Criminal Antitrust Anti-Retaliation Act Signed Into Law
By Barbara T. Sicalides and Miranda Hooker
On December 23, 2020, President Trump signed into law the Criminal Antitrust Anti-Retaliation Act of 2019 (“the Act”), prohibiting companies from retaliating against employees and others for reporting criminal antitrust violations. The Act amends the Antitrust Criminal Penalty Act of 2004 to protect from retaliation whistleblowers who report criminal antitrust violations or other related criminal conduct. The Act has been almost a decade in the making: the bill stemmed from a 2011 US GAO report that recommended whistleblower protection for the reporting of criminal antitrust violations, and the Senate passed three similar bills in 2013, 2015, and 2017 that were never acted upon by the House.
Federal Trade Commission Releases Commentary on Analysis of Vertical Mergers
By Barbara Sicalides and Megan Morley, Troutman Pepper LLP
Split along partisan lines, on December 22, 2020, the Federal Trade Commission voted to issue its Commentary on Vertical Merger Enforcement (the “Commentary”). The Commentary is intended to “provide greater transparency to the public regarding [the Commission’s] analysis of vertical mergers” by collecting in a single document the Commission’s past vertical merger cases and summarizing how it has analyzed potential anticompetitive effects in vertical transactions.
The two Democratic Commissioners dissented here just as they had, in June 2020, with respect to the issuance of the Vertical Merger Guidelines (the “Guidelines”) themselves. Here, the dissenting Commissioners caution against relying on the past to assess how the agency will, in the future, treat transactions that include a non-horizontal element, while the Republican majority points out that the Democrats dissent “not because they quibble with the faithfulness of the Commentary’s recounting of the history of vertical merger enforcement, but because they object to the history itself.” The majority appears frustrated by their dissenting colleagues’ criticism of vertical merger analysis without any explanation of how they would address the challenges created by the existing case law and litigating without economic models and theory that has been accepted in this area.
Even in the face of a change in administration, the Commentary is a helpful resource for parties considering vertical transactions. Moreover, the Guidelines and the Commentary remain relevant and important because, absent a Republican resignation, the current Republican majority will retain control until 2023.
Federal Agencies Issue Statement on LIBOR Transition
By Jeremy Rzepka and Arthur Rotatori, McGlinchey Stafford PLLC
On November 30, 2020, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the agencies) issued a Statement encouraging banks to transition away from U.S. dollar (USD) LIBOR as soon as practicable. The agencies stated that failure to prepare for disruptions to LIBOR, including operating with insufficiently robust fallback language, could undermine financial stability and banks’ safety and soundness. The agencies advised that any new contracts entered into before December 31, 2021 should either utilize an alternative reference rate other than LIBOR or provide robust fallback language that identifies an alternative reference rate after LIBOR’S discontinuation.
The LIBOR transition is a significant transition event for a number of banks, lenders, and other financial services providers as many products and services are tied to LIBOR as a reference rate. The agencies’ joint statement continues a trend of agency statements on the LIBOR transition and appropriate alternative reference rates as we approach the planned discontinuation of the one week and two month USD LIBOR settings on December 31, 2021 and the remaining USD LIBOR settings on June 30, 2023. This statement closely follows the agencies’ November 6, 2020 statement reiterating that they are not endorsing a specific replacement reference rate. These two statements suggest that the agencies wish to create a sense of urgency about the LIBOR transition while still providing banks some flexibility in how to execute that transition.
Governor Cuomo Signs New York Small Business Finance Disclosure Law
By Katherine C. Fisher and Caleb Rosenberg
On December 23, 2020, New. York Governor Cuomo signed into law A10118A/S5470B requiring disclosures in various commercial financing transactions, including loans, merchant cash advances ("MCA"), and factoring transactions (the "Disclosure Law"). The Disclosure Law will be effective 180 days from Dec. 23, 2020.
The required disclosures differ depending on the type of transaction, but in each case the provider must disclose an "APR" calculated in accordance with the federal Truth in Lending Act and Regulation Z. The APR disclosure was included over the objection of industry groups who noted that TILA and Regulation Z do not apply to commercial finance, and that an APR applied to a transaction with no fixed term, such as factoring and MCA, will be inaccurate and misleading.
