Maryland Legal Alert for Financial Services

In This Issue:

A SURVEY OF CFPB UDAAP ACTIONS

NEW SURVEY OF CREDIT LAWS BOOK

COURTS CONTINUE TO CHIP AWAY AT "NO SURCHARGE" lAWS

CFPB ATTACKS FINTECH PROVIDER USING TRIBAL LENDING MODEL

BE PREPARED FOR MARIJUANA-RELATED BUSINESS

LAWS IMPLICATED BY VIRTUAL CURRENCIES, ICOS, AND BLOCKCHAIN

PAY ATTENTION TO FINANCING STATEMENT DETAILS

A Survey of CFPB UDAAP Actions

On January 7, 2018, Christopher Rahl (together with his co-author Adam Maarec of Davis Wright Tremaine LLP) published an article for the American Bar Association, Business Law Section, Consumer Financial Services Committee, A Survey of Activities Identified as Unfair, Deceptive, or Abusive by the CFPB. The article provides a detailed summary of enforcement actions brought by the Consumer Financial Protection Bureau (CFPB) concerning unfair, deceptive and abusive acts or practices (UDAAPs) in the second half of 2017.

A review of the specific acts or practices identified by the CFPB as being problematic and resulting in UDAAP violations is instructive for industry participants in conducting their own internal compliance reviews to ensure they do not engage in similar practices. If you have questions about this topic or for assistance with any compliance review, please contact Christopher Rahl.

Contact Christopher Rahl

New Survey of Credit Laws Book

We have updated our publication, A Survey of Maryland Laws Relating to Extending Credit and Consumer Financial Services. The publication is useful in deciphering the Maryland laws that apply to those who make loans to Maryland residents and to those who provide other financial services. For questions concerning the application of Maryland law to your business, please contact Christopher Rahl.

Contact Christopher Rahl

Courts Continue to Chip Away at "No Surcharge" Laws

In our April 2017 Maryland Legal Alert, we reported on a case decided by the U.S. Supreme Court that involved a First Amendment challenge to a New York law that prohibits merchants from charging a surcharge when a customer pays with a credit card rather than cash.

In that case, the Supreme Court found that the New York surcharge law regulated commercial speech, and the Court remanded the case for the Second Circuit to determine if the law impermissibly regulated commercial speech.

On January 3, 2017, the Ninth Circuit Court of Appeals held that a similar California “no surcharge” law impermissibly regulated commercial speech. The decision involved a challenge to a California law that prohibits merchants from charging a surcharge when a customer pays with a credit card rather than cash.

The Ninth Circuit relied on the Supreme Court’s recent New York “no surcharge” decision and held that the California law did not regulate how much merchants could charge customers, but rather regulated how merchants communicated pricing to customers. The Ninth Circuit held that the California law regulated commercial speech and, because the commercial speech it regulated was not misleading or connected to any illegal activity and was not narrowly tailored to achieve a legitimate California interest in protecting California consumers (e.g., from deceptive pricing), it found the California law unconstitutional. Including California, 10 states currently have "no surcharge" laws: Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas. Please contact Christopher Rahl with questions about credit card surcharges, credit card association rules or similar issues.

Contact Christopher Rahl

CFPB Attacks FinTech Provider Using Tribal Lending Model

In late 2017, the Consumer Financial Protection Bureau (CFPB) filed a complaint against Texas-based FinTech company that provided servicing for three entities with tribal ownership that claimed to make loans under tribal, not state, law (the respective tribes are located in Louisiana, Montana and Oklahoma).

The company provided marketing, origination and loan servicing (including payment processing) to facilitate internet-based high cost, small dollar loans by the tribal lenders. The CFPB alleged that, because the company effectively controlled the tribal lenders and took most of the lending risk under the arrangement, the loans were not subject to tribal law and therefore violated state licensing and usury laws.

The CFPB’s complaint faults the company for its role in allegedly deceiving consumers into repaying loans that were not legally owed under applicable state law. The CFPB’s complaint argues that the company’s actions constituted unfair, deceptive and abusive practices under the Consumer Financial Protection Act of 2010. The complaint seeks relief for harmed consumers, monetary penalties and an injunction prohibiting the company from collecting further loan payments. For questions concerning this case and its impact on bank partnership models, please contact Christopher Rahl.

Contact Christopher Rahl

Be Prepared for Marijuana-Related Business

As the business of medical cannabis in Maryland expands, depository institutions and non-depository lenders must grapple with whether and how to bank marijuana-related businesses (MRB). Margie Corwin presented an interactive seminar on this subject for the Maryland Bankers Association on January 23, 2018.

Attached is a checklist of issues every depository institution located in Maryland should think about. At the top is to have a board-level policy about whether the institution will affirmatively do business with MRBs, individuals affiliated with MRBs and service providers who do business with MRBs. Procedures will differ depending upon policy but, in all events, must be carefully considered and address the wide range of activities (for example, deposit taking, commercial lending, insurance coverage, third-party vendor arrangements, customer oversight, etc.) impacted by the medical cannabis industry. There is very little definitive regulatory guidance.

However, a glimpse of recent guidance is found in a February 2, 2018, letter from the Federal Reserve Bank of Kansas City (FRBKC) to the Fourth Corner Credit Union (Credit Union). The Credit Union has been fighting – for access to the FRBKC payment system and for share deposit insurance from the National Credit Union Administration (NCUA) – since 2015 in order to open for business and service the marijuana industry in Colorado.

