Maryland Legal Alert for Financial Services

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Maryland Legal Alert October 2016

In this Issue:

FTC TAKES ACTION AGAINST DEBT RELIEF PROVIDERS

The Federal Trade Commission (FTC) recently entered into two stipulated final orders banning two related debt relief providers from engaging in further debt relief activities.  The orders are the result of a complaint filed by the FTC in early 2015.  The FTC's original complaint alleged that the debt relief providers marketed debt relief services to payday loan borrowers, misrepresented the services offered, and collected fees in advance of performing services – in violation of Section 5 of the FTC Act and the Telemarketing Sales Rule's advance fee ban.  The stipulated final orders ban the debt relief providers (and related principals) from offering or providing debt relief services, prohibit the defendants from making any misrepresentations in connection with any financial or other products or services, and prohibit the defendants from profiting from any consumer personal information.  The orders each impose a judgment in excess of $23.7 million, with all but approximately $158,000 suspended as long as the defendants comply with the terms of the orders and have not misrepresented their financial condition.  For questions concerning this topic, please contact Christopher Rahl.

WHO IS A "CREDITOR" FOR ECOA NOTICE PURPOSES?

The Equal Credit Opportunity Act (ECOA) requires that a creditor provide written notice of specific reasons why a creditor has taken an adverse action related to an applicant's credit. An adverse action is defined broadly and can include "a denial or revocation of credit, a change in the terms of an existing credit arrangement, or a refusal to grant credit in substantially the amount or substantially the terms requested." A frequent ECOA litigation topic is whether an entity is a "creditor" under the ECOA. The ECOA is implemented by Regulation B which exempts "those who merely arrange for credit by referring applicants to lenders" from the obligation to provide written notice related to adverse action. The U.S. Court of Appeals for the Sixth Circuit recently held that an automobile dealer was a "creditor" for purposes of the ECOA, even though it was not the lender. In reviewing the record, the Sixth Circuit was persuaded by deposition testimony, which showed that the automobile dealer regularly participated in credit decisions and actually set the terms of the credit. The financing company's role was minimal and, because the dealer was the ultimate decision maker, the dealer had "an obligation to provide Plaintiff with a written statement" of its specific reasons related to the denial of credit. The appeals court also held the lower court erred in ruling that injunctive relief could not be granted as a matter of law under the ECOA and, as a result, remanded the case to the lower court for a determination as to whether an injunction was appropriate. Please contact Robert Gaumont for more information related to this topic.

CFPB FAULTS LENDING PLATFORM FOR MISLEADING BORROWERS

A recent Consumer Financial Protection Bureau (CFPB) consent order requires an online lending platform to pay $3.63 million for failing to deliver benefits that it allegedly promised to consumers.  The CFPB alleged that the lender had not given borrowers an opportunity to build credit and have access to less costly loans, as the lender had advertised.  The lender's advertisements apparently indicated that borrowers could "graduate" to lower-priced loans, and that loans obtained would be "credit building opportunities."  The lender allegedly did not report credit experience to credit reporting agencies for a lengthy period, so loans obtained from the lender were not helping borrowers establish credit profiles.  In addition, the CFPB argued that the lender hid the true cost of credit through misleading internet banner ads, without disclosing the associated APR or by understating the APR.  The resulting consent order requires the lender to make refunds to more than 50,000 borrowers (approximately $1.83 million); end deceptive advertising practices; ensure the accuracy of its loan pricing; and pay a $1.8 million civil penalty.  The order serves as a reminder to FinTech providers that online and marketplace lenders need to be guided by the same disclosure principles that apply to traditional lenders.  Please contact John Morton or Christopher Rahl for more information concerning this topic and similar FinTech disclosure issues.

LIEN PRIORITY CONCERNS: REAL PROPERTY LENDERS BEWARE

Real estate lenders in Maryland now have more reasons to ensure that the search of land records is complete and that they are protected from all potential prior liens.  In our September 2016 Maryland Legal Alert, we reported on a recent decision by the Court of Special Appeals of Maryland that raises concerns for lenders making real estate-secured loans.  Under the facts of the case, a property developer filed a declaration of deferred water and sewer charges in favor of a private utility company that would construct the water and sewer infrastructure connecting the proposed residential development to public utilities.  The declaration provided that owners of properties within the development were obligated to pay annual water and sewer charges to the named utility, and that a lien was created in favor of the private utility.  The Court of Special Appeals determined the lien in the declaration had priority over a later recorded homeowner's refinance deed of trust, even though there was no compliance with the Maryland Contract Lien Act.  Please review the in-depth article in our Real Estate Practice Group's September 2016 Relating to Real Estate publication, which discusses this decision and its legal implications.  We have been informed that a petition for certiorari will be filed this month asking the Court of Appeals of Maryland to review this decision.  Please contact Edward Levin, William Shaughnessy or Marjorie Corwin with any questions concerning the impact of this decision.