On January 24, 2023, the U.S. Justice Department, joined by the Attorney Generals of California, Colorado, Connecticut, New Jersey, New York, Rhode Island, Tennessee, and Virginia, filed a civil antitrust suit against Google alleging violation of Section 1 and 2 of the Sherman Act. This is the second such lawsuit filed against Google in two years. The earlier suit was filed under the Trump administration in October 2020 alleging Google was cutting off competition for internet search through exclusionary agreements. That lawsuit is expected to go to trial in September 2023.
The current complaint filed in the U.S. District Court for the Eastern District of Virginia alleges that Google engages in anticompetitive and exclusionary conduct when it comes to advertising by monopolizing key digital advertising technologies, referred to as the “ad tech stack.” Website publishers rely on ad tech tools to secure revenue that supports maintenance and creation of an open web, which in turn gives public access to various goods, services, unique ideas, and artistic expressions.
The allegations in the complaint, as summarized in the accompanying press release, state that Google engaged in a conduct consisting of “neutralizing or eliminating ad tech competitors through acquisitions; wielding its dominance across digital advertising markets to force more publishers and advertisers to use its products; and thwarting the ability to use competing products.”
This lawsuit is seeking to hold Google accountable for monopolizing digital advertising for more than fifteen years and to bring back more competitive exchange of ideas on the web. The lawsuit is described as a major “milestone in the Department’s efforts to hold big technology companies accountable for violations of the antitrust laws.”
Federal Banking Agencies Issue Joint Statement on Risks Associated with Crypto-Assets
By Rachael Aspery and Taylor Bennington, McGlinchey Stafford, PLLC
On January 3, 2023, the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) (collectively “the Agencies”) issued a joint statement on the risks of crypto-assets to banking organizations. The statement came after a year of twists and turns for the cryptocurrency industry. The Agencies highlighted the “significant volatility and the exposure of vulnerabilities in the crypto-asset sector.”
The Agencies identified eight key risks associated with “crypto-assets,” which generally refer to any digital assets implemented using cryptographic techniques, and the crypto-asset sector. Some of the key risks that banking organization should be aware of include, but are not limited to: the risk of fraud and scams among crypto-asset sector participants; inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance; susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves; and risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
While the Agencies state that banking organizations are neither prohibited nor discouraged from providing banking services to any legally permitted subset of customers, the Agencies take a “careful and cautious” approach and believe that “issuing or holding as principal crypto-assets that are issued, stored, or transferred on an open, public, and/or decentralized network, or similar system is highly likely to be inconsistent with safe and sound banking practices.” This approach is premised on the Agencies’ “current experience and understanding to date.”
Accordingly, the Agencies will continue to closely monitor crypto-asset-related exposures of banking organizations, and where warranted, issue additional statements. The Agencies also will continue to enhance their knowledge, expertise, and understanding of how crypto-assets can impact banking organizations from the individual banking customer to the U.S. financial system as a whole. Given the proceed-with-caution position the Agencies appear to take, it is important for banking organizations to ensure that risk management programs are equipped to effectively identify and manage risks that are presented by crypto-assets to ensure compliance with applicable laws, including those designed to protect consumers and combat illicit activity and financial crime.
Federal Reserve Board Adopts Final Version of LIBOR Transition Rule
By Arthur J. Rotatori & Rachael Aspery, McGlinchey Stafford, PLLC
The Board of Governors of the Federal Reserve System (Board) published a proposed regulation to implement the Adjustable Rate (LIBOR) Act (Act). The purpose of the Act was to facilitate the transition away from the use of LIBOR as an index for variable rate loans due to LIBOR’s scheduled sunset on June 30, 2023. The final regulation, Regulation ZZ, was released on December 16, 2022. While Regulation ZZ will technically become effective thirty days after its publication in the Federal Register, in practice, Regulation ZZ will take effect in the period around June 30, 2023, as LIBOR sunsets.
Regulation ZZ is substantially similar to the Board’s proposed regulation. As such, Regulation ZZ largely follows the text of the Act by providing a mechanism that will, by operation of law, replace contractual references to LIBOR with the benchmark replacements described in Regulation ZZ. For consumer loans, the benchmark replacements will be the CME Term SOFR, which is based on the Secured Overnight Financing Rate (SOFR), a rate published daily by the Federal Reserve Bank of New York. During a one-year transition period beginning on June 30, 2023, tenor spread adjustments will be added to the CME Term SOFR to minimize adverse effects on consumer borrowers. These adjustments are provided in Regulation ZZ.
