Banking Law
House of Representatives Passes the SAFE Banking Act
By James Morrissey, Pilgrim Christakis LLP
Although 37 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands have legalized marijuana to some degree, it remains a Schedule I narcotic under the federal Controlled Substance Act—along with heroin, morphine, and mescaline. To address this yawning gap between state a federal law, on April 19th the House of Representatives passed the Secure and Fair Enforcement Banking Act of 2021 (or “SAFE Banking Act”) with a large bipartisan majority of 321 to 101. The purpose of the SAFE Banking Act is to ensure “access to financial services to cannabis-related legitimate businesses” that operate under state laws and reduce “the amount of cash at such businesses.” To that end, the Act broadly prohibits federal banking regulators from penalizing or discouraging banks and insurers for providing services to cannabis businesses or their suppliers. The SAFE Banking Act also exempts the proceeds of state-sanctioned cannabis businesses from federal anti-money laundering laws and insulates banks, insurers, their officers and employees from liability “pursuant to any Federal law or regulation.” The SAFE Banking Act is now under consideration by the Senate Committee on Banking, Housing, and Urban Affairs where a similar bill died in 2019 without a vote.
FDIC Seeks Public Comments to Sign and Advertising Rule
By Aaron Kouhoupt and Jeremy Rzepka, McGlinchey Stafford, PLLC
The Federal Deposit Insurance Corporation (“FDIC”) recently published a notice seeking public comments on how to modernize its sign and advertising requirements. The FDIC requires banks to display the FDIC sign where deposits are normally received and to use an official statement when advertising deposit products.
The sign and advertising requirements are likely to draw significant interest from a variety of parties. Technology has shifted the way customers deposit money and interact with their banks from deposit windows to online and mobile banking, digital wallets, electronically-staffed kiosks, or other tools. Further, consumers are exposed to a more diverse marketplace of deposit products and other cash management solutions because of developments in technology, fintechs, and bank partnership programs.
The FDIC discusses its concern that, because of these changes, consumers could be confused, or misled, as to the true nature of the entity advertising a deposit product. The FDIC articulated two common scenarios: (1) Advertisements by non-bank entities, who have entered into a legitimate business relationship with FDIC-insured depositories; and (2) Fraudulent advertising by entities that are not FDIC insured and do not have a relationship with an insured entity. While the FDIC wants to protect consumers from fraudulent advertising, the FDIC seems to acknowledge the legitimacy of advertisements that disclose pertinent aspects of the business relationship between a non-bank entity and a depository institution.
The FDIC asked for comments on 21 questions, which range from technical issues (such as the size or formatting of the FDIC logo) to risks associated with the misrepresentation of advertised parties. The comment period closes on May 24.
Maryland Commissioner of Financial Regulation Asserts Action against Non-Maryland State Bank for Lending Without State License
By Latif Zaman, Hudson Cook, LLP
On January 21, 2021, the Maryland Commissioner of Financial Regulation filed an administrative charge letter against an FDIC-insured, out-of-state, state chartered bank and its non-bank service providers in connection with the bank’s consumer lending platform. Among other allegations, the Commissioner asserted that the bank was required to hold state lending licenses to originate loans to Maryland residents, despite the fact that Maryland law apparently prohibits the Commissioner from licensing banks. The defendants recently removed the case from the Maryland Office of Administrative Hearings to the U.S. District Court for the District of Maryland.
Mid-America Bank & Trust Company, an FDIC-insured, Missouri state-chartered bank, made loans with an APR of 36% or less to Maryland consumers. The Bank engaged Fortiva Financial, LLC to assist it in originating loans. According to the charge letter, the bank retained ownership of accounts after origination. The Commissioner claimed that the bank violated Maryland law by failing to hold licenses to make loans under the following three consumer credit statutes: (1) the Maryland Consumer Loan Law, the state’s small loan act; (2) the Credit Grantor Closed End Credit Provisions; and (3) the Credit Grantor Revolving Credit Provisions. The Commissioner also claimed that Fortiva was required to hold a credit service business license to assist Maryland consumers to obtain extensions of credit and another service provider was required to hold a collection agency license to collect accounts on behalf of the bank.
The Commissioner claimed that the loans were unenforceable because the bank made the loans without the licenses noted above, barring the bank or any assignees from collecting any amounts related to the loans. The Commissioner brought these claims despite the fact that the Maryland Consumer Loan Law expressly provides that the “Commissioner may not license any bank, trust company, savings bank, credit union, or savings and loan association.” In its notice of removal, the defendants argued that the Maryland licensing statutes interfered with the bank’s rate exportation authority under Section 27 of the Federal Deposit Insurance Act and that the Commissioner’s claims were, therefore, completely preempted.