For sales-based financing, which includes MCAs, the Disclosure Law includes a lengthy list of disclosure requirements. The Disclosure Law also imposes disclosure requirements on repeat financing transactions from the same provider. Under certain circumstances, a statutory disclosure is required.
Finally, the Disclosure Law authorizes the DFS to promulgate rules and regulations to effectively administer the Disclosure Law, including, at least, rules regarding:
- Calculation of required disclosures;
- Formatting of disclosures, which may include requirements or "approving adequate forms;" and
- Defined terms.
Notably, the authorization to create rules is broad and, arguably, is not limited to disclosures. As a result, the Disclosure Law could have the effect of increasing DFS authority over commercial finance in general.
California Attorney General Proposes Fourth Set of Changes to CCPA Regulations
By Christopher Capurso, Hudson Cook LLP
On December 10, 2020, the Office of the Attorney General of California proposed a fourth set of modifications to the regulations implementing the California Consumer Privacy Act. After the Office proposed CCPA regulations in October 2019, the Office subsequently proposed two sets of modifications to those regulations in February and March of 2020. The CCPA regulations came into force on August 14, 2020. In October 2020, the Office proposed a third set of modifications. This fourth set of modifications is in response to comments on the third set of modifications and is intended to clarify and conform the proposed regulations to existing law.
The new proposed modifications cover two specific areas:
- Clarification for Providing Notice of Right to Opt Out Offline. The proposed modifications would provide further clarification that a business selling personal information collected from consumers in the course of interacting with them offline must inform consumers of their right to opt out of the sale of their personal information by an offline method. The specific offline notice of right to opt out was originally introduced in the third set of modifications in October 2020.
- Use of Opt-Out Button. The proposed modifications would allow businesses to use a unique button that would allow consumers to opt out of the sale of their personal information. The button would be used in addition to, and not in lieu of, posting the notice of right to opt out. Where a business posts a "Do Not Sell My Personal Information" link, the button would need to be placed to the left of that link. Further, the button itself would also need to link to the same website that the "Do Not Sell My Personal Information" link targets.
The OAG accepted written comments regarding these proposed changes through 5 PM Pacific Time on December 28, 2020.
The CCPA provides California residents with certain rights with regard to their personal information and imposes related requirements on certain businesses in California. Regulated businesses should consult the current and complete text of the law and regulations alongside knowledgeable counsel. Significant exemptions may apply to financial services businesses. The CCPA became effective on January 1, 2020, and enforceable on July 1, 2020.
CFPB Issues Second Final Debt Collection Rule
By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP
On December 18, 2020, the CFPB issued a final rule amending Regulation F, which implements the Fair Debt Collection Practices Act (the “FDCPA”). The final rule focuses primarily on consumer disclosure under Regulation F. The final rule is a companion to the November 2020 final rule implementing the FDCPA, which permitted the use of email and text messages in collecting consumer debts, established limits on debt collectors, created a safe harbor for limited-content voicemail messages, and established standards for mandatory disclosures to consumers. Both final rules stem from a May 2019 proposed rule and February 2020 supplemental proposal. In the press release accompanying the final rule, the Bureau noted that the FDCPA rulemaking process is now concluded.
Key provisions of the final rule include the following:
- Initial disclosures to consumers. The final rule clarifies the information that a debt collector must provide to a consumer at the outset of debt collection, including validation notices. The final rule provides a safe harbor for compliance with these disclosure requirements for debt collectors who use the model validation notice included in the rule.
- Prohibition on collection of time-barred debt. The final rule prohibits a debt collector from suing or threatening to sue a consumer to collect time-barred debt. Under the final rule, debt collectors are strictly liable for violations of this prohibition. This provision of the final rule represents a significant victory for consumer advocacy groups, who argued that the proposed rule’s “know or should know” standard would make violations too difficult for consumers to prove.
- Pre-furnishing requirements. The final rule prohibits passive collections, in which a debt collector furnishes information about a debt to a consumer reporting agency before engaging in outreach to the consumer about the debt.
The final rule will become effective November 30, 2021.
CFPB Issues Final Rules Defining General and Seasoned QM Loans
By Eric Mogilnicki and Uttara Dukkipati, Covington & Burling LLP
On December 10, 2020, the CFPB issued two final rules related to Qualified Mortgage ("QM") loans. This is the latest in a series of developments to the Ability-to-Repay/Qualified Mortgage ("ATR/QM") Rule contained in Regulation Z, which the Bureau originally issued in 2013 pursuant to the Dodd-Frank Act.
