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  • Regulation Crowdfunding and Small Businesses: A Match Made in SEC-Regulated Heaven?
    May 2, 2016
    Tom Sporkin, Stephen M. LeBlanc, & Loyal T. Horsley

    The Dawn of a New Era in Capital Formation

    The need for crowdfunding regulation became apparent after the Securities and Exchange Commission issued a cease and desist order to stop a crowdfunding effort by two men seeking funds to purchase the Pabst Brewing Company in 2011. Two men set up a website, BuyaBeerCompany.com, and raised more than $200 million in an unregistered offering between November 2009 and February 2010 from more than five million people. [In the Matter of Michael Migliozzi II and Brian Williams Flatow, Securities Act of 1933 Release No. 33-9216, (June 8, 2011), https://www.sec.gov/litigation/admin/2011/33-9216.pdf]. Each individual received a ‘‘crowdsourced certificate of ownership’’ and were promised beer in an amount commensurate with their investment. However, BuyaBeerCompany.com never registered the transaction with the SEC and did not limit its solicitation to accredited investors. Nor did the offering fit within any exemption from the SEC’s registration rules.

    On May 16, 2016, the microcap financing landscape is set to change when the SEC’s new rules governing equity crowdfunding take effect. Equity crowdfundingis a form of financing by which companies can raise capital through relatively small contributions from large pools of individuals with the expectation that the investor will receive a financial reward if the company is profitable. This approach should not be confused with websites such as Kickstarter or DonorsChoose,which provide a tangible product, service, or other type of benefit to those who pledge money in support of the venture.

    Originally published in Bloomberg BNA; reprinted with permission.

  • High Court Silent on Deference to Agency Rule-Making
    March 24, 2016
    Valerie Hletko and Caroline Stapleton

    On March 22, 2016, the U.S. Supreme Court issued a split decision (4-4) in Hawkins v. Community Bank of Raymore.[1] The court’s one-sentence affirmance was a notable anti-climax in a case that had been viewed as likely to elicit guidance regarding limitations on deference to agency statutory interpretations. At issue in the case was the viability of a Board of Governors of the Federal Reserve System rule extending the protections of the Equal Credit Opportunity Act (ECOA) to spousal guarantors, in addition to traditional applicants for credit. While the court’s decision affirms the Eighth Circuit’s holding that the board’s spousal guarantor rule is not entitled to deference within that jurisdiction, affirmance by an equally divided court does not resolve the issue with respect to other circuits that already have considered, or have not yet confronted, the validity of the board’s rule. Moreover, in the absence of a substantive rationale, creditors operating outside of the Eighth Circuit are left with continued uncertainty regarding whether they may be subject to discrimination claims under ECOA by spousal guarantors.

    ECOA and the Spousal Guarantor Rule

    ECOA states that it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction — (1) on the basis of [...] sex or marital status.”[2] Congress broadly defined the term “applicant” to encompass: any person who applies to a creditor directly for an extension, renewal or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.[3]

    Regulation B, which implements ECOA, was originally drafted and administered by the Federal Reserve Board.[4] Initially, the board defined “applicant” under Regulation B to expressly exclude guarantors.[5] However, the board later amended its definition to include guarantors and other similar parties,[6] explaining that a spouse who is required to serve as a guarantor simply because he or she is married to a party to the debt “has suffered discrimination based on marital status” within the meaning of ECOA.[7] The board’s expansion of the scope of ECOA to encompass spousal guarantors is often referred to as the spousal guarantor rule.

    Originally published in Law360; reprinted with permission.

  • It's Anyone's Guess How Fincen Determines Fines
    March 9, 2016
    Robert Serino

    For many years, the federal banking agencies have used publicly available processes and matrices to determine both whether a civil money penalty is justified and, if so, the size of the fine. They must also litigate the action in a formal Administrative Procedure Act proceeding, brought before an independent administrative law judge. Most recently, the Office of the Comptroller of the Currency updated the guidelines on civil money penalties as well as cease and desist orders to enhance consistency.

    In contrast, the Financial Crimes Enforcement Network has not publicly disclosed any civil money penalty matrix or criteria to determine either the justification or amount of a penalty. There is an urgent need for Fincen to bring its process into alignment with the other regulators. As it stands, there is no publicly known process to ensure that Fincen's vast power is applied consistently and equitably. Likewise, as it stands now, Fincen can unilaterally and publicly assess a penalty on an institution or person without any standards, hearing or opportunity for the targeted party to appeal.

    On Feb. 26, the OCC reiterated its intention to continue using a matrix for assessing appropriate fines, with adjustments to its decision-making process to strengthen fairness and consistency. The OCC's changes - consistent with congressional requirements for the agency to use statutory criteria to justify an action - include one matrix for institutions and, for the first time, a separate matrix for institution-affiliated parties. Three days later, the OCC issued a revised bulletin on cease-and-desist powers in cases of "potential noncompliance with Bank Secrecy Act compliance program requirements or repeat or uncorrected BSA compliance problems."

