Maryland Legal Alert for Financial Services

In This Issue:

Online Sellers May Need to Collect State Sales Tax Even Without A Physical Presence in a State

Creditor Assessed Punitive Damages for Violating Bankruptcy Discharge Injunction

Is the CFPB's Structure Unconstitutional?

Depository Institutions: Do You Have "Compliance Review Committee" Protections?

Clients are Asking about GDPR

SEC Revises Definition of 'Smaller Reporting Company' and Expands the Availability of Scaled Disclosure

Online Sellers May Need to Collect State Sales Tax Even Without a Physical Presence in a State

A recent U.S. Supreme Court decision impacts how taxes may be assessed in the e-commerce industry. Internet retailers without a physical presence in a state may now be required to collect sales tax from online consumers in that state. Douglas Coats, our firm’s Tax Practice Chair, explains the recent decision here. It is important for any company selling products via the internet, including financial institutions, to know how they may be impacted by this decision. Please contact Douglas Coats for questions regarding this issue.

Contact Douglas Coats

Creditor Assessed Punitive Damages for Violating Bankruptcy Discharge Injunction

Most individual debtors in Chapter 7 receive a discharge of their unsecured debts unless the debts are reaffirmed with the bankruptcy court’s approval. The discharge includes the unsecured portion of any mortgage loan (i.e., the deficiency). The Bankruptcy Code automatically enjoins actions to collect a discharged debt, and creditors who violate the injunction by attempting to collect a discharged debt may be held in contempt of court.

In a recent decision, the Maryland Bankruptcy Court applied these rules to find the holder of a second mortgage in contempt of court for attempting to require the debtor to reaffirm her debt to the creditor as a condition of allowing the debtor to retain her home after foreclosure.

Under the alleged facts, the debtor owned a home subject to two mortgages: a first mortgage in the initial amount of $284,000 and a second mortgage in the initial amount of $49,650. It was undisputed that the house was worth less than the amount due under the first mortgage, and thus, the second mortgage was underwater. Prior to bankruptcy, the second mortgage loan was sold to a loan purchaser for $2,881. The debt buyer then issued a Notice of Intent to Foreclose, which led to the debtor’s Chapter 7 bankruptcy filing. The debtor received a discharge. Thereafter, the second lien mortgagee (creditor) foreclosed on its lien and purchased the property at the foreclosure sale subject to the first lien. It obtained an order evicting the debtor from the house. The debtor asked the creditor for a proposal that would permit her to stay in the residence. The creditor proposed an agreement that would have required the debtor to pay $81,600 over a 30-year term, including a one-time arrears payment of $3,000. The debtor rejected the offer, reopened her bankruptcy case and, represented by a firm on a pro bono basis, filed a lawsuit against the creditor for violating the discharge injunction. The creditor attempted to mitigate by deeding the house back to the debtor. The court held that the discharge injunction had been violated and awarded punitive damages against the creditor in the amount of $25,000 plus compensatory damages and attorney’s fees.

Although mortgage liens are unaffected by a bankruptcy discharge in Chapter 7 and a mortgagee has the right to foreclose after bankruptcy if the loan is in default, the bankruptcy court found that the discharge injunction had been violated, because the creditor went too far by conditioning retention of the house on reaffirmation of a discharged debt. Mortgagees who want to work with borrowers after bankruptcy should proceed with caution so as not to violate the discharge injunction where the house is worth less than the mortgage balance.

Contact Christoper R. Rahl

Is the CFPB's Structure Unconstitutional?

Federal courts are divided on whether the president of the United States can fire the Bureau of Consumer Financial Protection’s (BCFP, formerly known as the Consumer Financial Protection Bureau or CFPB) director at will or if termination can only be for cause. Federal courts are also divided as to whether the BCFP’s underlying structure is constitutional.

A New York federal district judge recently ruled that the BCFP’s structure is unconstitutional, because the independent agency is led by a director who cannot be fired, except for cause, and thus the director has too much executive power. This ruling is contrary to an earlier decision by the Court of Appeals for the District of Columbia Circuit, which ruled that a director could be fired at will and  the agency having a single director is not unconstitutional.

The ruling that the agency’s structure is unconstitutional was made within a case to which the BCFP was a party, along with the N.Y. attorney general, against a company for alleged Consumer Financial Protection Act violations. As a result, the judge then ordered that the BCFP drop out as a party to the lawsuit and allowed the case to move forward with the N.Y. attorney general as the remaining plaintiff.