The first rule covers General QM loans and, among other changes, swaps out the previous requirement that a consumer's debt-to-income ("DTI") ratio not exceed 43 percent for a new set of limits based on the pricing of the loan. Under the new rule, loans with APRs that do not exceed the average prime offer rate for a comparable transaction by 1.5% receive a conclusive presumption that the consumer is able to repay. Loans with APRs that exceed the average rate by between 1.5% and 2.25% receive a rebuttable presumption that the consumer is able to repay. The rule provides for higher pricing thresholds for smaller loans and manufactured housing loans. Additionally, the rule requires lenders to consider a variety of factors in assessing a consumer's ability to repay, including a consumer's DTI ratio or residual income, assets other than the value of the dwelling, and debts. The rule "provides more flexible options" for creditors to verify these factors.
The second rule creates a new category of "Seasoned QMs." First-lien, fixed-rate mortgages that are held by the originating creditor or first purchaser for 36 months and comply with certain other requirements related to loan terms, performance, and underwriting are eligible for this new classification. The loans will only "season" after a certain period has elapsed and the loan's performance can be evaluated. In her statement, Director Kraninger cited encouraging "responsible innovation" and access to credit as reasons for this new category.
11th Circuit Rejects TCPA "Revocation of Consent" Claim Because Borrower Re-Consented
By Christopher P. Hahn, Maurice Wutscher LLP
On December 4, 2020 in Lucoff v. Navient Solutions, LLC, the U.S. Court of Appeals for the Eleventh Circuit affirmed entry of summary judgment in favor of a defendant student loan servicer against claims raised by a customer for purported violations of the federal Telephone Consumer Protection Act (“TCPA”) after the customer “re-consented” to receive automatic telephone dialing system (ATDS) and prerecorded calls to his cell phone.
A now-attorney consumer (Customer) consolidated his student loans with a prominent lender/servicer (Servicer), and expressly consented, as a member of a class action lawsuit against the Servicer, to allow the Servicer and its affiliates to call him concerning his student loan. Roughly two years later, during a call with the Servicer to discuss a proposed settlement offer for his consolidated loan, the Customer orally stated that he did not consent to receiving ATDS or pre-recorded messages on his cell phone. However, while still on the same conversation, the Customer submitted a demographic form on the Servicer’s website providing his cell phone number (though not a “required field”) as consent to such calls.
After the Customer fell behind on his payments and began receiving calls to his cell phone from the Servicer, he filed suit alleging that the Servicer violated the TCPA by calling his cell phone using an ATDS and prerecorded messages without his prior express consent. The Servicer prevailed on summary judgment in district court on the basis that the customer “re-consented” to the servicer’s calls when he submitted the demographic form.
On appeal, the Eleventh Circuit affirmed the district court’s judgment, concluding that that it was reasonable for the Servicer to understand the customer’s submission of the online demographic form that contained his cell phone number and a clear, unambiguous consent provision as his consent to the calls, and rejecting the Customer’s arguments that the Servicer knew or should have known that he did not want to receive the calls, and that the online demographic form was deceptive and misleading.
9th Circuit Reverses Trial Court Ruling in Favor of Defendant on FDCPA Claim Related to Bankruptcy
By Christopher P. Hahn, Maurice Wutscher LLP
On November 25, 2020 in Manikan v. Peters & Freedman, L.L.P., the U.S. Court of Appeals for the Ninth Circuit reversed an award of summary judgment in favor of a defendant debt collector against claims that it violated the federal Fair Debt Collection Practices Act (“FDCPA”) by attempting to collect a debt that was discharged in bankruptcy and no longer owed.
After a homeowner fell behind on his homeowners’ associations (HOA) dues, a law firm acting as a debt collector for the HOA recorded a lien and initiated nonjudicial foreclosure proceedings. The homeowner (Debtor) filed for Chapter 13 bankruptcy, wherein the confirmed plan paid off the debt owed to the HOA before a discharge was entered. This fact notwithstanding, the law firm served a notice of default on the Debtor related to the HOA debt that was already paid. Though the law firm later admitted error, the Debtor sued the law firm, HOA and associated debt collectors for allegedly violating sections 1692e and 1692f of the FDCPA for attempting to collect the already-paid debt, and section 1692d alleging that the collection techniques were harassing, oppressive and/or abusive.
