Maryland Legal Alert for Financial Services
Maryland Legal Alert March 2017
In this issue:
The Consumer Financial Protection Bureau (CFPB) recently filed an action to shut down several affiliated law firms that provided debt relief services. The CFPB's complaint attacks the "legal model" that certain debt relief providers shifted to after the Federal Trade Commission's Telemarketing Sales Rule (TSR) was amended in 2010 to prohibit the collection of up-front debt relief fees. The complaint alleges that the named law firms partnered with a debt relief company that had previously been involved in litigation with the CFPB (Mogan Drexen) in order to make it appear that the law firms were providing legal services, when in fact Morgan Drexen provided nearly all of the services. The complaint filed by the CFPB alleged that the named law firms had clients enter into 2 separate agreements, one for bankruptcy services and one for debt relief services. For the bankruptcy services, the law firms charged "engagement" fees of between $1,000 and $3,250 and administrative fees of $50 per month. The complaint notes that the law firms purported not to charge any fees under the separate debt relief services agreement. The CFPB alleged that the fees collected before any services were provided for bankruptcy assistance were really disguised debt relief fees that violated the TSR's advance fee ban. The CFPB's complaint seeks a permanent injunction, consumer redress, and civil money penalties. This action is a reminder to debt relief providers to examine their fee practices and services performed to ensure compliance with the TSR. For more information concerning the TSR or the provision of debt relief services, please contact Christopher Rahl.
Creditors know that when a debtor files for bankruptcy, there is an automatic stay of all actions against the debtor including any act exercising control over property of the estate. A Bankruptcy Court may hold the creditor in contempt and enter judgment for actual or even punitive damages if the stay is violated. In a recent decision, the United States Court of Appeals for the 10th Circuit considered the question of whether the stay is violated by a creditor that has refused to return repossessed collateral (a truck) after bankruptcy was filed. Although a majority of the circuit courts of appeal have held that the stay is violated when collateral is not returned after bankruptcy, in that the creditor is exercising control over the debtor's property, the 10th Circuit, based on a strict reading of the Bankruptcy Code's stay section, held that the stay is not violated by a creditor that passively holds onto collateral after bankruptcy is filed. The 4th Circuit, in which Maryland is located, has not ruled on this issue. While it is not known how the 4th Circuit would decide this question, the 10th Circuit's decision should strengthen a Maryland creditor's arguments concerning this issue. Please contact Lawrence Coppel with questions concerning this topic.
We reported in our December 2016 Maryland Legal Alert about the Office of the Comptroller of the Currency's plan to issue special purpose national bank charters (Special Purpose Charters) to fintech firms engaged in certain lending, deposit, and check-cashing activities. The OCC issued a request for comments concerning Special Purpose Charter qualifications, limits on how they should be used, etc. (asking for comments by January 15, 2017). Thomas Curry, the Comptroller of the Currency, made remarks in a recent presentation indicating that the OCC received more than 100 "thoughtful comments" and is planning to roll out its blueprint for how it will issue Special Purpose Charters in a supplement to its Licensing Manual. The Comptroller did not provide any firm indication on the timing for the release of the updated Licensing Manual. The Comptroller did however stress that a Special Purpose Charter will not be a way to get a "light touch" on supervision, re-enforcing our view that obtaining a Special Purpose Charter will not be easy and will come with many compliance/supervisory burdens. For questions concerning this topic, please contact Christopher Rahl.
We reported in our March 2015 Maryland Legal Alert about "out of stat" debts (debts for which the appropriate state statute of limitations period has expired) and related challenges faced by debt buyers under the Fair Debt Collection Practices Act (FDCPA). The FDCPA, among other things, bans all false, deceptive, misleading, and unconscionable debt collection practices, including any false representations concerning the "character, amount, or legal status" of a debt. A common practice of debt buyers is to contact debtors with proposed settlement terms, sometimes involving "out of stat" debts. Cases out of both the 6th and 7th Circuit Courts of Appeals have found violations of the FDCPA where collection letters from debt buyers communicated a settlement offer for an "out of stat" debt. A 2016 decision from the 5th Circuit Court of Appeals reached the same conclusion. The Court held that an unsophisticated debtor might hastily accept a settlement offer for an "out of stat" debt not realizing that the debt is judicially unenforceable and that partial payment could restart the applicable statute of limitations. This case serves as a reminder that debt buyers should take steps to identify "out of stat" debts in their portfolios and document those identification efforts. For those debts identified as "out of stat," debt buyers should consider including disclosures in any communications concerning such debts that include notice that: (i) the debt buyer is not going to file suit to recover on the debt; and (ii) a debtor's partial payment will revive the debt buyer's ability to sue in connection with the total debt (note that some states require additional disclosures). For additional information about this topic, please contact Christopher Rahl.