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Business Law Today

January 2023

January 2023 in Brief: Business Regulation & Regulated Industries

Lynette I Hotchkiss

January 2023 in Brief: Business Regulation & Regulated Industries

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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.”

Banking Law

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.

CFPB Releases Annual Report on Nationwide Consumer Reporting Agencies, Foreshadows New Rulemaking

By Eric Mogilnicki & Rye Salerno, Covington & Burling LLP

On January 3, 2023, the CFPB released its annual report, as required by the Fair Credit Reporting Act, on the nationwide consumer reporting agencies and their responses to consumer complaints transmitted by the Bureau. The report finds that each of the agencies has significantly improved how they respond to complaints and the rate at which they are able to provide relief to consumers who submit complaints. In particular, the Bureau found that most complaints now receive substantive responses, and more than 50% of complaints were closed with explanation or relief receiving tailored responses. The Bureau also found that the agencies provided relief in response to the majority of complaints, compared to just 2% of complaints in 2021—a statistic that the Bureau highlighted and criticized in last year’s report.

Despite the improvements in how the agencies handle consumer complaints, the Bureau signaled dissatisfaction with the volume of complaints received, which totaled more than 480,000 from October 2021 to September 2022. The report outlines the CFPB’s view that “complaints are one indicator as to whether markets are serving consumers. Complaints about credit reporting suggest that the system increasingly is not.” In the press release accompanying the report, CFPB Director Rohit Chopra reiterated this thinking, and foreshadowed the possibility of new CFPB rulemaking to regulate the nationwide consumer reporting agencies: “We will be exploring new rules to ensure that they are following the law, rather than cutting corners to fuel their profit model.”

Department of Education Proposes Rule to Amend Student Loan Repayment Plans

By Jane Michetti, JD Candidate 2023, Widener Commonwealth Law School

On January 10, 2023, the U.S. Department of Education (Department) announced a proposed rulemaking aimed at reducing the cost of federal student loan payments, particularly for low- and middle-income borrowers. This proposal is a follow-up on Biden’s commitment announced in August 2022 to provide student debt relief. The main goals are to simplify the program, create the most affordable income-driven repayment plan to date, and eliminate pitfalls that delay students’ progress toward forgiveness.

The Department’s proposal includes the following changes: expanding the benefit of the Revised Pay As You Earn (RPAYE) plan by increasing the amount of income protected from the calculation of the borrower’s payments and decreasing the share of unprotected income used in the same calculations, resulting in more affordable monthly payments; preventing the charge of remaining accrued interest after the payment is applied each month; and allowing a credit towards forgiveness for certain periods of deferment or forbearance.

The Department is projecting to finalize the rules later this year and may start implementing some provisions later this year unless changes are to be made based on the received public comments. The last date to comment is February 10, 2023.

The Department also stated in its press release that it is working on implementing another promise made by President Biden in his August announcement: publication of a list of programs at colleges and universities with the least financial value to students. To speed up this process, the Department will be publishing a request for information to gain public feedback on how to best identify such programs with least financial value to students.

Second Circuit Holds a Legal Inaccuracy Does Not Give Rise to a Cause of Action Under the Fair Credit Reporting Act

By Jim Sandy & Stefanie Deka, McGlinchey Stafford, PLLC

On January 4, the Second Circuit held in Mader v. Experian Information Solutions, Inc. that an alleged inaccuracy in a consumer’s credit report that turns on an unsettled legal question is not the type of actionable inaccuracy under the Fair Credit Reporting Act (“FCRA”).

This appeal involved a challenge over a furnisher’s credit reporting regarding a student loan debt allegedly discharged in bankruptcy. Mader obtained a private educational loan in 2008. Subsequently he filed for Chapter 7 bankruptcy and included his loan on his petition, and he ultimately received a bankruptcy discharge. The bankruptcy court did not specify if the loan was discharged but noted, “most, but not all, types of debts are discharged,” but that “debts for most student loans” are not discharged. Post-discharge, Navient sought to collect the amount due and worked out a modification with Mader, which was reported to Experian.