Consumer Finance
U.S. Supreme Court Holds Section 13(b) of FTC Act Does Not Authorize Recovery of Equitable Monetary Relief
By Eric D. Mulligan, Hudson Cook, LLP
On April 22, 2021, the U.S. Supreme Court ruled U.S. Supreme Court ruled unanimously that Section 13(b) of the Federal Trade Commission Act did not allow the FTC to bypass its own administrative process and seek equitable monetary relief in court directly against a defendant it accused of unfair or deceptive trade practices.
The FTC sued Scott Tucker and his payday loan companies in federal district court for making deceptive disclosures to consumers in violation of Section 5(a) of the FTC Act. The FTC alleged that Tucker did not adequately disclose the loans' automatic renewal features. The FTC, under its authority in Section 13(b), sought a permanent injunction against future violations of the FTC Act. The FTC also asked the court to order restitution and disgorgement, again relying on Section 13(b). The FTC moved for summary judgment, and the district court granted the motion. The district court issued a permanent injunction against Tucker and ordered him to pay $1.27 billion in restitution and disgorgement. Tucker appealed to the U.S. Court of Appeals for the Ninth Circuit. The Ninth Circuit affirmed the district court's decision, including the monetary relief order. Tucker petitioned the Supreme Court for certiorari. The Court granted the petition.
The Supreme Court reversed the lower courts' rulings. The Court found that Section 13(b) does not authorize the FTC to seek monetary relief in court directly. The court gave two main reasons for this conclusion. First, Section 13(b) provides prospective, not retrospective, relief. Second, other provisions of the FTC Act allow a court to award monetary relief or impose monetary penalties, but only after the FTC has issued a cease and desist order. The FTC argued that several U.S. Courts of Appeals had agreed with the FTC's interpretation of Section 13(b) and that Congress had ratified that interpretation in later amendments to the FTC Act. However, the Court explained, the later amendments to the FTC Act were too minor to create a presumption of Congressional acquiescence. The FTC also argued that policy considerations disfavored an interpretation of Section 13(b) that allowed a defendant to keep profits that it had earned illegally at consumers' expense. The Court answered that the FTC could use its administrative process under other provisions of the FTC Act to obtain monetary relief.
U.S. Supreme Court Adopts Narrow, Business-Friendly TCPA "Autodialer" Standard
By Michael A. Goodman, Hudson Cook, LLP
On April 1, 2021, the U.S. Supreme Court announced its decision in Facebook, Inc. v. Duguid, adopting the narrow "autodialer" standard under the Telephone Consumer Protection Act that Facebook favored. The unanimous opinion establishes that equipment can be regulated as a TCPA "autodialer" only if it has the capacity either to store a telephone number using a random or sequential number generator, or to produce a telephone number using a random or sequential number generator. This decision rejects the broader, consumer-friendly interpretation that applied the TCPA "autodialer" definition to equipment that was capable of automatically dialing numbers from a stored list.
The Court boiled this issue down to a basic application of grammatical standards. The TCPA's "autodialer" definition contains the phrase "using a random or sequential number generator" after referring to "capacity to store or produce telephone numbers to be called." Facebook argued that the use of a random or sequential number generator must apply to either capacity to store or capacity to produce telephone numbers. Duguid argued that the use of a random or sequential number generator must apply only to the capacity to produce numbers.
The Court concluded that the TCPA's text, its legislative purpose, and canons of statutory construction favored Facebook’s reading. While the Court conceded that Congress might have been trying to address a broad concern with consumer privacy, it found that Congress chose to do so with a narrow statutory "autodialer" definition. Therefore, the Court directed Duguid to Congress to seek a revision to the statutory text. While Justice Sotomayor posited in the opinion that "Duguid greatly overstates the effects of accepting Facebook's interpretation,” the Court’s decision sharply cuts back the options for plaintiffs to bring TCPA cases.
Communication to Vendor Violates FDCPA Third-party Communication Prohibition
By Kelly Lipinski, McGlinchey Stafford, PLLC
On April 21, 2021, the Eleventh Circuit Court of Appeals held that: i) a violation of the Fair Debt Collection Practice Act’s (FDCPA) prohibition against communicating with a third-party in connection with the collection of a debt gives rise to a concrete injury to establish Article III standing and ii) a debt collector’s transmittal of a consumer’s personal information to its vendor is a communication in connection with the collection of a debt for purpose of the same FDCPA prohibition.