The trial court granted summary judgment in the law firm’s favor, holding that the Debtor’s FDCPA claims were barred by the Ninth Circuit’s holding in Walls v. Wells Fargo Bank, N.A., which precludes FDCPA claims premised on a violation of a bankruptcy discharge order, reasoning that doing so would circumvent the proper remedy of bringing a contempt proceeding before the bankruptcy court.
On appeal, the Ninth Circuit noted that in Walls, the debtor’s FDCPA claim depended solely on the discharge injunction, and that no independent basis existed to show that the creditor acted unlawfully. But here, the Debtor did not seek to remedy a violation of his discharge order, but instead, alleged that the law firm acted unlawfully because it tried to collect the debt that was fully paid nearly two years before his discharge. Thus, a potential cause of action existed for the Debtor even if he had never received a discharge in his bankruptcy case.
Because the Debtor’s FDCPA claims were premised on his full satisfaction of the debt through a Chapter 13 plan before the discharge was entered, and not a violation of the discharge order, the Ninth Circuit concluded that Walls did not apply to bar his claims. Accordingly, the trial court’s entry of summary judgment in the law firm’s favor and against the Debtor was reversed and remanded for further proceedings.
Eighth Circuit Reverses Summary Judgment for Debtor in FDCPA Action
By Patrick Huber, Pilgrim Christakis LLP
In Reygadas v. DNF Associates, LLC, the Eighth Circuit Court of Appeals reversed summary judgment that the district court entered in favor of a debtor in an action brought under the Fair Debt Collection Practices Act (“FDCPA”). The case hinged on whether a consumer can hold a debt buyer liable under agency principles for the actions of its third-party debt collection agency without setting forth evidence of the alleged agency relationship. The case arose out of an earlier state court proceeding in which Appellant DNF Associates, LLC (“DNF”), a debt buyer, had sued to collect on Reygadas’ debt. After the state court dismissed the suit, DNF enlisted the help of Radius Global Solutions, LLC (“RGS”), a third-party licensed debt collector, which sent a letter to Reygadas offering to settle. Reygadas then filed suit in federal court alleging violations of the FDCPA and its state equivalent when RGS sent her the letter communication without the consent of her attorney.
DNF filed a motion for summary judgment, arguing that it was not a “debt collector” under the FDCPA or its state equivalent. The court denied DNF’s motion and, sua sponte, granted partial summary judgment in favor of Reygadas. The district court found that DNF qualifies as a “debt collector” because its principal purpose is the “collection of any debts” and that, in sending the settlement letter, RGS was acting as DNF’s agent.
The Eighth Circuit agreed that DNF qualifies as a “debt collector” but found that Reygadas failed to present evidence to establish that RGS was acting as DNF’s agent when it sent the letter to Reygadas offering to settle her debt. The court recognized that the FDCPA imposes liability, under § 1692c(a)(2), if a debt collector contacts a consumer in the process of collecting a debt if the debt collector knows that the consumer is represented by an attorney. It was undisputed that DNF had knowledge that Reygadas was represented by counsel, but Reygadas did not allege that RGS also had knowledge. Instead, Reygadas argued that DNF was liable under the FDCPA because it took action through its agent, RGS, that it could not lawfully take on its own. The court noted that the district court failed to address the alleged agency relationship in light of the fact that the creditor contracting with the third-party debt collection agency was itself a debt collector. Furthermore, Reygadas did not submit evidence of an agreement between DNF and RGS to establish the agency relationship. The panel vacated summary judgment and remanded the case for further proceedings.
FTC Action Reinforces Importance of Vendor Oversight
By K. Dailey Wilson, Hudson Cook, LLP
On December 15, 2020, the Federal Trade Commission announced a proposed settlement with Ascension Data & Analytics, LLC, a mortgage industry data analytics company. The settlement stems from allegations that the company violated the Gramm-Leach-Bliley Act ("GLBA") and the FTC's Standards for Safeguarding Customer Information Rule ("Safeguards Rule") by failing to develop, implement, and maintain a comprehensive information security program, and that its third-party document scanning vendor failed to adequately secure customer information in its cloud-based storage system, resulting in the exposure of the personal information of over 60,000 consumers. The action is an important reminder of the importance of strong vendor onboarding and oversight with respect to the handling of customer information.