Despite this, Mader sued Experian under section 1681(e)(b) of the FCRA for allegedly not following reasonable procedures to ensure the accuracy of the reported information regarding his educational loan. The district court ultimately granted Experian summary judgment, finding that the education loan was non-dischargeable under bankruptcy law.

On appeal, the Second Circuit focused on the claim’s viability under the FCRA, not on whether the loan was dischargeable under the bankruptcy code. The court first focused on the plain meaning of the FCRA provisions at issue, and defined “accuracy” per its plain meaning as “freedom from mistake or error” or “conformity to truth or to some standard or model.” Notably, the Second Circuit concluded Experian’s reporting of the loan was not inaccurate. Instead, whether the reporting concerning the education loan was inaccurate turned on “unsettled” legal issues and disputes, and the Second Circuit concluded that “inaccuracies that turn on legal disputes are not cognizable under the FCRA.”

FCRA Class Action Settlement Approved by Court

By Jaline Fenwick, Quintairos, Prieto, Wood & Boyer, P.A.

Class settlement approval in TransUnion LLC v. Ramirez, a case that reached the Supreme Court in 2021 to resolve questions of Article III standing, was granted to the parties on December 15, 2022. Class members’ claims that TransUnion improperly reported them as “potential matches” to names on the Office of Foreign Asset Control’s Specially Designated Nationals and Blocked Persons List were resolved as part of a Fair Credit Reporting Act settlement.

Initially, the district court certified a class of more than 8,000 individuals, and the jury ultimately awarded them $60 million. However, the Supreme Court reversed the verdict, ruling that more than 75% of the class members lacked Article III standing because they failed to show that they suffered a concrete injury by showing that TransUnion disseminated their consumer reports with the Office of Foreign Assets Control alerts to a third party. After mediation, the parties agreed to pay damages to all class members whose certification had been upheld by the Supreme Court and any other class members who could prove through a claims process that their report had been published to a third party. There is a total of $9 million up for grabs in the settlement, and depending on the number of valid claims, each class member will receive a percentage of that amount. Final approval was requested on the class counsel’s estimate that each class member would receive more than $2,000. Additionally, the district court approved the class counsel’s attorneys’ fees request of $4.2 million. Furthermore, the named plaintiff will receive a service award of $75,000 as part of the settlement.

New York Revises Benchmark for Subprime Calculation

By Thomas P. Quinn, Jr., Hudson Cook, LLP

New York Banking Law § 6-m, the state’s subprime home loan statute, determines whether a “home loan” is a “subprime home loan” by comparing the greater of the home loan’s initial or fully indexed rate to a statutory benchmark rate to determine if it exceeds the benchmark by certain thresholds. The benchmark rate varies based on whether the home loan is a fixed rate transaction (and its term) or an adjustable or variable rate transaction (and its initial fixed rate term). The threshold amounts by which the home loan must exceed the benchmark rate depend on whether the home loan is a first-lien home loan, a subordinate-lien home loan, or a home loan insured by the Federal Housing Administration (subject to certain conditions and exclusions).

The statutory benchmark for comparison is to the average commitment rate for loans with a “comparable duration” to the home loan published by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) in its Primary Mortgage Market Survey (“PMMS”). The subprime statute authorizes the Department of Financial Services (“DFS”) to revise the “comparable duration” standard as necessary. A need to do so recently arose on November 17, 2022, when Freddie Mac replaced its traditional survey method for publication of the PMMS with loan information submitted to Loan Product Advisor (Freddie Mac’s automated underwriting system). These process changes also resulted in Freddie Mac’s discontinuing publication of interest rate, margin, and discount points and fees for the hybrid 5/1 adjustable rate mortgage (ARM), which was the applicable benchmark to determine whether an adjustable or variable rate home loan with an initial fixed rate of at least three years was a “subprime home loan.” To address this, the DFS issued an Industry Letter on December 16, 2022 (Updated December 20, 2022) designating the Average Prime Offer Rate (APOR) for 5/1 ARMs as published by the Federal Financial Institutions Examination Council as the replacement benchmark for determining if an adjustable or variable rate home loan with an initial fixed rate of at least three years is a “subprime home loan.” The guidance issued in this recent Industry Letter is retroactive to November 17, 2022.

