Maryland Legal Alert for Financial Services

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Maryland Legal Alert - October 2017

In this Issue:







A Survey of CFPB UDAAP Actions

On September 13, 2017, Christopher Rahl (together with his co-author Adam Maarec of Davis Wright Tremaine LLP) published an article for the American Bar Association, Business Law Section, Consumer Financial Services Committee, A Survey of Activities Identified as Unfair, Deceptive, or Abusive by the CFPB. The article provides a detailed summary of enforcement actions brought by the Consumer Financial Protection Bureau (CFPB) concerning unfair, deceptive and abusive acts or practices (UDAAPs) in the first half of 2017. A review of the specific acts or practices identified by the CFPB as being problematic and resulting in UDAAP violations is instructive for industry participants in conducting their own internal compliance reviews to ensure that they do not engage in similar practices. If you have questions about this topic or for assistance with any compliance review, please contact Christopher Rahl.

Contact Christopher Rahl

Increased Scrutiny for Virtual Currency Offerings

On September 29, 2017, the U.S. Securities and Exchange Commission (SEC) announced that it had charged two related companies offering virtual currencies with allegedly engaging in illegal unregistered securities offerings and ongoing fraudulent conduct. This appears to be the first time the SEC has formally charged a company for raising money by offering virtual currencies in what is known as an “initial coin offering.”

A virtual currency, also known as a “cryptocurrency,” “blockchain protocol token” or simply a “token,” is a digital representation of value that can be digitally traded and functions as a medium of exchange, unit of account and/or a store of value. Examples of popular virtual currencies are Bitcoin, Ether (Ethereum) and XRP (Ripple).

Underlying contemporary virtual currencies is a technology known as a “blockchain.” A blockchain is a publicly verifiable digital ledger that records transactions made in a virtual currency. The digital ledger is stored across thousands of networked computers, and all transactions are continuously reconciled by each computer participating in the network. Once reconciled, a transaction is added to the ledger using cryptographic techniques that render the ledger effectively immutable.

In an initial coin offering (ICO), a company raises money by issuing its own virtual currency to a participant in exchange for either fiat money (e.g., U.S. dollars) or other virtual currencies (e.g., Ether). Depending on the circumstances of the ICO, the offering of the virtual currency may be subject to securities laws.

Earlier this year the SEC issued a Report of Investigation that determined, for the first time, that virtual currencies could be deemed securities subject to federal securities laws. In the first three quarters of 2017, the total market capitalization for virtual currencies has increased dramatically. Whether settling payments, securing the “Internetm of Things,” or improving land registries, companies are continuing to advance applications of virtual currencies and are likely to continue to look to ICOs for funding.

It is now also clear that regulators will increasingly seek to align virtual currencies within the existing securities legal framework. Organizations and individuals looking to invest in or do business with companies that incorporate virtual currencies and blockchain technology need to keep up to date on this changing enforcement environment. We will continue to provide updates as this space evolves. For more information concerning blockchain and how it can impact your business, please contact Ned T. Himmelrich, and for questions concerning securities offerings and raising capital, please contact Michele Walsh.

Contact Ned Himmelrich

Contact Michele Walsh

CFPB Precluded from Bringing Abusive Claims Against Attorney

On September 13, 2017, the U.S. District Court for the District of Maryland dismissed claims brought by the Consumer Financial Protection Bureau (CFPB) against an attorney involved with a company in the business of “structured settlement factoring.”

Structured settlement factoring involves buying an asset (usually a settlement involving future payments in a personal injury lawsuit) for a discounted upfront payment.

The company, at issue, allegedly targeted settlements in lead paint cases and provided cash advances which it would then be treated as an “extension of credit” that consumers were required to repay if they did not complete the underlying transaction.

Maryland is one of the majority of jurisdictions to require court approval and review by an independent professional advisor (IPA) before allowing a structured settlement factoring transaction to occur.

In this case, the CFPB alleged that the factoring company selected the same attorney to serve as the IPA for most transactions and that the advice provided by this attorney was perfunctory (but the CFPB’s complaint did characterize the advice provided as legal in nature). After the parties filed motions to dismiss, the court denied the motion filed by the company, finding that the CFPB had adequately plead claims for abusive practices under the Dodd-Frank Act where the company had provided cash advances structured as “extensions of credit” to be repaid by consumers that allegedly suffered from lead paint-related cognitive disabilities.

The court, however, 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. On October 3, 2017, the CFPB filed a motion for leave to file an amended complaint that included no allegations of the IPA providing legal advice and that emphasized the cursory nature of the professional advice being provided.  We will continue to monitor this important case.  Please contact Robert Gaumont for more information related to this topic.

Contact Robert Gaumont

CFPB Releases Updated Compliance Manual

The Consumer Financial Protection Bureau (CFPB) recently released revisions to the compliance management review portion of its Supervision and Examination Manual.

The updated examination procedures stress the importance of maintaining an effective compliance management system (CMS).  The recent release contains five modules:

  1. Board and management oversight;
  2. Compliance program;
  3. Service provider oversight;
  4. Violations of law and consumer harm; and
  5. Examiner conclusions and wrap-up. 

The CFPB’s release stresses that an effective CMS must contain two independent control components: (1) board and management oversight; and (2) a strong compliance program. 

The CFPB expects an institution’s board/management to be committed to the institution’s CMS and have an effective change management process (including responding to internal and external changes).

The CFPB also expects an institution to have a compliance program that includes effective, well-documented policies and procedures; training that effectively communicates the institution’s policies and procedures; regular monitoring/audits of the institution’s compliance with its policies and procedures; and a responsive and organized process for receiving, tracking and responding to consumer complaints. 

The recent release also stresses the importance of proper third-party service provider oversight and an effective process to self-identify and address violations of law and instances of consumer harm.  For more information about CFPB compliance management expectations, please contact Christopher Rahl.

Contact Christopher Rahl


CFPB Issues First No Action Letter to FinTech Provider

Late last year, the Consumer Financial Protection Bureau (CFPB) finalized a process to permit Fintech providers and other financial services companies to request input from the CFPB concerning whether a proposed business model or practice would be permissible.

The CFPB no action letter initiative is designed to foster innovation, so companies exploring new financial products/services or new delivery methods for financial products/services can get some assurance that the CFPB will not find the proposed conduct objectionable.

The first no action letter issued by the CFPB involves an online lending platform for consumers that uses alternative data to determine creditworthiness (along with data supplied by the nationwide consumer reporting agencies). The no action letter confirms that the CFPB does not intend to take enforcement action against the requesting party under the Equal Credit Opportunity Act or its implementing regulation, Regulation B. The no action letter is based only on the facts presented by the requesting party and the use of alternative data as presented by the requesting party in its automated loan decision process. The no action letter also expires three years after its issue date (unless the requesting party seeks and obtains a renewal of the no action determination). 

The no action letter was issued with some strings. It requires the requesting party to provide periodic reports to the CFPB concerning the company’s loan applications, how loans are approved/denied, and how the use of alternative data impacts consumer access to credit.

While the no action letter provides some assurance to the requesting party that it is operating in accordance with applicable law (in the eyes of the CFPB), the CFPB’s reporting requirements may make other fintech providers hesitant to initiate similar requests. For more information concerning this topic, please contact Christopher Rahl.

Contact Christopher Rahl