Maryland Legal Alert for Financial Services

In This Issue:

DEPARTMENT OF DEFENSE RELEASES NEW MILITARY LENDING ACT GUIDANCE

SECURED LENDERS MUST PAY ATTENTION TO GARNISHMENT PROCEEDINGS

ARCHITECTURE DIFFERENCES IN VIRTUAL CURRENCIES

MANDATED INTEREST RATES INCREASE FOR ESCROW/SPECIAL PURPOSE ACCOUNTS

BANKRUPTCY RULE CHANGES

COURT ALLOWS CFPB TO REVIVE ABUSIVE PRACTICE CLAIMS AGAINST ATTORNEY

Department of Defense Releases New Military Lending Act Guidance

The U.S. Department of Defense (DOD) released updated guidance under the Military Lending Act (MLA). 

The MLA imposes restrictions on the terms of credit extended to certain “covered borrowers.” In August 2016, the DOD released “Q&A” guidance to clarify certain aspects of the MLA.

In the recent updated guidance, the DOD supplemented three of the answers for previous questions and added one more question and answer. The three prior questions and answers that are addressed are:

1. Q: whether a purchase-money loan is exempt from MLA coverage where an additional amount is advanced above the property’s purchase price (A: possibly, if the additional funds are to finance costs directly related to the property purchased -- like leather seats, or negative equity for a trade-in -- but not for costs less “directly related” such as the purchase of GAP);
2. Q: whether the MLA’s limitation on using a covered borrower’s check or other deposit account access prohibits a covered borrower from granting a security interest in a checking/savings account (A: no); and
3. Q: whether the MLA’s limitation on using a covered borrower’s check or other deposit account access prohibits a creditor from exercising rights under a statutory lien or from exercising rights under a security interest granted by a covered borrower (A: no). 

The updated guidance adds a new question and answer that involves the timing for making the safe harbor “covered borrower” determination and whether an individual’s status can be based on a determination made simultaneously with a credit application, or one made up to 30 days prior to an application. The answer notes that the determination can be made at the time of application (or during processing of the application) or can be based on a determination made within the previous 30-day window. For questions concerning the Military Lending Act, please contact Christopher Rahl.

Contact Christopher Rahl

Secured Lenders Must Pay Attention to Garnishment Proceedings

A recent Bankruptcy Court decision from the District of Nevada held that a lender with a lien in a borrower’s rents (and in a blocked account into which the rents were deposited) lost its right to the funds after a judgment creditor of the borrower successfully garnished the account and received the funds.

The court based its decision on Uniform Commercial Code (UCC) Sec. 9-332, which states that a transferee of funds from a deposit account takes the funds free of a security interest in the account.

Maryland adopted this UCC section.

What the decision demonstrates is that a lender with a lien on a bank account must intervene in any garnishment proceeding before the funds are released in order to protect its interest in the funds. In order to intervene, the lender will necessarily have to know about the garnishment. In that regard, it is important that the lender’s control agreement require the depository bank to give the lienholder notice of any garnishment proceedings.

For any questions, please contact Christopher Rahl.

Contact Christopher Rahl

Architecture Differences in Virtual Currencies

Bitcoin continues to receive the majority of attention in the virtual currency space.

Originally designed as a means of payment, many view bitcoin as a place to store value and the virtual currency experienced price increases of over 1,400% in 2017.

The trusted nature of bitcoin is based on the fact that each bitcoin transaction is immutably recorded on bitcoin’s public blockchain, validated by a network participant, and this validation is proven to every participant in the network by a mathematically verifiable “proof-of-work.”

Other virtual currencies have not tied their design to a permissionless blockchain architecture like bitcoin and have realized competitive advantages over bitcoin for certain functions.

For example, Ripple maintains a network that enables transactions in Ripple’s virtual currency, XRP. Transactions in XRP do not require validation to be proven to every other node in Ripple’s network.

Rather, each participating node in the Ripple network is free to select the other participants it has decided to trust, and such trusted participants are granted permission to validate transactions. A transaction is validated when a super majority of trusted participants relevant to the transaction have voted to accept the transaction. Validated transactions are then added to Ripple’s record of transactions (distributed ledger), which is stored on each node in the Ripple network.

Eliminating the need to demonstrate “proof-of-work” to every other network participant significantly increases the speed of transaction confirmation. Currently, Ripple’s distributed ledger confirms a transaction in approximately 5-10 seconds, whereas bitcoin confirmations are averaging 44 minutes and have taken more than 48 hours in the last few days.