The Supplemental Information to Regulation ZZ clarifies that it will apply to “tough legacy contracts” that allow the lender or other determining person identified in the contract to select a benchmark replacement when LIBOR is unavailable. Whether the Act was limited to situations where LIBOR was available but no longer reliable was an issue noted by the Board when it published its proposed rule. After reviewing the comments it received and considering the issue further, the Board now believes that it has the authority under the Act to apply the transition mechanism of Regulation ZZ to all contracts that use LIBOR as the benchmark rate, which is a result that the lending industry will welcome. Note, however, the requirements of Regulation ZZ generally do not apply to LIBOR contracts with an effective fallback provision, such as those with a defined and practicable benchmark for LIBOR, or with a “determining person” who has the authority, right, or obligation to determine a benchmark replacement.
It also should be noted that Regulation ZZ implements the safe harbor provisions of the Act so that lenders following the provisions of Regulation ZZ will not be subject to any liability for transitioning from LIBOR to SOFR.
Finally, while the Board reiterated in the Supplemental Information to Regulation ZZ that it does not impose any notice requirements in connection with consumer loans, the Board noted that a lender should select SOFR prior to June 30 to accommodate rate reset contractual provisions that would occur after that date so that LIBOR could continue to be used until the first reset date after June 30. Most consumer lenders likely will send communications to their borrowers in the period before June 30, 2023, to explain the upcoming transition from LIBOR to SOFR and will include an explicit “selection” of SOFR in those communications to provide for a seamless transition between benchmark rates.
FinCEN Invites Comment on Final Beneficial Ownership Information Reporting Rule
By Rachael Aspery, McGlinchey Stafford, PLLC
On January 17, 2023, the Financial Crimes Enforcement Network (“FinCEN”) published a notice inviting comment on the Beneficial Ownership Information Reporting Requirements final rule (“Final BOI Reporting Rule”) that was published on September 30, 2022. Interested parties are invited and welcome to submit comments on or before March 20, 2023.
The Final BOI Reporting Rule requires reporting entities to file reports with FinCEN that identify the beneficial owners of the entity. Additionally, entities created or registered to do business on or after January 1, 2024, have additional reporting requirements, which include identifying the individual who created or registered the entity, and the individual who was primarily responsible for directing or controlling the creation or registration filing of the entity. Further, the regulations detail who must file a report, the information required in the report, and the report due dates. Entities must certify that the report is true, correct, and complete.
FinCEN provided estimates for reporting time, cost, and number of respondents, and concluded that the Final BOI Reporting Rule does not impose a significant burden on reporting entities. Further, FinCEN assumed that reporting entities already have the equipment and tools needed to comply with the regulatory requirements that are prescribed by the Final BOI Reporting Rule. Any greater burden would be impacted by the complexity of the entity’s beneficial ownership structure. Ultimately, the Final BOI Reporting Rule requirements are intended to minimize the burden on reporting entities all while being designed to help prevent and combat illicit financial activity and enhance the strength and transparency of the U.S. financial system.
Commercial Finance Law
Commercial Financing Disclosure and Broker Registration Bill Introduced in Missouri
By Susan Seaman, Husch Blackwell LLP
A bill has been introduced into the Missouri legislature that would require non-depository financial institutions to provide disclosures at or before consummation of certain commercial financing products. Missouri House Bill No. 584 also would require commercial financing brokers to register with the Missouri Division of Finance. If passed, the law would be known as the Commercial Financing Disclosure Law.
As written, the term “commercial financing product” includes any commercial loan, accounts receivable purchase transaction, and commercial open-end credit plan. Both credit products and non-credit funding products like merchant cash advances could be “commercial financing products” subject to the disclosure requirements. The bill defines the term “business” broadly to include sole proprietorships.
The bill would require a provider to disclose (i) the total amount of funds provided to a business, (ii) the total amount of funds disbursed to a business, (iii) the total amount to be repaid to a provider, and (iv) the total dollar cost of the commercial financing product. Certain repayment information also must be disclosed. The bill does not include annual percentage rate (APR) disclosure. The term “provider” means a person who consummates more than five commercial financing products to a business located in Missouri in a calendar year. The term “provider” also includes certain non-lenders that arrange for the extension of commercial financing products by a depository institution.