Subject to limited exceptions, the FDCPA prohibits a debt collector from communicating with a third party in connection with the collection of a debt. Some of the permitted exceptions include when the debt collector shares information with a consumer reporting agency, the attorney of the debtor or creditor, or the creditor. Particularly relevant to the Eleventh Circuit’s analysis, there is no exception for when a debt collector shares information with its vendor to generate dunning letters. The court acknowledged that the debtor did not suffer a tangible harm or risk or real harm when his information was shared with the debt collector’s vendor, but found that the alleged statutory violation could be an invasion of privacy protected by the FDCPA. When considering the merits of the case, the parties agreed that the transmittal was a “communication.” The sole issue was whether the communication was one “in connection with the collection of a debt.” The Eleventh Circuit adopted an expansive interpretation of this phrase. The court characterized a transfer of the debtor’s personal information to a vendor to be “concerned with”, “in reference to”, or otherwise in relationship to the debt collector’s effort to collect the debt.
CFPB’s Interim Final Rule: Pandemic Debt Collection Practices Effective May 3, 2021
By Sanford Shatz, McGlinchey Stafford, PLLC
On April 19, 2021, the CFPB announced that it issued an interim final rule (IFR) in support of the Centers for Disease Control and Prevention’s (CDC) residential eviction moratorium (CDC Order), which will be effective May 3, 2021. The CFPB’s interim rule requires debt collectors to provide written notice to tenants of their rights under the CDC Order and prohibits debt collectors from misrepresenting tenants’ eligibility for protection from eviction under the moratorium.
The CFPB issued the rule because it believes that consumers were not aware of their rights under the CDC moratorium, and because debt collectors pursuing evictions may have been misrepresenting tenants’ rights. The CFPB found that the failure of debt collectors to disclose the protections available under the CDC Order can violate the FDCPA with immediate consequences to health and safety. The CFPB also issued the rule to provide guidance on how debt collections can comply with the CDC Order.
The IFR provides that during the effective period of the CDC Order, in any jurisdiction where it applies, the debt collector must disclose to the consumer, clearly and conspicuously in writing, that the consumer may be eligible for temporary protection from the eviction under the CDC Order. In addition, the debt collector may not falsely represent or imply to a consumer that the consumer is ineligible for temporary protection from eviction under the CDC Order.
The CDC Order does not apply in any state, local, territorial, or tribal areas with a moratorium on residential evictions that provides the same or greater level of public-health protection than the CDC Order, and although the IFR does not require debt collectors in those areas to comply with the IFR, they may do so without running afoul of the rule or the FDCPA.
CFPB Proposes Delay of Debt Collection Rule Effective Date
By Eric Mogilnicki & Graves Lee, Covington & Burling LLP
On April 7, 2021, the Bureau proposed extending the effective date of its recently-finalized debt collection rules. The Bureau invited public comments on the proposal, and explained that this extension was designed to give market participants more time to comply with the new rules in light of the pandemic.
This Bureau's explanation for the proposed delay is in some tension with the fact that the Bureau rescinded other pandemic-related actions last week on the grounds that “[p]roviding regulatory flexibility to companies should not come at the expense of consumers. The different approach here suggest that the Bureau may have had other additional reasons to delay the effective date, including considering proposing changes to the rules.
The new rules were issued in October and December of last year and are presently scheduled to take effect on November 30, 2021. Under the Bureau's proposal, the rules would become effective 60 days later on January 29, 2022.
CFPB Proposes Mortgage Servicing Changes Aimed at Preventing COVID-19 Foreclosures
By Eric Mogilnicki & Graves Lee, Covington & Burling LLP
On April 5, 2021, the Bureau announced a set of proposed changes to mortgage servicing rules aimed at "prevent[ing] avoidable foreclosures as the emergency federal foreclosure protections expire." The changes are intended to "give borrowers time," "give servicers options," and "keep borrowers informed if their options." The Bureau set forth its proposal in a Notice of Proposed Rulemaking and a set of "Fast Facts" on the proposed rule. As the Bureau noted in its announcement, this proposal come in the wake of the Bureau's April 1, 2021 compliance bulletin warning mortgage servicers to "gear up for [an] expected surge in homeowners needing assistance" and that "unprepared is unacceptable."