Ohio Regulatory Sandbox Law Signed into Law

By Susan Seaman, Husch Blackwell LLP

Ohio Governor Mike DeWine has signed Ohio Regulatory Sandbox Law (Ohio S.B. 249) into law; the law becomes effective on March 14, 2023. The Regulatory Sandbox Law creates a regulatory sandbox to test novel financial products or services on a temporary basis without a license or authorization.

Products or services that may be tested in the regulatory sandbox must fit the definition of a “novel financial product or service” and must trigger a license or authorization requirement under certain Ohio laws related to money transmitters, nonbank loans, residential mortgage lending credit unions, credit services organizations, pawnbrokers, or precious metal dealers. Both consumer-purpose and business-purpose financial products or services may be tested in the sandbox.

When testing in the sandbox, a person will not be subject to Ohio laws that require a license or authorization to offer the novel financial product or service. In addition to licensing relief, a person may request exemptions from any Ohio law(s), other than the Regulatory Sandbox Law and the Consumer Sales Practices Act, when participating in the sandbox. On the other hand, the Ohio Superintendent of Financial Institutions may require a sandbox participant to follow certain Ohio regulatory laws while testing a product or service.

A person must apply to the Superintendent to participate in the regulatory sandbox. Upon approval, a sandbox participant must enter into an agreement with the Superintendent that lays out conditions to product testing. A person may participate in the sandbox for up to twenty-four months after the date of approval unless an extension is granted. Testing in the sandbox involves some oversight by the Superintendent. While records regarding sandbox participation generally will be confidential, the name of the sandbox participant and an overview of the participant’s novel financial product or service are public record and may be disclosed.

Texas Prepares to Tweak Home Equity Law Again

By Paul Kellogg & Louis Rossitto, McGlinchey Stafford, PLLC

Under current Texas law, a home equity loan must be “closed only at the office of the lender, an attorney at law, or a title company.” This has proved to be a considerable obstacle for borrowers who are “homebound” or in quarantine, out of state, working overseas, or deployed in the armed forces.

A pair of bills has been filed with the Texas Legislature that would amend the Texas Constitution (which is where the home equity lending statute is located) to allow such borrowers to close a home equity loan at a remote location using online notarization. The closing also could be conducted through an agent acting under a power of attorney (POA) that expressly gives the agent that power. To become effective, the proposed amendment must be approved by a supermajority of the Legislature and a majority of voters next Fall.

The amendment is a good start, but there’s a catch. The Texas Supreme Court has held that a POA for a home equity loan also must be executed “at the office of the lender, an attorney at law, or a title company.” The Constitutional amendment and implementing statute would allow an attorney-in-fact to close a home equity loan regardless of where the borrower signed the POA, but very few existing POAs expressly give the agent the power to close a home equity loan. Also, although existing POAs may have been executed at one of the authorized locations, many don’t expressly state that, and the lender will likely require confirmation of the location before allowing the POA to be used.

Finally, consider the many borrowers who are seniors. A borrower who granted a POA several years ago may no longer be physically or mentally capable of executing a new POA that is compliant with existing Texas law, much less the proposed requirements.

The bottom line is that an existing POA must be carefully reviewed to make sure it meets legal requirements (and made compliant if possible). Going forward, all POAs should contain the language that is required to make them valid.

