In this issue:
• CREDIT CARD OFFSETS BY ISSUERS THAT TAKE DEPOSITS
• LATE NOTICE TO INSURER MEANS NO COVERAGE FOR LENDER
• VOID JUDGMENTS NOT SUBJECT TO STATUTE OF LIMITATIONS
• CAMPAIGN CONTRIBUTION DISCLOSURE REPORTS ARE DUE
• 2016 MARYLAND LAWS UPDATE COMING SOON
For credit card issuers who also maintain deposit accounts for their borrowers, navigating the general "no offset" provisions in Regulation Z (Reg. Z) can be tricky. Reg. Z prohibits a credit card issuer from taking any action to offset "a cardholder's indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer." The Official Commentary to Reg. Z provides a mechanism for obtaining a consensual security interest in deposit accounts (under applicable state law) that can be accessed in connection with credit card debt, but specific requirements must be met. The consensual security interest cannot be the functional equivalent of an offset right buried in the issuer's deposit account agreement. It must be affirmatively agreed to by the borrower in such a way that the borrower is aware that they are granting a security interest in deposit accounts as a condition for obtaining a credit card (or more favorable credit card account terms). The Official Commentary gives specific examples of the indicia of borrower awareness of an "affirmatively agreed to" consensual security interest, including at least one of the following: (a) separate signature or initials by relevant security interest language; (b) security agreement language on a separate page or otherwise separating the security interest language from other contract/disclosure provisions; and/or (c) reference to a specific amount of deposited funds or to a specific deposit account number. Most issuers incorporate required Reg. Z open-end credit card disclosures into their credit card agreements. To address the "no offset" Reg. Z prohibition, many issuers include bolded/segregated security interest language that clearly stands out from other language in their credit card agreement (without a separate signature or borrower initials), and the credit card agreement itself is provided to, but not signed by, borrowers. Many issuers also require a borrower signature on the related credit card application and include clear security interest language just above the credit card application signature line. This approach can be used to address most credit card application channels, but what about credit card pre-approvals? If an issuer mails a pre-approved offer to a consumer and the consumer only signs the pre-approved acceptance form (not the issuer's credit card application), and then the issuer mails its standard credit card agreement with bolded/segregated security interest language, the borrower has never signed anything specifically granting a security interest in his/her deposit accounts in order to open the credit card account. To address this, issuers should ensure that their pre-approved offers contain clear security interest language near the pre-approved acceptance form's signature line, so it is clear that by accepting the pre-approved offer, the consumer knows they are also granting a security interest in their deposit accounts. Please contact Christopher Rahl for more information concerning credit card disclosures in general and credit card offsets.
On April 14, 2016, the U.S. Court of Appeals for the Fourth Circuit affirmed a declaratory judgment from the U.S. District Court of Maryland which held that an insurer had no obligation to provide lender liability coverage to a bank in Maryland when the bank failed to provide the insurer with notice until after a multi-million dollar default judgment had been entered against the bank in Illinois state court (case available here). The bank incurred $1.8 million in attorneys' fees before ultimately prevailing in vacating the judgment and having the case dismissed on personal jurisdiction grounds. The Fourth Circuit affirmed all of the trial court's findings, including that the bank had received actual notice of the lawsuit through service on its resident agent, that the bank failed to comply with the policy terms in providing notice to the insurer until eight months after service, and that the insurer suffered "actual prejudice" because it was not part of the defense selection process. While the insurer had issued letters stating that it viewed the notice as late and reserved the right to deny coverage, the bank's uncertainty regarding the insurer's final determination made the bank willing to incur more in attorneys' fees than (the bank argued) it may have taken to settle the case. The Fourth Circuit found that the prospects of settling the case for less was "speculation" on the bank's part and held that the insurer neither waived nor was estopped from asserting the untimeliness of the notice as a basis for denying coverage. Please contact Robert Gaumont for more information related to this topic.