In addition to disclosures, the bill would require a person engaged in business as a commercial financing broker in Missouri to register prior to conducting business. The term “broker” has a specific meaning.
Notably, the disclosure and registration requirements do not apply to state- and federally chartered banks and credit unions. The bill contains other product exclusions, but the bill contains no exception for large-dollar business loans or lines of credit.
Consumer Finance Law
CFPB Mulling Changes to Disclosure Rules for International Money Transfer Fees
By Eric Mogilnicki & B. Graves Lee, Covington & Burling LLP
On January 16, 2023, reporting by the Wall Street Journal indicated that the Consumer Financial Protection Bureau (CFPB) is considering new restrictions on disclosures about fees that money transfer companies impose for overseas remittances. The Electronic Funds Transfer Act and its implementing Regulation E generally require remittance transfer providers to disclose to consumers the exchange rate and fees associated with a transaction. However, advocates for reform, including a group of Senate Democrats led by Senator Elizabeth Warren, have argued that the existing regulations permit transfer providers to “hid[e] costs in exchange rates unreasonably inflated beyond the mid-market rates or in bloated third-party fee estimates, all while advertising a zero-dollar transaction fee,” and that “[t]aken together, these practices misrepresent the true cost of remittances to the consumer . . . .”
CFPB Director Rohit Chopra likewise stated in a letter to Senator Warren that “[w]e continue to see a lack of transparency about fees, exchange rates, and taxes, which comprise the true cost to consumers of sending money abroad.” Chopra also asserted that “there is significant noncompliance” with the existing remittance rules by money transfer providers. According to the Wall Street Journal report, “A CFPB official said the bureau is looking into boosting exchange-rate transparency but didn’t say what the agency plans to propose or when.”
This potential change in policy comes amid the broader criticism of “junk fees” throughout the economy by the CFPB and the Federal Trade Commission (FTC). Among other things, the Bureau under Director Chopra has issued guidance curtailing certain overdraft fee and debt collection fee practices, promulgated an Advanced Notice of Proposed Rulemaking regarding credit card late payment fees, and published research on fees charged on student banking products. Similarly, the FTC last year took aim at “junk fees” through an Advanced Notice of Proposed Rulemaking of its own.
CFPB Issues Circular on “Negative Option” Subscription Services
By Eric Mogilnicki & B. Graves Lee, Covington & Burling LLP
On January 19, 2023, the CFPB announced a new Consumer Financial Protection Circular dealing with “negative option” subscription marketing practices. The Bureau describes negative option practices to include “subscription services that automatically renew unless the consumer affirmatively cancels, and trial marketing programs that charge a reduced fee for an initial period and then automatically begin charging a higher fee.”
In the Circular, the Bureau observes that “[n]egative option programs can cause serious harm to consumers who do not wish to receive the products or services for which they are charged,” especially “when sellers mislead consumers about terms and conditions, fail to obtain consumers’ informed consent, or make it difficult for consumers to cancel.” The Bureau casts this Circular as another step in the recent initiative by the CFPB and the FTC to “take action to combat the rise of digital dark patterns, which are design features used to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent.”
CFPB Publishes Updated Mortgage Servicing Examination Procedures
By Eric Mogilnicki & B. Graves Lee, Covington & Burling LLP
On January 18, 2023, the CFPB released an updated version of its Mortgage Servicing Examination Procedures. The revised Procedures, which represent the first such update since June 2016, provide guidance to CFPB examiners in evaluating mortgage servicers’ policies and procedures, assessing whether servicers are complying with the law, and identifying consumer protection risks arising from mortgage servicing. The updates incorporate COVID-19 pandemic relief, such as forbearances and streamlined loss mitigation options. The updated Procedures also integrate topics from relevant Bureau Supervisory Highlights dealing with questions surrounding the fees charged to borrowers, and misrepresentations regarding foreclosures.
CFPB Proposes Rule to Establish Public Registry of Terms and Conditions in Form Contracts That Claim to Waive or Limit Consumer Rights and Protections
By Eric L. Johnson, Hudson Cook, LLP
On January 11, 2023, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule to establish a public registry of supervised nonbanks’ terms and conditions in “take it or leave it” form contracts that claim to waive or limit consumer rights and protections, like bankruptcy rights, liability amounts, or complaint rights. Under the proposed rule, nonbanks subject to the CFPB’s supervisory jurisdiction would need to submit information on terms and conditions in form contracts they use that seek to waive or limit individuals’ rights and other legal protections. That information would be posted in a registry that will be open to the public, in addition to state regulators, attorneys general, and plaintiff’s attorneys.