The complaint alleged that Ascension failed to thoroughly vet and oversee its third-party vendors prior to establishing a business relationship. The complaint stated that, although the company maintained a Third Party Vendor Risk Management policy requiring the company to conduct a comprehensive due diligence of potential third-party vendors prior to onboarding, Ascension failed to undertake any formal review of its third-party vendors. The FTC further alleged that, contrary to its Third Party Vendor Risk Management policy, Ascension failed to conduct adequate risk assessments of third-party vendors prior to September 2017.
The FTC also alleged that Ascension failed to contractually require vendors to safeguard customer personal information. In particular, although Ascension's contracts required its third-party vendors to comply with the GLBA, the contracts did not clearly state that the vendors were responsible for protecting customer information in accordance with the Safeguards Rule. The contracts also lacked specificity regarding the customer information safeguards that third-party vendors were required to implement.
The proposed settlement requires Ascension to develop and implement a data security program containing certain specified elements and to undergo twice-yearly assessments of the effectiveness of its data security program, conducted by an independent organization. A senior executive must also annually certify the company's compliance with the settlement order, and the company must report any future data breaches to the FTC within 10 days of notifying other state or federal government agencies.
Commissioner Chopra dissented from the FTC's approval of the settlement, focusing on three key issues: (1) failure to hold affiliated companies liable; (2) failure to charge the alleged conduct as unfair; and (3) failure to provide consumer redress and adequate deterrence. Commissioner Chopra, while noting that the FTC is considering changes to the Safeguards Rule, emphasized that the FTC must rethink its enforcement strategy and consider partnering with state attorneys general and other agencies in future data security actions to ensure adequate compensation for victims and appropriate penalties for wrongdoers. Commissioner Phillips filed a separate statement countering many of the points raised by Commissioner Chopra's dissent, including opining that inclusion of an unfairness claim is not necessary where a violation of a particular statute, such as the GLBA, is alleged.
Department of Labor Finalizes Rule Allowing Mandatory Tip Pools
By Charles E. Stoecker, McGlinchey Stafford PLLC
This new rule follows 2018 federal legislation which amended the Fair Labor Standards Act (FLSA) to prohibit employers from keeping their employees’ tips. The new rule makes it legal for some restaurants to implement mandatory tip pools—and force front-of-house servers and bussers to share their earnings with non-tipped employees.
This rule benefits the restaurant industry because tip pools can help businesses cut down on labor costs. Previously the tip pool was only open to employees who received tips and contributed to the tip pool. Because of tips, a server can take home several times the money that a prep cook or dishwasher earns. Under the new rule, an employer may require tipped employees to share tips with other non-tipped employees, such as cooks and dishwashers in the kitchen. However, under the new rule, the applicable law has not changed in that a shared tip pool cannot include managers or supervisors. The impact of the new rule will likely be felt in larger cities and in fine-dining establishments, where it is not unusual for servers to bring home six-figure earnings, largely due to tips.
The new rule provides employers with flexibility to include traditionally non-tipped employees in a tip pool – but only if the employer does not take the “tip credit.” This allows employers to more effectively recruit and retain traditionally non-tipped employees as these employees will now be able to potentially receive greater wages. Additionally, the new rule provides employers with further guidance on what “related” tasks an employee may perform without disqualifying employers’ utilization of the “tip credit.”
The rule, which goes into effect in February 2021, does not apply to every restaurant—only those where employers do not take a tip credit to pay their front-of-house employees a subminimum wage, and where state law does not prohibit tip pools. However, it is important to keep in mind that wage and hour requirements are a product of both federal and state legislation. State laws and rules may be more restrictive than federal laws and rules. Additionally, with the upcoming change in leadership at the federal level it is likely that wage and hour regulations will be amended. Employers should be prepared for further changes.