In addition to speed, permissioned architectures, such as Ripple’s, have proven more suitable to certain real world contexts. For example, Ripple is increasingly seeing adoption among financial institutions where participants have significant legal obligations to know the identity of their counterparties for the purposes of detecting fraud and money laundering.

Real world functionality has also been a major driver in the value of virtual currencies. Indeed, for as much as bitcoin’s price increase was celebrated last year, it was Ripple’s XRP that had the most successful growth in 2017, with a net price increase of 3,800%. For more information concerning virtual currencies and how they can impact your business, please contact Ned T. Himmelrich.

Contact Ned T. Himmelrich

Mandated Interest Rates Increase for Escrow/Special Purpose Accounts

Maryland law requires depository institutions doing business in Maryland that make first lien residential real property loans and maintain escrow accounts for those loans to pay a minimum rate of interest on the escrow accounts.

Maryland law also requires Maryland-chartered banks that offer certain short-term "special purpose" deposit accounts (for example, Christmas Club Accounts) to pay a minimum rate of interest on those deposit accounts.

The minimum rate of interest on these accounts is based on the weekly average yield of U.S. Treasury Securities, adjusted to a constant maturity of one year as of the first business day of the calendar year.

The minimum rate of interest to be paid on these accounts for 2018 is 1.83% (i.e., the statutory prescribed rate as of January 2, 2018, the first business day of 2018). This is up from 0.89%, which was the minimum rate to be paid in 2017.

For any questions, please contact Christopher Rahl.

Contact Christopher Rahl

Bankruptcy Rule Changes

Several significant amendments to the Federal Rules of Bankruptcy Procedure became effective on December 1, 2017.

Most notable are the amendments to Bankruptcy Rule 3002, which governs the filing of proofs of claim.

Rule 3002(a) now provides that a secured creditor must file a proof of claim for the claim to be allowed. However, the failure to file a proof of claim on its own will not cause the lien securing the claim to be deemed void.

As amended, under Rule 3002(c), the deadline for filing proofs of claim in Chapter 7, 12 and 13 cases has been shortened, and the deadline is no longer measured with reference to the date of the first meeting of creditors.

Now, in a voluntary Chapter 7 case, or in Chapter 12 or 13 cases, a proof of claim must be filed within 70 days after the petition date, or the date of conversion to a case under Chapter 12 or 13. 

In an involuntary Chapter 7 case, the proof of claim must be filed within 90 days after the order for relief. 

Prior to these amendments, Rule 3002 provided that the proof of claim deadline was 90 days from the date of the first meeting of creditors. 

Thus, the amendments to Rule 3002 effectively shorten the proof of claim bar date by two months.

These amendments do not alter the deadline for filing proofs of claim in Chapter 11 cases under Rule 3003(c)(3).  Under local rules for Chapter 11 cases pending in Maryland, a proof of claim in a Chapter 11 case must be filed within 90 days after the first date set for the meeting of creditors unless the court fixes a different date. For more information concerning this topic and the other amendments to the Bankruptcy Rules, please contact Bryan Mull.

Contact Bryan Mull

Court Allows CFPB to Revive Abusive Practice Claims Against Attorney

As reported in our October 2017 Maryland Legal Alert, we are continuing to monitor one of the few federal cases where a court has applied the “practice of law” exclusion to the jurisdiction of the Consumer Financial Protection Bureau (CFPB) in an abusive practices claim against an attorney. 

The United States District Court for the District of Maryland had dismissed the claims against an independent professional advisor (IPA) who was an attorney and who had provided at least some legal advice to consumers that were considering a structured settlement factoring arrangement. In response to the CFPB’s motion for leave to file an amended complaint, the court issued an opinion on December 13, 2017, granting the CFPB leave to amend. Specifically, the amended complaint alleged that consumers were actually unaware that the IPA was an attorney.

The court then held that “[i]t is logically impossible for a ‘client’ to form an attorney-client relationship with someone she does not know is an ‘attorney.’” Therefore, if the allegations in the amended complaint are accepted as true, the IPA and the consumers “did not form an attorney-client relationship, which means [the IPA’s] alleged conduct falls within the [Dodd-Frank Act’s] exception to the ‘practice of law exclusion.’”

The court therefore allowed the amended complaint to be filed, reviving abusive practice claims under the Dodd-Frank Act against the IPA.

On December 27, 2017, the IPA filed a motion to dismiss or, in the alternative, motion for summary judgment, which included an affidavit from the IPA asserting that he told consumers that he was a Maryland attorney in his IPA consultations with consumers. We will continue to monitor this important case. Please contact Robert Gaumont for questions about this topic.

Contact Robert Gaumont