Bureau Urges Mortgage Servicers to Prepare for Homeowners Needing Assistance
By Eric Mogilnicki & Graves Lee, Covington & Burling LLP
On April 1, 2021, the Bureau released a compliance bulletin urging mortgage services to take all necessary steps to prevent avoidable foreclosures this fall. According to the bulletin, the CFPB will closely monitor how mortgage servicers are engaging with borrower requests and processing applications for loss mitigation, including addressing language access issues and evaluating income fairly. More specifically, the Bureau will pay close attention to:
- Whether servicers are providing clear and readily understandable information to borrowers regarding payment assistance;
- Whether servicers are complying with the outreach requirements under Regulation X;
- Whether services are complying with the Equal Credit Opportunity Act’s prohibitions against discrimination;
- Whether servicers are promptly handling loss mitigation inquiries;
- Whether servicers are maintaining policies and procedures that are reasonably designed to ensure delinquent borrowers receive accurate information about loss mitigation;
- Whether servicers evaluate applications for loss mitigation consistent with Regulation X requirements;
- Whether services comply with foreclosure requirements in both Regulation X and state law; and
- Whether servicers comply with the Fair Credit Reporting Act’s reporting requirements.
California Court Rules Interest not Required on Insurance Proceeds Held in Escrow
By Daniel S. Miller, Maurice Wutscher LLP
The California Second Appellate District recently held in Gray v. Quicken Loans, Inc. that neither Civil Code section 2954.8 nor the parties’ loan agreement required the defendant to pay interest on insurance proceeds it held in escrow following the destruction of the plaintiff's home.
The plaintiff's home was destroyed by wildfire, and his hazard insurance policy jointly paid him and his mortgage lender, the defendant, the proceeds for repairs. The defendant placed these funds in a non-interest bearing escrow account.
Cal. Civ. Code § 2954.8(a) requires a lender “that receives money in advance for payment of taxes and assessments on the property, for insurance, or for other purposes relating to the property” to pay two percent interest annually on the amount held. The plaintiff argued that the hazard insurance proceeds the defendant received count as “money in advance.” The Deed of Trust required the plaintiff to maintain hazard insurance on his home and allowed the defendant to hold the insurance proceeds in escrow and to disburse the funds as repairs to the home were being made. The Deed of Trust further stated that the defendant was not required to pay the plaintiff any interest or earnings on such proceeds.
Citing Lippitt v. Nationstar Mortgage, LLC (C.D.Cal. Apr. 16, 2020, No. SA CV 19-1115-DOC-DFM) 2020 U.S. Dist. Lexis 122881, the Court held that, based upon the Deed of Trust’s language and the plain language in the statute, section 2954.8 applies to common escrows maintained to pay taxes, assessments, and insurance premiums, not to the unique situation of hazard insurance proceeds held by a lender pending property rebuilding. Accordingly, the Court affirmed the trial court’s decision sustaining the defendant’s demurrer to the complaint without leave to amend.
FCRA Suit Dismissed for Lack of Personal Jurisdiction
By Patrick Huber, Pilgrim Christakis LLP
In Breneisen v. Countryside Chevrolet/Buick/GMC, Inc., the district court dismissed an Fair Credit Reporting Act (“FCRA”) case where the plaintiffs were the “only link between the defendant and the forum.” In this case, the plaintiffs drove from their home state of Illinois to the neighboring state of Wisconsin to test drive a vehicle at a dealership. After the drive, during sales negotiations, the plaintiffs told the dealer they would be paying cash for the vehicle, and even explicitly asked the dealer not to perform a credit check. Ultimately, sales negotiations fell through, and the plaintiffs returned home to Illinois without the vehicle. They later discovered that the dealership had, in fact, pulled their credit report against their clear instructions. The plaintiffs brought suit against the dealership under the FCRA for the allegedly accessing their credit report unlawfully.
The dealer moved to dismiss for lack of personal jurisdiction. The plaintiffs argued that the dealer’s conduct “must have occurred in Illinois because they are Illinois residents.” Id. (emphasis added). They argued that the dealer purposefully directed its activities at Illinois by reaching into Illinois and unlawfully accessing the credit reports of Illinois citizens. Further, the plaintiffs argued that they were injured in Illinois, not in Wisconsin, where the dealer resides. The Court rejected their argument, stating that the plaintiff cannot be the defendant’s only link to the forum. The Court found that, “absent any allegation that [the dealer] reached into Illinois to access their credit reports, for example, from an Experian or Trans Union facility located in Illinois, [the plaintiffs] have not alleged a prime facie case of personal jurisdiction.” Breneisen illustrates the difficulty of showing personal jurisdiction in a credit reporting case where the defendant is not “at home” in the forum.
North Dakota Enacts Significant Limits on Money Broker Loans Including 36% Rate Cap
By Wingrove S. Lynton, Hudson Cook, LLP
On April 16, 2021, North Dakota Governor Doug Burgum signed Senate Bill 2103, which limits the finance charge a licensed money broker may charge to not more than an annual rate of 36%. This rate includes all charges and fees necessary for the extension of credit incurred at the time of origination.
