Maryland Legal Alert for Financial Services

In This Issue:

OVERDRAFT CLASS ACTIONS BASED ON ACCOUNT AGREEMENT LANGUAGE

FTC AMENDS TELEMARKETING SALES RULE

CFPB ISSUES PREAUTHORIZED ELECTRONIC PAYMENTS COMPLIANCE BULLETIN

CHANGES TO TILA 'SMALL CREDITOR' RULES TAKE EFFECT JANUARY 1, 2016

ANNUAL PRIVACY NOTICES MAY BE ELIMINATED: STAY TUNED

GORDON FEINBLATT SENDS BEST WISHES FOR THIS HOLIDAY SEASON

OVERDRAFT CLASS ACTIONS BASED ON ACCOUNT AGREEMENT LANGUAGE

Several credit unions have been targets of recent class action lawsuits filed in Maryland concerning overdraft practices.

A California firm that previously brought claims against several large banks (and obtained significant settlements) is now targeting credit unions. At least two out-of-state credit unions subject to these claims have settled for large sums.

While the lawsuits initially focused on California-based credit unions, two recently filed complaints involve credit unions in Maryland. The complaints fault the named credit unions for imposing overdraft fees based on “available balance” (actual balance less any pending transactions or anticipated debits) rather than actual balance at the time of item presentment. The complaints are primarily based on breach of contract theories and point to language in credit union disclosures that overdraft fees will be imposed only when there are insufficient funds or when there are not enough funds in an account to cover a transaction.

We wrote in our April 2015 Maryland Legal Alert about the importance of maintaining carefully drafted account documentation and these recent overdraft cases are a reminder that all depository institutions should verify that their actual overdraft practices closely match the language of account disclosures.

Please contact Christopher Rahl for more information concerning this topic.

FTC AMENDS TELEMARKETING SALES RULE

On November 18, 2015, the Federal Trade Commission (FTC) approved amendments to the Telemarketing Sales Rule (TSR) that will limit the payment methods that “telemarketers” can use when selling products or services.

Under the TSR, “telemarketing” is broadly defined to include any “plan, program, or campaign” used to “induce the purchase of goods or services … by use of one or more telephones.”

A “telemarketer” under the TSR is generally any individual or entity that initiates or receives a telephone call to or from a consumer in connection with telemarketing.

The recent FTC changes to the TSR include prohibitions on using the following payment methods in connection with telemarketing:

• Remotely created checks and other payment orders (created by the telemarketer or its agent using the deposit account information of the purchaser),
• Cash-to-cash money transfers (provided through third-party money transmitters such as MoneyGram and Western Union), and
• Cash reload mechanisms (the use of codes/devices to convert cash into electronic form in order to load onto general use prepaid cards).

In addition, the changes clarify certain telemarketer responsibilities concerning the federal Do Not Call Registry (and each telemarketer’s internal Do Not Call list) and prohibit any sharing of federal Do Not Call Registry access fees between telemarketers.

The changes prohibiting the above payment methods become effective 180 days after the TSR amendments are published in the Federal Register and the remaining changes take effect 60 days after the publication date. Businesses subject to the TSR will need to ensure that they do not use any of the prohibited payment methods after the effective date of the changes.

For more information concerning this topic, please contact Christopher Rahl.

CFPB ISSUES PREAUTHORIZED ELECTRONIC PAYMENTS COMPLIANCE BULLETIN

On November 23, 2015, the Consumer Financial Protection Bureau (CFPB) issued a compliance bulletin to remind entities of their obligations under the Electronic Funds Transfer Act (EFTA) and its implementing regulation, Reg. E.

The bulletin clarifies the requirements that must be met when obtaining authorizations to initiate preauthorized electronic funds transfers (EFTs) from consumer accounts. In addition to covering the basic Reg. E requirements (clear, readily understandable, and readily identifiable as an EFT authorization), the bulletin provides some helpful guidance concerning telephone authorizations.

Under Reg. E, preauthorized EFTs from a consumer’s account must be authorized by a “writing signed or similarly authenticated by the consumer.” The bulletin confirms that a signed, written authorization may be obtained over the telephone, by use of an oral recording or by requiring a consumer to enter a code through a telephone keypad, so long as the authorization complies with the Electronic Signatures in Global and National Commerce Act (E-Sign).

