Maryland Legal Alert for Financial Services

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Maryland Legal Alert - June 2018

In This Issue:

REPEAL OF CFPB'S ECOA AUTO LENDING GUIDANCE

FUNDS AVAILABILITY REGULATION CC AMENDMENTS

DUE DILIGENCE IN AUTHENTICATING WIRE INSTRUCTIONS

PENALTIES INCREASE FOR VIOLATIONS OF MARYLAND CONSUMER PROTECTION LAWS

VIRTUAL CURRENCIES AND THE MARYLAND MONEY TRANSMISSION ACT

U.S. SUPREME COURT HOLDS THAT DEBTOR'S FALSE ORAL STATEMENT ABOUT SINGLE ASSET DOES NOT BAR BANKRUPTCY DISCHARGE

MORE ON THE "PRACTICE OF LAW" EXcLUSION TO THE CFPB'S JURISDICTION

 

Repeal of CFPB's ECOA Auto Lending Guidance

In 2013, the Consumer Financial Protection Bureau (CFPB) targeted auto dealer mark-ups; the practice of allowing auto dealers to price retail installment sale credit at interest rates that are higher than the “buy” rates of indirect auto finance companies (dealer markups).  The CFPB’s controversial bulletin (Bulletin 2013-2) announced that the CFPB would use disparate treatment/impact theories under the Equal Credit Opportunity Act to hold indirect auto finance companies responsible for the conduct of auto dealers.  As we reported in our May 2018 Maryland Legal Alert, the United States Senate moved to invalidate the CFPB’s 2013 bulletin under the Congressional Review Act (CRA).  The United States House of Representatives took similar action in early May.  President Trump signed the repeal on May 21, 2018.  Rescission of the CFPB’s 2013 bulletin may provide an opening for indirect auto lenders to revisit dealer markup practices.  For questions concerning this matter, please contact Christopher Rahl.

Contact Christopher Rahl

Funds Availability Regulation CC Amendments

The Board of Governors for the Federal Reserve System finalized amendments to FRB Regulation CC’s Availability of Funds and Collection of Checks provisions to address the reality that most checks are presented, collected, and paid electronically. The final rules take effect on July 1, 2018. The rules, among other things, add new liability provisions concerning remotely deposited checks and require each depository institution that accepts a remotely deposited check (remote deposit bank) to indemnify any other depository institution that takes the underlying original check for deposit.  The new indemnity obligation is not absolute.  If an underlying original check has a restrictive endorsement (such as “for remote deposit only”), the depository institution that accepts the original check cannot make an indemnity claim against the remote deposit institution.  Also, if a depository institution that accepts the underlying original check has acted negligently or in bad faith, the remote deposit institution’s indemnity obligation will be reduced proportionately to the extent of such negligence/bad faith.  Depository institutions that offer remote deposit services should: (1) examine their remote deposit agreements to ensure that customers have a duty to add a restrictive “for remote deposit only” type endorsement to all remotely deposited checks; and (2) discuss with the provider of their remote deposit platform any tools that the provider may have to examine incoming remote deposits for the specified restrictive endorsements (and reject checks without a proper restrictive endorsement).  Please contact Christopher Rahl to discuss this topic or for help reviewing/updating your remote deposit agreements.

Contact Christopher Rahl

Due Diligence in Authenticating Wire Instructions

While not a recent development, wire fraud continues to be a serious issue in real estate and financial transactions.  In its recently released 2017 Internet Crime Report, the FBI identified reported losses tied to various internet crimes, including wire fraud, in excess of $1.4 billion for the year 2017.  Criminals are using increasingly sophisticated techniques, including hacking e-mail accounts and using spoofed accounts, to perpetrate wire fraud schemes.  Exercising due diligence in receiving, sending, and verifying wire instructions is critical to helping prevent wire fraud.  Banks, title companies, and other financial institutions that regularly send or receive wire instructions should have internal procedures in place for properly authenticating those instructions.  There are various procedures that can be used to combat wire fraud, including requiring two separate points of authentication to verify wire instructions.  While the methods used to perpetrate wire fraud schemes will undoubtedly continue to evolve, taking simple steps to properly authenticate wire instructions is an easy way to help prevent wire fraud.  For more information concerning this topic, please contact Peter Rosenwald or Christopher Magette.

Contact Peter Rosenwald

Contact Christopher Magette

Penalties Increase for Violations of Maryland Consumer Protection Laws

The Maryland General Assembly passed, and the Governor signed, the Financial Consumer Protection Act of 2018 (see Chapter 732 of the 2018 Laws of Maryland, introduced as SB1068).  This is an expansive law covering numerous topics that we will address in forthcoming Maryland Legal Alerts.  One aspect of this new law concerns penalties for statutory violations.  Specifically, beginning October 1, 2018, many businesses that interface with consumers will be faced with potential penalties that increase exponentially.  These increased penalties apply to collection agencies, mortgage lenders and originators, check cashers, money transmitters, and debt management services.  In addition, increased penalties may be imposed against persons subject to the jurisdiction of the Maryland Commissioner of Financial Regulation and against persons subject to Maryland’s Consumer Protection Act (i.e., Maryland’s unfair or deceptive trade practices law which, as a result of Chapter 732, will include abusive practices beginning October 1, 2018).  Click here for a chart showing the increased statutory penalties.  Please contact Marjorie Corwin for questions about Maryland’s new Financial Consumer Protection Act.