The letter revealed that the Credit Union’s case against the FRBKC settled and the FRBKC has agreed to grant the Credit Union a master account subject to certain pre-conditions. One significant condition is that the Credit Union will not serve or service MRBs unless and until it becomes lawful under federal law to provide banking or financial services to MRBs. The Credit Union’s counsel is quoted as saying that under this limitation, MRBs are those businesses that are licensed to sell marijuana, which includes “plant-touching” businesses. Credit Union counsel explained that the limitation does not prohibit the Credit Union from providing services to “pot-adjacent” businesses, such as landlords and other service providers, that directly support the industry. The limitation also should not prohibit the Credit Union from banking employees of businesses involved in the industry. 

The Credit Union dismissed its lawsuit against the FRBKC on February 5, 2018. The Credit Union’s lawsuit against the NCUA was not dismissed as a result of the agreement between the Credit Union and the FRBKC.

Please contact Christopher Rahl with any questions.

Contact Christopher Rahl

Laws Implicated by Virtual Currencies, ICOs and Blockchain

Operating in the virtual currency space, undertaking an initial coin offering (ICO) or developing a blockchain application can implicate a web of legal obligations. For example, as we discussed in our October 2017 Maryland Legal Alert and November 2017 Maryland Legal Alert, companies raising money through ICOs can run afoul of federal and state securities laws for failing to register with the Securities and Exchange Commission or qualify for an exemption to registration under the Securities Act of 1933.

As we discussed in our December 2017 Maryland Legal Alert, the Commodities Future Trading Commission views virtual currencies as commodities and has recently begun regulating the trading of bitcoin derivatives contracts.

The following is a list of additional laws and regulations that should be considered if you are operating in the virtual currency space, undertaking an ICO or developing a blockchain application:

• Securities Exchange Act of 1934 and related state laws (registration as a “broker-dealer” is required for persons effecting virtual currency transactions);
• Investment Advisors Act of 1940 and related state laws (there are registration and reporting requirements for persons providing advice about ICOs and other virtual currency offerings);
• Investment Company Act of 1940 (there are registration and record keeping requirements for entities that hold a significant percentage of their total investment assets in virtual currencies);
• Bank Secrecy Act and related state money services laws (there are registration, licensing, “anti-money laundering,” and “know your customer” compliance obligations for money transmission businesses such as virtual currency exchanges);
• Department of the Treasury's Office of Foreign Assets Controls (OFAC) (ICO offerors and others transacting in virtual currencies are prohibited from dealing with persons sanctioned by OFAC);
• Internal Revenue Code and related state tax laws (trading one virtual currency for another is a taxable event, and virtual currencies are treated as property, subject to capital gains and related tax treatment);
• Federal Trade Commission and related state consumer protection laws (ICOs that fail to issue tokens in accordance with their white paper or other offering documents can be subject to federal, state and consumer causes of action for unfair and deceptive trade practices);
• Consumer Financial Protection Act of 2010 (CFPB) (the CFPB may investigate ICOs, virtual currencies and exchanges, and blockchain developers in connection with consumer complaints of unfair treatment; and
• Export Administration Regulations of the Department of Commerce, Bureau of Industry and Security (developers of encryption software underlying blockchain-based virtual currencies may require licenses through the Export Administration Regulations before transferring the software outside of the United States).

For more information concerning virtual currencies, ICOs, the blockchain and how these issues can impact your business, please contact Ned T. Himmelrich or Michele Walsh.

Contact Ned T. Himmelrich

Contact Michele Walsh

Pay Attention to Financing Statement Details

A recent Bankruptcy Court decision from the Southern District of Georgia demonstrates how small errors in financing statements can result in dire consequences for lenders.

This case arises out of a lender’s $18,000 loan to an individual debtor to finance the purchase of a fertilizer spreader for his farm. The parties executed a security agreement granting the lender a lien on the equipment and thereafter the lender filed a financing statement in the appropriate state office. After the debtor filed a voluntary Chapter 12 bankruptcy petition, the lender timely filed a proof of claim asserting a secured claim against the debtor. The debtor filed an objection to the lender’s claim, contending that the lender failed to correctly identify the debtor on the financing statement and, thus, the lender’s claim was unperfected and wholly unsecured.

Under Section 3-503 of the UCC, as adopted in Georgia, if an individual has a State-issued unexpired driver’s license, a financing statement against an individual debtor sufficiently provides the debtor’s name “only if the financing statement provides the name of the individual which is indicated on the driver’s license.” The debtor argued that because the lender failed to list his middle name on the financing statement, the financing statement failed to sufficiently identify his name. The lender argued that the financing statement was proper, because the debtor’s name without his middle name was also signed on the debtor’s driver’s license and, thus, the financing statement matched one of the debtor’s names on the driver’s license.

The court rejected this argument, finding that a printed name trumps a signed name on a driver’s license.

Maryland has adopted UCC Section 3-503. This decision should remind lenders of the need to take special care when preparing financing statements. For individual debtors, lenders should insist on reviewing the debtor’s driver’s license or other state-issued identification. Please contact Bryan Mull with any questions concerning this topic.

Contact Bryan Mull