Labor and Employment Law

FTC Proposes Rule Prohibiting Employer Non-Compete Agreements

By Andrew M. Albritton & Chase Stoecker, McGlinchey Stafford, PLLC

On January 5, 2023, the Federal Trade Commission (FTC) followed up on President Biden’s July 9, 2021, Executive Order requesting a broad ban on employer non-compete agreements. The FTC has proposed a new rule, based on the proposition that such agreements violate the Federal Trade Commission Act as an unfair competition method, that would constitute a total ban on nearly all non-compete agreements.

As written, the rule defines non-compete broadly as a contractual provision preventing an employee from “seeking or accepting employment with a person, or operating a business,” after the employment relationship ends. It also includes a functional test to determine whether a clause that is not explicitly a non-compete may be a de facto non-compete.

In addition to prohibiting employers from entering into non-competes with their employees, the rule also would invalidate existing non-competes, including a rescission provision requiring employers to provide notice to both current and former employees that their non-competes are no longer in force.

According to a 2019 study by the Economic Policy Institute, non-compete agreements are estimated to be used by roughly half of private-sector businesses, and anywhere between 36 and 60 million Americans are affected. The White House’s estimates are similar: that non-compete agreements are used by roughly half of private-sector businesses for at least some of their employees. The FTC estimates that the competition promoted by this new rule could increase wages “by nearly $300 billion per year” nationwide.

The rule is subject to a sixty-day public comment period, during which citizens may weigh in on whether the rule should be published in the Federal Register and become an official regulation. If it does go into effect, employers will have to comply within 180 days.

White Collar Crime

FTX Crash with Criminal Charges for Fraud, Money Laundering, and Campaign Finance against Founder Samuel Bankman-Fried

By Joseph Mayo, LL.M. Candidate at New York University School of Law

On December 23, 2022, Samuel Bankman-Fried, founder of FTX and the Alameda Research hedge fund, was indicted by a federal grand jury in Manhattan with eight counts of conspiracy to commit wire fraud and wire fraud on customers, conspiracy to commit wire fraud and wire fraud on lenders, conspiracy to commit commodities and securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate campaign finance laws.

Bankman-Fried, also known by the name SBF, was the chief executive officer of FTX, a cryptocurrency exchange that, according to some sources, had at one point $16 billion in customer assets.

According to the indictment, Bankman-Fried misappropriated FTX customers’ money fraudulently to cover Alameda’s expenses and debts and to make other investments. He also is charged for allegedly providing false and misleading information to Alameda’s lenders regarding the company’s financial condition.

By misappropriating investors’ money to cover Alameda’s expenses and make other investments, Bankman-Fried allegedly tainted the money as proceeds of unlawful activity. He is now facing money laundering charges, which claim his actions were designed to disguise the nature, source, and ownership of the proceeds of his unlawful activity, among other things.

Bankman-Fried also is facing charges of committing securities fraud due to allegedly manipulating and deceiving FTX investors by providing false and misleading information regarding FTX’s financial conditions.

Lastly, Bankman-Fried is charged with violating campaign finance laws. While not detailed in the indictment, according to the Department of Justice press release, in the 2022 elections, Bankman-Fried used Alameda to contribute millions to federal candidates and committees while using the names of others to avoid limitations and reporting requirements mandated by law for such contributions.

Besides criminal charges, Bankman-Fried also is facing forfeiture procedures, with the DOJ declaring it will pursue all property in kind that is, or derived from, proceeds of criminal activity in this case. If such property is not found, or if its value is decreased for any reason, the DOJ will go after any other Bankman-Fried personal property, even if such property is not related to the alleged criminal activity, up to the value of the forfeitable property.

While Alameda was in deep financial trouble, and Bankman-Fried claimed that everything was done “by the book,” concerns by the financial sector of spotty record keeping, “complete lack” of risk management, and other corporate governance issues give some color to the allegations brought in the indictment. In November 2022, FTX and 101 affiliated debtors filed for bankruptcy protection in Delaware, owing customers billions of dollars.