The conflicting rulings could mean that the Supreme Court will address the issue. If found to be unconstitutional, the BCFP could be restructured and possibly led by a bipartisan commission.  Proponents of having a commission head the independent agency believe this will allow for a broader, more balanced approach to enforcement. Proponents of allowing the agency’s structure to remain intact believe that restructuring will lead to less stringent industry regulations that could result in conditions similar to those contributing to the 2007-2008 financial crises. As this issue continues to unfold, it could have an impact on the level and tenor of regulatory oversight of financial institutions. We will continue to monitor this issue and provide updates as they become available.

Contact Christoper R. Rahl

Depository Institutions: Do You Have "Compliance Review Committee" Protections?

Having an internal compliance committee could protect the internal information of your financial institution from being discoverable in a civil action. At the Maryland Bankers Association’s Annual Convention on June 4, 2018, Andy Bulgin, Margie Corwin and Bob Enten from our Financial Services Practice presented information about effective strategic planning for legal risks. You can access our presentation here. Following that presentation, we received a number of questions about some of our recommendations.

A topic that sparked considerable interest is a 25-year-old Maryland law that allows an insured depository institution to prevent certain internal compliance and investigatory information from being discovered and used against it in a civil action. The law provides that an institution’s board of directors may form a “compliance review committee” that is charged with evaluating and seeking to improve four specific areas of operations, including the institution’s compliance with law. The protections apply to any document that is prepared by or for the committee in connection with its evaluation of a matter that is or becomes the subject of a civil action.

The law has limitations and it is very important to ensure that the committee is properly established, that the scope of its duties is properly focused, and that its work (and the work that is performed for it) fits within the statutory framework. This is not a situation where “any committee will do.” Please contact Andy Bulgin or Bob Enten to discuss how your institution can take advantage of the protections offered by this Maryland law.

Contact Andrew Bulgin

Contact D. Robert Enten

Clients are Asking About GDPR

We have had several inquiries from clients concerning compliance with the European General Data Protection Regulation (GDPR). The GDPR (effective as of May 25, 2018) is a set of privacy standards that applies to the personal data of individuals in European Union (EU) countries. The GDPR also applies to businesses outside of the EU if they are dealing with the personal data of individuals in the EU.

The GDPR imposes restrictions on how businesses can collect, use and transfer personal data. Businesses that sell products or services to individuals in the EU and/or that collect or process personal data for such individuals must take specific actions under the GDPR. There are strict consent, information safeguarding and data breach notification requirements for those subject to the GDPR.

Financial institutions in the United States that do not actively market to individuals in the EU still need to give some thought to GDPR compliance. All financial institutions should take steps to identify individuals in the EU who may be receiving communications from the financial institution (such as account statements, newsletters, etc.). Financial institutions that have consumer-facing websites should:

• Determine what they will do if an individual in the EU submits information through a “contact us” webpage,
• Examine how cookies are used on its website, and
• Determine whether it should take steps to identify users with IP addresses in the EU.

Vendor contract due diligence is also impacted by the GDPR. Financial institution vendors that are themselves subject to GDPR requirements could face significant penalties for GDPR violations, causing financial institutions continuity risk for critical vendors. Financial institutions should also be wary of signing vendor contract amendments that include representations concerning GDPR compliance and/or liability for GDPR violations. Please contact Christopher Rahl or Ned T. Himmelrich with questions concerning this topic.

Contact Christopher Rahl

Contact Ned T. Himmelrich

SEC Revises Definition of 'Smaller Reporting Company' and Expands the Availability of Scaled Disclosure

On June 28, 2018, the U.S. Securities and Exchange Commission (SEC) issued Release No. 33-10514, which amended the definition of “smaller reporting company” by increasing the public float threshold from $75 million to $250 million. A reporting company that transitions out of smaller reporting company status will not be eligible for that status again until its public float falls below $200 million (the pre-amendment threshold was $50 million).

In addition, the SEC’s release also increased the revenue threshold by providing that a company will be deemed to be a smaller reporting company if its annual revenue for the prior year was less than $100 million (or less than $80 million for a company that previously transitioned out of smaller reporting company status under this test) and its public float is less than $700 million. Prior to these amendments, the revenue threshold was $50 million and applied only to a company whose public float was $0. Importantly, a smaller reporting company may provide “scaled disclosure” in the periodic reports and certain other documents that it files with the SEC. As a result, a significantly broader universe of public companies will now have the ability to reduce their reporting burden. The SEC did not change its rules regarding how and when a company calculates its public float or how and when a company enters and exits smaller reporting company status. Please contact Andy Bulgin  to discuss how these rule revisions might impact your company.

Contact Andrew Bulgin