Some examples of terms and conditions that would be included in the registry are those that:
- Waive servicemembers’ legal protections: The Military Lending Act and the Servicemembers Civil Relief Act set limits on the cost of loans for military families and include numerous other important consumer protections.
- Undermine credit reporting rights: In contracts for credit monitoring products, some consumer reporting companies may use terms and conditions that seek to block the ability of consumers to pursue legal action, including through class action lawsuits, to remedy alleged violations of the Fair Credit Reporting Act.
- Limit lender liability for bank fees caused by a lender’s repeated debit attempts: Some companies may seek to waive liability for bank fees that borrowers incur when the lender engages in repeated attempts to debit payments from an account that lacks sufficient funds to cover the debit.
- Mislead consumers by using unenforceable waivers in mortgage contracts: The CFPB claims that its examiners have regularly identified deceptive acts and practices committed through mortgage lenders’ use of waivers and limitations that are inconsistent with TILA restrictions on the use of waivers and limitations in such transactions.
The public comment period to the proposed rule will remain open for sixty days following publication of the proposed rule on the CFPB’s website or thirty days following publication of the proposed rule in the Federal Register (estimated to be March 13, 2023), whichever period is longer. The CFPB proposes that, once issued, the final rule for the proposal would be effective thirty days after it is published in the Federal Register. However, registration would be required by an annual registration date that comes at a later time, after the nonbank registration system implementation date, which is likely to be no earlier than January 2024. The CFPB also is seeking comment on the proposed effective date, including whether it should be at a different time, and if so, when and why.
CFSA Opposes Supreme Court Review of Fifth Circuit CFPB Appropriations Clause Case
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On January 13, 2023, the Community Financial Services Association filed its brief in opposition to the CFPB’s recent certiorari petition. The petition asks the Supreme Court to review and reverse the recent Fifth Circuit opinion striking down the payday lending rule on the grounds that the agency’s funding structure violates the Constitution’s Appropriations Clause. In opposing the petition, the CFSA argues that the Fifth Circuit opinion appropriately struck the rule down on Appropriations Clause grounds, and that the case does not warrant review because there are independent grounds that would justify vacating the rule. The CFSA also argues that, at a minimum, the case should be heard during the Supreme Court’s next term rather than on the expedited timeline proposed by the Bureau.
CFPB Releases Fall 2022 Regulatory Agenda, Including New Rulemakings for 2023
By Eric Mogilnicki & Rye Salerno, Covington & Burling LLP
On January 4, 2023, the CFPB released its Fall 2022 regulatory agenda, which revealed several new rulemakings the Bureau may initiate in 2023:
- The Bureau is considering whether to amend the rules under Regulation Z for determining whether fees associated with overdraft services are considered finance charges, which determines whether Regulation Z applies to those fees.
- The Bureau also is considering new rules targeting the imposition of “non-sufficient fund” fees when a consumer attempts to engage in a transaction that would overdraft their deposit account.
- The Bureau also is considering whether to amend Regulation V, which implements the Fair Credit Reporting Act, and the obligations it imposes on credit reporting agencies and entities that collect, use, or furnish consumer data.
- Finally, the Bureau has been developing proposed rules that would require supervised nonbank entities to register with the CFPB and provide information about the terms and conditions they use in standard-form contracts—in particular, “contracts that are not subject to negotiating or that are not prominently advertised in marketing.”
The regulatory agenda also describes the Bureau’s plans to follow up on a number of initiatives:
- The Bureau plans to release in January a proposed rule amending the portions of Regulation Z that implement the Credit Card Accounting Responsibility and Disclosure Act, following the advance notice of proposed rulemaking issued in June 2022.
- The Bureau also is making progress towards rules governing personal financial data rights and portability, as required by the Dodd-Frank Act. The Bureau anticipates releasing a report in February, in conjunction with the Office of Management and Budget (“OMB”) and the Chief Counsel for Advocacy of the Small Business Administration (“SBA”), on the efforts made so far, which have included an advance noticed of proposed rulemaking in November 2020, and convening with the OMB and SBA in October 2022.