Maryland Legal Alert for Financial Services

In This Issue

Compliance with FTC’s Safeguards Rule

Beware of Potential Stay Violations in “Information-Only” Mortgage Statements

FTC Proposed Rule Would Ban Most Non-Compete Agreements

Compliance with FTC’s Safeguards Rule

The Federal Trade Commission (FTC) has authority to issue regulations and take enforcement action in connection with unfair or deceptive business practices. The FTC’s authority covers certain non-bank entities engaged in activities that are “financial in nature” and which are not subject to the enforcement authority of another regulator under the federal Gramm-Leach-Bliley Act (GLBA). Covered entities include mortgage companies/brokers, creditors, financial advisors, tax preparation firms, credit counselors, and debt collectors. In addition, financial services providers covered under the Safeguards Rule include: appraisers, entities that regularly wire funds to and from consumers, entities that provide real estate settlement services, and matchmaking/credit service business entities.

The FTC shares enforcement authority with the Consumer Financial Protection Bureau (CFPB) for these types of non-bank financial services providers in the consumer protection area. In late 2021, the FTC adopted a rule covering Standards for Safeguarding Customer Information (Safeguards Rule). A number of requirements under the Safeguards Rule are scheduled to take effect on June 9, 2023 and impose information security restrictions on covered entities. Under the new rule, covered entities must explain information sharing practices and implement policies/procedures concerning how consumer information is accessed, collected, distributed, processed, stored, transmitted, and disposed. The provisions of the new rule scheduled to go into effect include requirements to:

• Designate a qualified individual to oversee the entity’s information security program;
• Develop a written risk assessment;
• Limit and monitor who can access sensitive customer information;
• Encrypt all sensitive information;
• Train security personnel;
• Develop an incident response plan, periodically assess the security practices of service providers; and
• Implement multi-factor authentication or another method with equivalent protection for any individual accessing customer information.

Practice Pointer: Many non-bank financial services providers have already adopted information security practices that comply with the federal GLBA. Those entities who have followed GLBA requirements up to this point should review existing information security practices to determine what additional requirements the Safeguards Rule imposes.  Those entities subject to the FTC’s jurisdiction that have not implemented information security provisions following GLBA requirements should review information security policies and procedures and make adjustments to ensure compliance with the Safeguards Rule.

For questions concerning this topic, please contact Christopher R. Rahl.

Contact Christopher R. Rahl | 410-576-4222

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Beware of Potential Stay Violations in “Information-Only” Mortgage Statements

A recent decision from the U.S. Bankruptcy Appellate Panel of the Ninth Circuit (BAP) serves as a useful reminder that servicers should pay close attention to their monthly statements to customers under bankruptcy protections.

In this case, the debtors filed a chapter 13 bankruptcy when they were current on their mortgage, aside from a small escrow shortage. The servicer filed a proof of claim and later filed a notice asserting a $950 claim for legal fees.

The servicer sent monthly mortgage statements to the debtors post-petition, which included a typical disclaimer that the statement was for informational purposes only. However, despite conceding that the $950 legal fee claim was a prepetition claim, the servicer included the $950 in the monthly statement as one of the “Advances on Your Behalf” under the section entitled “Next Payment Breakdown (Post-Petition Payment).” Thus, the $950 was shown as a part of the “Total Payment Amount” on the monthly statement along with the regular post-petition monthly payment amount.

The debtors paid the $950 and later objected to the servicer’s proof of claim as to the small escrow shortage and the $950 fee. The debtors later moved for contempt, arguing that the servicer willfully violated the automatic stay by including the $950 attorney’s fee claim on the monthly billing statement. The Bankruptcy Court ruled that the attorney’s fees were a prepetition claim but that the servicer did not violate the automatic stay by including those fees in the billing statement. The court reasoned that the billing statements are permitted, the debtors had an interest in using that information to formulate their chapter 13 plans, and that the debtors were not coerced into paying the fees.

On appeal, the BAP reversed. While the BAP noted that information-only mortgage statements to debtors are beneficial to debtors, the typical disclaimer can be contradicted by coercive demands for payment. The BAP reasoned that by including the $950 in attorney’s fees as part of the regular monthly payments (instead of prepetition arrears to be paid through the plan), the servicer sought immediate payment of those fees.

Practice Point: Though the BAP noted that it expects damages to be minor, this case nonetheless demonstrates the need for servicers to pay careful attention to their monthly statements when a customer files for bankruptcy.

For more information concerning this topic, please contact Bryan M. Mull.

Contact Bryan M. Mull | 410-576-4227

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FTC Proposed Rule Would Ban Most Non-Compete Agreements

On January 5, 2023, the Federal Trade Commission (FTC) issued a proposed rule that would ban non-compete agreements. The ban would apply not only to agreements made after the effective date of the rule but also to existing agreements. The proposed rule defines a non-compete clause as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.”  The proposed rule includes an exception only for individuals selling a business entity or their ownership interest in a business entity. Additionally, the proposed rule provides a functional test to determine whether other contractual terms, such as non-solicitation and non-disclosure agreements, are de facto non-compete clauses. If adopted, the proposed rule would be effective 180 days after the final rule is published, and, as noted above, the ban will be retroactive and apply to existing agreements. The proposed rule would require employers to notify current and former employees within 45 days of the rule’s effective date that their non-compete agreements are no longer valid or enforceable. Due to the large volume of comments submitted and pushback from a wide range of business organizations, the comment review period, originally set to end on March 20, 2023, was extended to April 19, 2023. Most observers expect that the FTC will issue a final rule and that such rule will face court challenges soon after it is issued.

For questions about this topic, please contact Tonya R. Foley.

Contact Tonya R. Foley | 410-576-4238

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