Contact Marjorie Corwin

Virtual Currencies and the Maryland Money Transmission Act

The Maryland Money Transmission Act is broad in scope and likely covers a range of activities involving virtual currencies.  The Act defines “money transmission” to be “the business of . . . receiving money or monetary value, for transmission to a location . . . by any means, including electronically or through the internet” where “monetary value” is defined as “a medium of exchange whether or not redeemable in money.”  A virtual currency such as bitcoin or ether appears to be a medium of exchange.  Therefore, an operation in the business of receiving and transmitting a virtual currency likely constitutes money transmission under the Act.  Indeed, at least one major virtual currency exchange, Coinbase, is licensed in Maryland as a money transmitter. The penalties for operating a money transmission business without a license are potentially severe and can include fines and imprisonment under Maryland and federal law.  Businesses with operations that involve virtual currencies should conduct a careful analysis of their activities to ensure they are not conducting unlicensed money transmission.  The Maryland Financial Consumer Protection Commission is currently analyzing the implications of virtual currencies and blockchain technology for Maryland consumers.  The Commission will provide recommendations to the Governor and General Assembly in December 2018 for potential legislation including amendments to the Maryland Money Transmission Act.  We will continue to monitor this space and provide updates as it evolves. For more information on this topic, please contact Andrew Wichmann.

Contact Andrew Wichmann

U.S. Supreme Court Holds That Debtor's False Oral Statement About Single Asset Does Not Bar Bankruptcy Discharge

In a unanimous decision in Archer & Cofrin, LLP v. Appling, the U.S. Supreme Court held that an individual debtor was not barred from discharging debt he incurred by making a false oral statement about one of his assets in order to obtain an extension of credit.  The Court’s decision was based on its statutory interpretation of Section 523 (a)(2)(A) and (B) of  the Bankruptcy Code.  Section 523 (a)(2)(A) provides that an individual debtor will not be discharged from any debt “for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by . . . false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s financial condition . . . .”  Further, Section 523 (a)(2)(B) requires that a false  “statement respecting the debtor’s financial condition” be in writing in order to be nondischargeable.

Under the facts, the debtor hired a law firm but did not pay his legal fees.  The firm threatened to file a lien and withdraw representation.  The debtor convinced the firm not to withdraw by making the oral statement that he would be receiving a $100,000 tax refund that he would use to pay the fees.  The debtor still failed to pay and used the tax refund (which was only $60,000) for other purposes.  Ultimately, the firm obtained a judgment for $104,000.  The debtor then filed for Chapter 7 bankruptcy protection in order to discharge the firm’s judgment.  The firm used Section 523 (a)(2)(A) to oppose the discharge by stating that the debtor made a false representation in order to receive services and therefore the debt should be nondischargeable.

In defense, the debtor argued that his statement about the tax refund qualified as one “respecting a debtor’s financial condition” and therefore had to have been in writing in order for his debt to the firm to be nondischargeable.  The firm argued that the phrase “statement respecting a debtor’s financial condition” means a financial statement of assets and liabilities as opposed to a statement regarding a single asset (the tax refund).  The firm further argued that since the debtor’s statement was about a single asset and not his overall financial condition, it did not have to be in writing to be nondischargeable.  On appeal, the Supreme Court, in an opinion by Justice Sotomayor, ruled that a “statement respecting a financial condition” can indeed be a statement about a single asset, which means it would need to be in writing in order to be nondischargeable.  The Court’s decision was based on its broad construction of the word “respecting”.  As a result, the debtor was discharged from the law firm’s claim despite the false statement about the tax refund since the statement was not in writing.  

As a result of the Supreme Court’s decision, a creditor deciding whether to extend credit by relying on a debtor’s statement as to a particular asset would be well advised to obtain the statement in writing. This should prevent the debt from being dischargeable if the debtor files for bankruptcy.  For more information on this topic, please contact Lawrence Coppel.

Contact Lawrence Coppel

More on the "Practice of Law" Exclusion to the CFPB's Jurisdiction

Pending in the United States District Court for the District of Maryland is one of the very 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.  In our October 2017 Maryland Legal Alert, we reported how the court had dismissed claims against an attorney working as an independent professional advisor (IPA) on behalf of a company engaged in structured settlement factoring.  While the court held that the claims against the company could move forward, the court granted the motion to dismiss filed by the IPA finding that, as an attorney, the IPA was protected by the “practice of law” exclusion to CFPB jurisdiction under 12 U.S.C. § 5517(e)(1), because the IPA gave consumers legal advice. As reported in our January 2018 Maryland Legal Alert, the court permitted the CFPB to file an amended complaint in which the CFPB asserted that consumers were simply unaware that the IPA was an attorney; as a result, an attorney-client relationship could not have been created.  The IPA filed a motion to dismiss or, in the alternative, motion for summary judgment, which included an affidavit from the IPA stating that he generally informed consumers that he was an attorney.  On June 4, 2018, the court denied the IPA’s motion to dismiss and ruled that summary judgment was premature because there were issues of material fact as to what the IPA disclosed to consumers and because the CFPB had not been given the opportunity to conduct discovery in this area.  This case still remains one of the few cases where liability may be determined based on the “practice of law” exclusion to the CFPB’s jurisdiction. We will continue to monitor this important case.  Please contact Robert Gaumont for questions about this topic.

Contact Robert Gaumont