Because E-Sign defines “electronic signature” to include electronic sounds, symbols, and processes “attached to or logically associated with a contract or other record,” recording a consumer’s oral authorization or telephone keypad entries can serve as the “electronic signature” required under Reg. E. The bulletin advises that such recordings should evidence the consumer’s identity, that they must be retained, and that the consumer must intend the oral authorization or keypad entries to be an electronic signature.

Also, businesses must provide a copy of the terms of the authorization, which include the recurring nature of the authorization and the EFT amounts and timing. In addition, businesses must comply with applicable state laws concerning the recordation of telephone conversations with consumers.

If you would like more details about the CFPB’s bulletin or regulatory requirements surrounding preauthorized EFTs and related state requirements, please contact Christopher Rahl.

CHANGES TO TILA 'SMALL CREDITOR' RULES TAKE EFFECT JANUARY 1, 2016

Many of our clients are community financial institutions. Some of these financial institutions take advantage of special Truth in Lending Act (TILA) Qualified Mortgage rules applicable to “small creditors.”

Effective January 1, 2016, the definition used to establish “small creditor status will change, making the status available to some additional institutions but precluding others from the status. The rules are convoluted and any institution that currently relies, or wants to rely, on small creditor status should re-examine the operative TILA rule, found at 12 CFR §1026.35(b)(2)(iii)(B) and (C) (as published in the October 2, 2015, Federal Register).

Simply stated (and paraphrasing), beginning January 1, 2016, to be a “small creditor” for Qualified Mortgage purposes, the creditor must meet two tests:

• During the preceding calendar year (or, if the loan application is received before April 1 of the current calendar year, then during either of the two preceding calendar years), the creditor and its affiliates together made no more than 2,000 (raised from 500) first lien consumer credit home loans, not counting loans held in the creditor’s or affiliates’ portfolios; and
   
• As of the preceding December 31 (or, if the loan application is received before April 1 of the current calendar year, then as of either of the two preceding December 31), the creditor along with affiliates that regularly make first lien consumer credit home loans together (as opposed to only the creditor) had assets of less than $2 billion.

In addition, the new rules extend for applications received before April 1, 2016, the exception that allows certain balloon loans by small creditors to be Qualified Mortgages even if the “rural” or “underserved” test is not met. This exception was scheduled to expire on January 10, 2016. On the topic of rural and underserved, the new rules expand and clarify those definitions, which should make it easier for institutions to determine if their loans are secured by properties in rural or underserved”areas and could make the Qualified Mortgage balloon loan exception more available.

Please contact Christopher Rahl for more information concerning this topic.

ANNUAL PRIVACY NOTICES MAY BE ELIMINATED: STAY TUNED

On December 4, 2015, President Barack Obama signed into law the Surface Transportation Reauthorization and Reform Act (Pub. L. No. 114-94).

A number of financial regulatory reform provisions are included near the end of this law, including Section 75001, which amends Section 503 of the Gramm-Leach Bliley Act (GLB). Specifically, GLB is amended to eliminate the requirement that financial institutions provide an annual privacy notice if:

• The financial institution only shares nonpublic personal information as permitted by express statutory or regulatory exceptions to disclosures, and
• There have been no changes in that financial institution’s policies and practices regarding disclosure of nonpublic personal information since the most recent privacy notice was sent.

While this federal statute eliminates the need to send an annual privacy notice under certain circumstances, as of the date this Maryland Legal Alert is being published (which is less than two full business days since the law was signed), applicable privacy regulations have not yet changed.

We recommend that financial institutions look to their regulators for guidance before deciding not to send annual privacy notices.

Please contact Christopher Rahl for more information concerning this topic.

GORDON FEINBLATT SENDS BEST WISHES FOR THIS HOLIDAY SEASON

From all of us at Gordon Feinblatt LLC, and especially from the Financial Services Practice Group, we wish everyone a happy holiday season and a healthy and prosperous New Year. Please view our holiday card!