In a reported decision issued April 1, 2016, Maryland's Court of Special Appeals, our intermediate appellate court, held that a judgment debtor may bring an action to have a judgment declared void at any time and no statute of limitations applies to such an action (click here for a copy of the decision). As background, in 2008, a buyer purchased a credit card debt in default and soon after filed suit to collect the debt. The trial court entered judgment in favor of the debt buyer in March 2009. At that time it was unclear whether a debt buyer which had no contact with debtors but simply hired a licensed attorney to file suit was subject to licensing under Maryland's Collection Agency Licensing Act. This debt buyer was unlicensed in March 2009. In July 2013, more than four years after entry of the judgment, the debtor filed a class action lawsuit challenging the judgment. The debt buyer filed a motion to dismiss and the trial court granted dismissal based on a three-year statute of limitations. The debtor appealed. In its April 1, 2016 opinion, the Court of Special Appeals looked to a 2013 decision in a different case which held that a judgment in favor of an unlicensed debt collector constitutes a void judgment. The Court then assumed for purposes of this appeal (without expressly deciding) that the debt buyer's judgment was void and determined that "there appears to be no time limit for asserting that a judgment is void." On this basis, the Court reversed the trial court's decision to dismiss certain counts in the debtor's lawsuit and remanded the case back to the trial court for further proceedings. Stay tuned for further developments. However, even without further developments, there are some practice points. First, buyers of Maryland consumer debt in default need to consider if licensing is required (or at least prudent) under Maryland's Collection Agency Licensing Act. Second, buyers of Maryland consumer debt who intentionally avoid debt in default need to be vigilant about due diligence when reviewing loans to be purchased. Third, SB771 passed by the 2016 Maryland General Assembly (as of May 5, 2016, the bill had not yet been signed by the Governor) will impose new obligations when collecting consumer debt in Maryland. Assuming SB771 is signed, it will become effective October 1, 2016. Please contact Margie Corwin if you have questions or would like to discuss this subject further.
Maryland law requires persons doing business with any governmental entity in Maryland (both State and local), and persons employing lobbyists to file a Disclosure of Contributions report with the State Board of Elections. Reports are due on May 31 and November 30 each year, with the transaction period ending the last day of the month prior to the due date. Reports may be filed on the Maryland State Board of Elections' website (available here). The State Board of Elections can assess fines for both late reports and the failure to file reports. It is important to note that once a filer is in the State Board of Elections' system, the filer must continue to report even if the filer no longer meets the reporting thresholds until an appropriate cancellation is filed. Filers must also keep in mind that contributions by a political action committee (PAC) are attributable to the entity that established the PAC. The reporting thresholds differ based on activity ("employing lobbyists" or "doing business with" Maryland governmental entities). The "employing lobbyists" thresholds require the filing of a Disclosure of Contributions report by persons who compensate one or more lobbyists at least $500 and make contributions of $500 or more to a candidate or official holding the office of Governor, Lt. Governor, Attorney General, Comptroller or member of the General Assembly during a 6-month reporting period. If the lobbyist's employer does not meet both triggers, it does not need to file a report. The "doing business with" thresholds require the filing of a Disclosure of Contributions report by any person who has a single contract of $200,000 or more with any governmental entity in Maryland. Generally, contributions by officers, directors and subsidiaries are attributed to the parent entity. However, recent changes in Maryland law (HB112, Chapter 252) create an exception to the attribution rules for federally regulated bank holding companies. While this new law is not effective until October 1, 2016, we have been informed that the State Board of Elections plans to follow it for the Disclosure of Contributions reports due on May 31, 2016. The rules concerning Disclosure of Contributions reporting are complex and should be carefully reviewed. Please contact D. Robert Enten for more information concerning this topic.
The Maryland General Assembly ended its work for this year at midnight on April 11, 2016. We again will prepare our Maryland Laws Update for Financial Services Providers, so be on the lookout for that electronic publication in June.