9th Circuit Upholds Denial of Class Cert in "Wage and Hour" Case Against Bank
By Ryan W. Grotz, Maurice Wutscher LLP
On November 18, 2020, in Castillo v. Bank of America, a putative class action for alleged underpayment of overtime wages, the U.S. Court of Appeals for the Ninth Circuit held that the use of a potentially improper pay structure was not evidence of harm in every instance, and thus the predominance requirement necessary to certify a class action was not met. The matter involved a class action complaint against an employer primarily alleging failure to pay minimum wage and overtime based on an intricate payment structure devised by the employer.
On appeal, the crux of the claim was the predominance requirement to certify a class where a plaintiff must demonstrate the superiority of maintaining a class action and show that the questions of law or fact common to class members predominate over any questions affecting only individual members. Both sides relied on Alvarado v. Dart Container Corp. of California, which held that under California law, employers must pay non-exempt employees who work overtime a premium on top of their “regular rate of pay.” Alvarado specifically focused on the proper way to calculate the per-hour value of a flat sum bonus earned by weekend workers.
The Ninth Circuit found that Alvarado was not sufficient to establish predominance where, as was the case here, a large portion of the proposed class either (1) did not work overtime or could not have been exposed to the overtime formulas or (2) if they were exposed to a formula, they were not underpaid and thus were not injured. Accordingly, the Ninth Circuit affirmed the holding of the trial court denying class certification.
What’s in Your Permit?
By Michael R. Blumenthal, McGlinchey Stafford PLLC
On November 30, 2020, a workgroup within the United States Environmental Protection Agency (U.S. EPA) released information about a memorandum to the U.S. EPA Regional Administrators summarizing an interim strategy for Per- and Polyfluoroalkyl Substances (PFAS) for sites with federally issued National Pollutant Discharge Elimination System (NPDES) permits.
EPA’s interim NPDES permitting strategy for PFAS provides recommendations from a cross-agency workgroup on an interim approach to include PFAS-related conditions in EPA-issued NPDES permits. The strategy advises EPA permit writers to consider including PFAS monitoring at facilities where these chemicals are expected to be present in wastewater discharges, including from municipal separate storm sewer systems and industrial stormwater permits. The PFAS that could be considered for monitoring are those that will have validated EPA analytical methods for wastewater testing, which the agency anticipates being available on a phased-in schedule as multi-lab validated wastewater analytical methods are finalized.
Yes, I Can Deduct Expenses Paid with a Forgiven PPP Loan
By Douglas W. Charnas and Paul S. Leonard, McGlinchey Stafford PLLC
On December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021. It contains a number of separate acts, including “The COVID-related Tax Relief Act of 2020.” Section 276 of The COVID-related Tax Relief Act of 2020 specifically provides that “no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income” of a PPP loan. It is interesting to note that the Internal Revenue Code is NOT amended to include this language. Rather, subsection (i) of section 7A of the Small Business Act (as created by another part of the Consolidated Act) is amended to include this language.
This provision is very helpful to businesses. It restores the full benefit of the forgiveness of a PPP loan – no inclusion of income on forgiveness and the full use of deductions/tax attributes associated with the forgiven loan. It is effective for taxable years ending after the date of the enactment of the CARES Act.
Winners and Losers in Like-Kind Exchange Final Regulations
By Douglas W. Charnas and Paul S. Leonard, McGlinchey Stafford PLLC
The Treasury Department and the IRS received 21 written comments in response to the like-kind exchange proposed regulations. The recently issued final IRS like-kind exchange regulations adopt some comments (Winners), reject some comments (Losers), and do not consider some comments because they are beyond the scope of the regulation project (Punts).
Regulations are needed because the 2017 Tax Cut and Jobs Act (TCJA, also called the Tax Act) limited like-kind exchanges occurring after 2017 to “real property held for productive use in a trade or business or investment.” IRC § 1031 does not define the term “real property.” The main purpose of the regulations has been to define the term “real property,” especially with regard to the exchange of personal property (including fixtures) and intangible property that are often part of a real property transaction. The regulations attempt to provide some clarity as to what will be treated as part of the real property and subject to like-kind exchange treatment, rather than non-like-kind property subject to the gain recognition rules of IRC § 1031(b). As expected, this has both succeeded in part and failed in part.
The changes from the proposed regulations to the final regulations are generally taxpayer favorable, making it easier to determine personal property and intangible property that will qualify for like-kind exchange treatment.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:
- Begin “integrating the financial risks from climate change into their governance frameworks, risk management processes, and business strategies”; and
- 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.
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.
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).