Cuts and Jobs Act (Public Law 115-97, 131 Stat. 2054 (December 22, 2017)) added IRC § 164(b)(6), which limits an individual’s deduction under IRC § 164(a) (the SALT deduction limitation) for taxable years beginning after 2017 and before 2026 to $10,000 ($5,000 in the case of a married individual filing a separate return) for the aggregate amount of the following state and local taxes paid during the calendar year:

  • real property taxes;
  • personal property taxes;
  • income, war profits, and excess profits taxes; and
  • general sales taxes.

Notice 2020-75 and the forthcoming proposed regulations are consistent with Congressional intent set forth in Congress’s Conference Report to the Tax Cuts and Jobs Act. In enacting IRC § 164(b)(6), Congress provided in the Conference Report that “taxes imposed at the entity level, such as a business tax imposed on pass-through entities, that are reflected in a partner’s or S corporation shareholder’s distributive or pro-rata share of income or loss on a Schedule K-1 (or similar form), will continue to reduce such partner’s or shareholder’s distributive or pro-rata share of income as under present law.” H.R. Rep. No. 115-466, at 260 n. 172 (2017).

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.