    Why Fincen has no uniform process, administrative standards or a required hearing is beyond explanation. Most agencies follow standards and statutes that usually call for a hearing. There is nothing unique about the BSA that would require a different process for the banking agencies versus Fincen. A lack of any guidance is troubling since it allows Fincen largely unfettered power, opening the door to arbitrary and unjustified decisions.

    Click here to read the full article on www.americanbanker.com.

  • Expanding the SCRA, If the DOJ Has Its Way
    March 2, 2016
    Valerie Hletko, Sasha Leonhardt & Alex Lutch

    The last few weeks of 2015 saw two important legislative developments relating to the Servicemembers Civil Relief Act (SCRA). First, in November, the Department of Justice (DOJ) submitted a legislative package to Congress with proposed revisions to several existing laws that protect service members, including several significant changes to the SCRA. If accepted by Congress, these changes would codify many of the positions that the DOJ has taken in recent SCRA settlements. Even if Congress declines to implement the DOJ’s proposed changes, however, this legislative package offers a window into what the DOJ expects from financial institutions—and may itself impose through enforcement.Of particular note, the DOJ’s legislative package would revise the following sections of the statute:

    • the default judgment provisions of the SCRA, including the affidavit requirement and expectations for attorneys appointed to represent service members;
    • the definition of military orders under the SCRA;
    • the notice requirement for borrowers seeking the SCRA’s interest rate benefit;
    • expanded protections under installment sales contracts and residential and motor vehicle leases;
    • enforceability of arbitration requirements;
    • DOJ’s investigatory and enforcement authority.

    Second, effective Dec. 1, the House of Representatives Office of the Law Revision Counsel (OLRC) eliminated the entire appendix to Title 50 of the U.S. Code and recodified the SCRA into a different section of the U.S. Code.2 The statute itself was not amended, and the recodification results in no substantive changes. Changes to the citations, however, impose burdens related to the updating of policies, procedures, and other documentation.

    Originally published in Bloomberg BNA; reprinted with permission.

Knowledge + Insights

  • Special Alert: CFPB Plans to Propose TRID Amendments in July
    April 29, 2016

    Director Cordray announced yesterday in a letter to industry trade groups that the CFPB has "begun drafting a Notice of Proposed Rulemaking (NPRM) on the Know Before You Owe Rule.” However, contrary to some reports, the proposal is not imminent. Instead, Director Cordray stated that the Bureau “hope[s] to issue the NPRM in late July,” which means that final amendments will likely come late in the year.

    In addition, it does not appear that the CFPB is contemplating extensive changes to the rule. Instead, the letter states that the Bureau plans to “incorporat[e] some of the bureau’s existing informal guidance, whether provided through webinar, compliance guide, or otherwise, into the regulation text and commentary” and to address “places in the regulation text and commentary where adjustments would be useful for greater certainty and clarity.”

    These amendments may be helpful insofar as they resolve ambiguities in the regulation and convert informal guidance into official interpretations that are binding on the CFPB and subject to a higher level of deference by the courts. It is not clear which issues the CFPB will address in the proposal or whether the Bureau will take up industry concerns about the limited ability of lenders to cure technical errors and the liability of purchasers of loans with such errors. However, Director Cordray did state that the Bureau “will arrange one or two meetings in late May or early June, but before the NPRM is issued, to discuss further with [the trade groups] the Know Before You Owe rule.”

    For additional information and resources on the TRID rule, please visit our TRID Resource Center.

    * * *

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    Benjamin K. Olson, (202) 349-7924

    Clinton R. Rockwell, (310) 424-3901

    Jeffrey P. Naimon, (202) 349-8030

    John P. Kromer, (202) 349-8040

    Joseph M. Kolar, (202) 349-8020

    Jeremiah S. Buckley, (202) 349-8010

    Joseph J. Reilly, (202) 349-7965

    Amanda Raines Lawrence, (202) 349-8089

    Melissa Klimkiewicz, (202) 349-8098

    Jonathan W. Cannon, (310) 424-3903

    Brandy A. Hood, (202) 461-2911

    Steven vonBerg, (202) 524-7893

  • Special Alert: CFPB Enters into First Consent Order with Online Payment Platform for Misrepresenting Data Security Practices
    March 3, 2016

    On March 2, the CFPB took action against an Iowa-based online payment platform and entered into a Consent Order for deceptive acts and practices relating to false representations regarding the company’s data security practices in violation of 1031(a) and 1036 (a)(1) of the Consumer Financial Protection Act of 2010. The CFPB ordered the company to pay a $100,000 fine and to take certain remedial steps to improve their cybersecurity practices. Notably, this action is the result of the company’s failure to have adequate controls in place; it is not the result of a breach incident. Similar to other regulators, the CFPB will likely pay increasing attention to cybersecurity and data privacy issues as the understanding of its significance grows.

    The Consent Order states that, despite representations to the contrary, the company (i) misrepresented the quality and efficacy of its cybersecurity and data privacy practices by stating that all personal data on its site was “safe” and “secure” and that its practices “exceeded” industry standards; (ii) did not properly encrypt consumer data; and (iii) failed to provide employees with sufficient cyber training.

    Click here to view the full Special Alert.