Unless an exemption applies, the North Dakota Money Brokers Act requires consumer and commercial lenders to obtain a money broker license. Prior to SB 2103, money brokers looked to North Dakota's Usury Law for guidance on interest rate limitations on loans above $1,000. However, the Usury Law contains an exemption for loans made by a lender that is regulated by a North Dakota regulator or loans greater than $35,000. As a result, for loans made by a licensed money broker or loans greater than $35,000, the maximum rate is the rate agreed to by the parties. SB 2103 changes that because the Money Brokers Act will contain its independent rate cap.
The legislation, which becomes effective August 1, 2021, also limits late fees on loans greater than $1,000 for the first time. SB 2103 also imposes additional restrictions on small loans of $2,000 or less, including:
- Installment loans must be paid in equal installments;
- The maximum term for installment loans may not be greater than 36 months;
- Balloon payments are prohibited;
- Existing loans may be refinanced into a new small loan of less than $2,000, but the combination of any refinance fees and any fees collected as part of the original loan may not be greater than $100 per calendar year; and
- Charges imposed as part of a loan extension or deferment may not be more than $100 per calendar year.
Tennessee Amends TILT Act Fee Provisions
By David Hicks, Hudson Cook, LLP
Tennessee has amended the Industrial Loan and Thrift Companies Act to increase certain fee amounts permitted for "A-loans" and to authorize a new fee for "B-loans."
For loans charging fees authorized by T.C.A. § 45-5-403(a) ("A-loans"), House Bill 421 increases the maximum service charge from four percent (4%) of the total amount of the loan to five percent (5%). It also increases the maximum installment maintenance fee to five dollars ($5.00) per month.
For loans charging fees authorized by T.C.A. § 45-5-403(b) ("B-loans"), the new bill adds a "closing fee" up to 4% of the amount financed (not to exceed $50), which may be paid from the loan proceeds or added to the amount financed. The closing fee is in addition to charges already authorized by the statute but must be refunded pro rata if the loan is prepaid within ninety (90) days of the date of the loan.
These changes become effective on July 1, 2021, and apply to contracts entered into on or after that date.
Intellectual Property
U.S. Supreme Court Decides Google’s Copying is Fair Use
By Dredeir Roberts, In House Counsel at Core States Group and Business Law Fellow
The U.S. Supreme Court issued its long awaited opinion in Google, LLC v. Oracle America Inc., finding Google’s copying of Oracle’s Java SE API’s declaring code was fair use. Analyzing the first fair use factor, the Court appears to expand the scope of fair use by finding that simply shifting the context from mobile to desktop satisfies the transformative use definition. Narrowing its opinion to the facts and questions presented, the Court did not broadly address the extent to which computer programs are copyrightable.
Tax Law
IRS Provides Safe Harbor to Deduct Certain 2020 PPP Related Expenses in 2021
By Douglas W. Charnas and Paul S. Leonard, McGlinchey Stafford, PLLC
Before enactment of the 2021 Consolidated Appropriations Act on December 27, 2020, the Internal Revenue Service took the position that taxpayers could not deduct expenses paid with proceeds of a forgiven PPP loan. By passage of the Consolidated Appropriations Act, Congress reversed this position. The Internal Revenue Service now has announced a safe harbor in Revenue Procedure 2021-20 that will permit certain taxpayers an election to deduct in 2021 expenses paid with proceeds of a forgiven PPP loan that were not claimed as a deduction on their tax return or information return filed in 2020. Without this election, a taxpayer would need to file an amended return or administrative adjustment request for its 2020 taxable year to claim a deduction for expenses paid in 2020 with the proceeds of a forgiven PPP loan.
A taxpayer eligible to make the election (referred to as a “Covered Taxpayer”) is one who satisfies all of the following:
- The taxpayer received an original PPP covered loan;
- The taxpayer paid or incurred original eligible expenses during the taxpayer’s 2020 taxable year;
- On or before December 27, 2020, the taxpayer timely filed, including extensions, a Federal income tax return or information return, as applicable, for the taxpayer’s 2020 taxable year; and
- On the taxpayer’s Federal income tax return or information return, as applicable, the taxpayer did not deduct the original eligible expenses because—
- The expenses resulted in forgiveness of the original PPP covered loan; or
- The taxpayer reasonably expected at the end of the 2020 taxable year that the expenses would result in such forgiveness.
An important point to note is that a calendar year taxpayer with a taxable year ending December 31, 2020, is not eligible to make the election. This election only is applicable to certain taxpayers with a fiscal tax year other than the calendar year.