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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 crowdfunding is 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.

  • What's Driving Regulation of Auto Ancillary Products
    May 2, 2016
    Jonice Gray Tucker, Kristopher Knabe, & Eric Chang

    Federal and state regulatory scrutiny of the automobile finance industry has accelerated over the last several months. The Consumer Financial Protection Bureau (CFPB or the Bureau) and the Department of Justice (DOJ) recently announced the fourth public
    resolution with an indirect auto finance company in a series of joint efforts to address perceived fair lending risks from discretionary pricing and compensation policies.

    Similarly, other federal and state regulators have increased their attention on the auto industry, taking a broad look at various practices. This heightened, industry-wide scrutiny is carrying over to another area that has been targeted by regulators—ancillary products
    sold in connection with automobiles. 

    Sales and marketing of ancillary or add-on products have been a top priority for regulators for more than five years—with regulators initially focusing on the offering of such products in connection with credit cards. Most enforcement actions relating to ancillary products have been predicated on allegations of unfair, deceptive, and/or abusive acts and practices (UDAAP or UDAP) — a broadly applied, subjective, and contextspecific theory of liability.

    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.

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.

  • Credit Cards 2016: Consumer Protection in Focus
    December 31, 2015
    Valerie Hletko & Manley Williams

    The past year has seen heightened CFPB interest in the following areas: (i) deferred interest and rewards, (ii) limited English proficiency consumers, and (iii) the recent revisions to the Military Lending Act (MLA). Pursuing simplicity in the design of product features and closely following limited English proficiency issues will help credit issuers mitigate their regulatory risk. Also on the horizon in 2016 is the effective date of the MLA revisions, which were announced in July 2015.

    Deferred Interest and Rewards

    The Bureau has been focused on the marketing and design of deferred interest products and issued a strong admonition in September 2014 relating to the potential for consumer surprise. However, there has been relatively little enforcement activity in this regard. Instead, enforcement generally has focused on technical violations of law. For example, an August 2015 consent order arose out of point-of-sale disclosures as opposed to the product features themselves. Some deferred interest issues, such as “old fashioned mistakes,” (e.g., “if paid in full” is dropped from the marketing copy) may represent low-hanging fruit for the CFPB and should be addressed to mitigate enforcement risk. The Bureau has also expressed concern about technical issues that may complicate deferred interest for consumers, such as expiration of the promotional period prior to the payment due date.

    The Bureau has suggested that consumers base their choice of credit card more on the nature and richness of the rewards than on the interest rate. Accordingly, the Bureau has expressed concern about various aspects of rewards programs, including the expiration of points and complexity surrounding how they are earned and redeemed. While simplicity may reduce regulatory risk, it undoubtedly makes rewards programs more expensive for issuers, and makes it more difficult for consumers to distinguish among them.

    Limited English Proficiency

    In September 2015, the CFPB issued an enforcement action related to mortgages, which required the respondent to spend $1M on targeted advertising and an outreach campaign in Spanish and English over the five-year term of the order. The CFPB recently created several Spanish language documents: a glossary of basic financial terms as well as two documents titled “Your Money, Your Goals,” and “The Newcomer’s Guide to Managing Money.”

    Notwithstanding these efforts, it is worth noting that the CFPB has not translated any of the credit card model forms into Spanish. Determining the appropriate extent of Spanish-language marketing—and fulfillment, if any—is a difficult calculation, and the Bureau has provided no firm guidance. Still, while the industry awaits further developments in 2016, it is advisable to make specific efforts to engage Spanish-speaking communities.

    Military Lending Act

    The recently revised MLA will also impact the credit card industry in 2016. Under the new regulations, most credit card products will be subject to the MLA, including its 36 percent interest rate limitation. Creditors will need to determine who is a covered borrower, but the revised regulations also provided two safe harbors for a creditor to make such a determination. The revised regulations take effect on October 3, 2016, except for most credit cards, as to which the compliance date is October 3, 2017. BuckleySandler addressed this new rulemaking in an MLA Spotlight Series (see Part 1, Part 2, Part 3).