    * * *

    Questions regarding the matters discussed in this Alert may be directed to any of the persons listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure
    February 19, 2016
    Fredrick S. Levin & Daniel Paluch

    Yesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure. In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing. The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.

    The Court’s Holding

    In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void. To date, California courts have rejected hundreds of similar claims. In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.” Slip. Op. at 2. The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar.

    The Court’s Reasoning

    The Court acknowledged that the majority of California courts have held that borrowers do not have standing to challenge an allegedly void assignment because they are neither parties to, nor intended beneficiaries of, the assignment. Rather than adopt the majority approach, the Court based much of its decision on Glaski v. Bank of America, 218 Cal.App.4th 1079 (2013), in which the Fifth District Court of Appeal, on substantially similar facts, held that the question of standing turned on whether the alleged defect in the assignment, if proven, would render the assignment void altogether or merely voidable. Slip. Op. at 12. The parties to a voidable assignment have the power to ratify the defective assignment; parties to a void assignment have no such power. Id., at 10. In the former case, the Court would deny standing because the borrower would be asserting interests belonging solely to the parties to the assignment: only they have the power to ratify the assignment. Id. In the latter case, involving an allegedly void assignment, there would be no power of ratification, and thus the borrower would not be “asserting the interests of parties to the assignment; she [would be] asserting her own interest in limiting foreclosure on her property to those with legal authority to order a foreclosure sale.” Id., at 21.

    Potential Impact of the Court’s Decision

    Although a borrower’s standing to challenge an allegedly void assignment now appears settled under California law, the full impact of the decision will likely take some time to discern. By recognizing standing to challenge allegedly void assignments, the Court has clearly invited a substantial amount of wrongful foreclosure litigation. The statute of limitations for wrongful foreclosure is at least three years and, possibly longer, if a borrower can invoke the discovery rule or equitable tolling. See Cal. Code of Civ. Proc. § 338(d). Given the large number of securitized loans that have been foreclosed upon in California within the last several years, the number of possible claimants is potentially very large.

    Click here to read the full article on the BuckleySandler InfoBytes blog. 

  • Special Alert: CFPB Director Opines on TRID Liability
    January 5, 2016

    On December 29, 2015, CFPB Director Richard Cordray issued a letter in response to concerns raised by the Mortgage Bankers Association regarding violations of the CFPB’s new TILA-RESPA Integrated Disclosure (“TRID”) rule, also known as the Know Before You Owe rule. In an effort to address concerns that technical TRID violations are resulting in extraordinarily high rejection rates by secondary market purchasers of mortgage loans, Director Cordray acknowledged that, “despite best efforts, there inevitably will be inadvertent errors in the early days.” However, he suggested that rejections based on “formatting and other minor errors” are “an overreaction to the initial implementation of the new rule” and that the risk to private investors from “good-faith formatting errors and the like” is “negligible.” He expressed hope that this issue “will dissipate as the industry gains experience with closings, loan purchases, and examinations.”

    Click here to view the full Special Alert.

    * * *

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

  • Vendor Management in 2015 and Beyond
    December 31, 2015
    Valerie L. Hletko, Jon D. Langlois, Jeffrey P. Naimon & Christopher M. Witeck

    With evolving regulatory expectations and increased enforcement exposure, financial institutions are under more scrutiny than ever. Nowhere is this more evident than in the management and oversight of service providers. When service providers are part of an institution’s business practice, understanding the expectations of regulators, investors, and counterparties for compliance with consumer financial laws is critical.

    CFPB Guidance

    In 2012, the CFPB issued Bulletin 2012-03, which outlines the CFPB’s expectations regarding supervised institutions’ use of third party service providers. Banks and nonbanks alike are expected to maintain effective processes for managing the risks presented by service providers, including taking the following steps:

    • Conducting thorough due diligence of the service provider to ensure that the service provider understands and is capable of complying with federal consumer financial law
    • Reviewing the service provider’s policies, procedures, internal controls, and training materials
    • Including clear expectations in written contracts
    • Establishing internal controls and on-going monitoring procedures
    • Taking immediate action to address compliance issues

    Implementing consistent risk-based procedures for monitoring third party service provider relationships is an extremely important aspect of meeting the CFPB’s expectations and mitigating risk to the institution.

    The Risk Management Lifecycle and Best Practices

    The CFPB is but one of many agencies that have circulated vendor management guidance. Other federal prudential regulators—most notably the Office of the Comptroller of the Currency—have developed regulatory guidance describing a “lifecycle” for oversight of third parties that supervised institutions are expected to follow. The risk management lifecycle of a service provider relationship consists of:

    • Planning/risk assessment
    • Due diligence and service provider selection
    • Contract negotiation and implementation
    • Ongoing relationship monitoring
    • Relationship termination/contingency plans

    Supplemented by enhanced risk management processes, including meaningful involvement by the Board of Directors and extensive monitoring of performance and condition, the new framework for oversight of third parties can present both cost and operational challenges for all institutions. Financial institutions would be prudent to implement the following best practices into their vendor management procedures, among others:

    • Staffing sufficiently to ensure that service providers are properly monitored
    • Incorporating Board and senior executive involvement throughout the process
    • Documenting its efforts at every stage of the lifecycle