Maryland Legal Alert for Financial Services

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Maryland Legal Alert September 2015

In this issue:

CFPB OUTLINES PRINCIPLES FOR FASTER PAYMENT NETWORKS
CREDIT/DEBIT CARD LIABILITY SHIFTS TO MERCHANTS
PROBLEM PERFECTING SECURITY INTEREST IN INSURANCE PROCEEDS
BORROWERS MUST REPAY PRINCIPAL TO RECOVER UNDER CLEC
THIRD CIRCUIT REVERSAL SAVES MERS IN PENNSYLVANIA

CFPB OUTLINES PRINCIPLES FOR FASTER PAYMENT NETWORKS

On July 9, 2015, the CFPB released guidelines detailing what the CFPB wants to see in new payment systems. The guidelines address 9 areas of concern in connection with the structure and operation of new payment systems: (1) the system should be clear about when, how, and under what terms consumers have authorized payments (with an easy method to revoke authorization); (2) the system should inform consumers about data collection and transfer (and who has access to their data); (3) the system should include strong consumer protections related to mistaken, fraudulent, and unauthorized transactions (including applicable regulatory protections, such as those under Regulations E and Z); (4) the system should include real-time access to transaction status information (transaction confirmations, fees, funds availability, and security of the system); (5) the system should clearly disclose total applicable fees in a manner that allows consumer comparison with other payment methods; (6) the system should be widely accessible to consumers through multiple channels and non-depository parties (including mobile wallet providers and payment processors); (7) the system should deliver faster funds availability; (8) the system should include built-in data security protections to minimize consumer losses; and (9) the system should include automated monitoring functionality and incentives for participants to report misuse. The release demonstrates that alternative payment providers are clearly on the CFPB’s radar, even if not explicitly subject to the CFPB’s jurisdiction. Please contact Christopher Rahl for more information on this topic.

CREDIT/DEBIT CARD LIABILITY SHIFTS TO MERCHANTS

Beginning on October 1, 2015, credit card association rule changes will shift counterfeit card loss liability to merchants in many situations. EMV is the term used by the major card associations for chip-enabled smart cards that can generate one-time personal identification numbers (“PINs”) at terminals. EMV cards can significantly reduce the card-present fraud that has occurred with traditional magnetic-stripe credit/debit cards. The major card associations (including Visa, MasterCard, American Express, and Discover) have been encouraging merchants to adopt EMV technology and the coming liability shift is part of an effort to entice merchants to incur the additional costs to update payment terminals. Currently, if a counterfeit credit/debit card is used at a merchant’s payment terminal, the issuer typically bears liability for the resulting fraudulent activity. Starting on October 1, 2015, for most card-present transactions, if a merchant has not adopted EMV standards or does not process an EMV card using EMV standards, the merchant will be responsible for any related counterfeit card losses (different rules and timing apply to ATM transactions and transactions at fuel dispensers). Merchants that have not already taken steps to move toward EMV adoption should contact their merchant processors in order to determine EMV adoption requirements/costs in light of the coming liability shift. Please contact Christopher Rahl for more information concerning this topic.

PROBLEM PERFECTING SECURITY INTEREST IN INSURANCE PROCEEDS

In a case of first impression, the United States Court of Appeals for the First Circuit held that, under the law of Maine, a lender’s financing statement covering “inventory, accounts and payment intangibles (as those terms are defined in the Uniform Commercial Code),” together with proceeds including insurance proceeds, did not perfect a security interest in the borrower’s recovery of $3.8 million under a business interruption insurance policy. The Circuit Court’s ruling was based on the fact that UCC Article 9, as adopted by Maine (and Maryland), excludes liens on insurance policies other than liens on healthcare insurance receivables. As a result of the ruling, the borrower’s bankruptcy trustee was permitted to retain the full amount of the recovery free and clear of the lender’s lien. For a further discussion on this important case involving creditors' rights, please click here. Please contact Larry Coppel or Peter Rosenwald for more information.

BORROWERS MUST REPAY PRINCIPAL TO RECOVER UNDER CLEC

On August 6, 2015, the United States Court of Appeals for the Fourth Circuit held that Maryland’s Credit Grantor Closed End Credit Provisions (“CLEC”) require borrowers to have repaid more than the original principal amount of their loans before they are entitled to relief under CLEC. The plaintiffs, representing a class of consumers who financed motor vehicle purchases, alleged that the credit grantor’s post-sale repossession notices failed to comply fully with CLEC’s requirements. This claim was determined to be true. Even so, the United States District Court for the District of Maryland found that neither of the class representatives sustained any damages under CLEC because, after applying all the payments made on the loans to principal, and crediting the sale proceeds to principal, there still remained an unpaid principal amount. The Circuit Court affirmed, concluding that there can be no successful CLEC claim if the creditor has collected less than the principal loan amount. In addition, citing the plain language of CLEC, the Circuit Court made it clear that even if there is non-compliance with CLEC’s repossession requirements, credit grantors may pursue collection of the remaining unpaid principal loan amount, as long as those collection efforts are other than seeking a deficiency judgment. If you would like to discuss this case or repossessions in general, please contact Margie Corwin.

THIRD CIRCUIT REVERSAL SAVES MERS IN PENNSYLVANIA

On August 3, 2015, the United States Court of Appeals for the Third Circuit reversed a decision of the United States District Court for the Eastern District of Pennsylvania that we reported in our August 2014 Maryland Legal Alert. The District Court decision held that under Pennsylvania law a note and a mortgage that secures it are inseparable, that a mortgage is a conveyance, that the assignment of a note is a conveyance of the corresponding mortgage and, accordingly, that an assignment of a mortgage is required to be recorded under Pennsylvania law. The District Court’s decision could have toppled the MERS system in Pennsylvania because every assignment of a note secured by a mortgage on property located in Pennsylvania would have required the recordation of an assignment. The Circuit Court found that Pennsylvania law does not require recordation of all conveyances; rather, the Pennsylvania law that addresses the recordation of conveyances is applicable only for those persons who desire to avail themselves of the benefits of the public recordation system. Conveyances are required to be recorded in order to preserve the holder’s rights against subsequent bona fide purchasers, and persons may choose whether they want this benefit. Accordingly, because a conveyance, such as a mortgage note assignment, is not required to be recorded, the Circuit Court reversed the decision of the District Court and provided assurance for the continued use of MERS in Pennsylvania. If you would like to discuss this topic, please contact Ed Levin.