Maryland Legal Alert for Financial Services

IN THIS ISSUE:

CFPB ISSUES SECOND PART OF FINAL DEBT COLLECTION RULE

CFPB ISSUES GUIDANCE FOR EARNED WAGE ACCESS PROGRAMS

LANDLORD’S LENDER LACKED AUTHORITY TO ENFORCE TERMS OF LEASE

FEDERAL RELIEF BILL INCLUDES SEVERAL AMENDMENTS TO THE BANKRUPTCY CODE

BANKS URGED TO TRANSITION AWAY FROM LIBOR

MARYLAND SETS LOWER MINIMUM INTEREST RATE FOR ESCROW AND SPECIAL PURPOSE ACCOUNTS

CFPB Issues Second Part of Final Debt Collection Rule

On December 18, 2020, the Consumer Financial Protection Bureau (CFPB) issued the second part of its long-awaited final rule implementing the Fair Debt Collection Practices Act (FDCPA) via amendments to Regulation F. Last month, we reported on the first part of the final rule, which focused on communications between debt collectors and consumers. The second part of final rule focuses on validation notices, passive debt collection and time-barred debt. Highlights include:

• Validation Notices — The FDCPA generally requires a debt collector to provide a debt validation notice either in its initial communication with a consumer or shortly thereafter. The final rule provides a model form collectors may use as a safe harbor. Under certain circumstances, debt collectors may provide the validation notice electronically. Among other things, the validation notice must provide an itemization of the current amount of the debt as of an “itemization date” reference point (e.g., last statement date, charge-off date and last payment date).
• Passive Debt Collection — Passive debt collection refers to the practice of reporting debt collection information to credit reporting agencies without first attempting to notify the consumer about the debt. The final rule prohibits this practice, requiring that a debt collector must either speak to a consumer or wait a reasonable period of time (14 days) after sending a written message to the consumer about the debt to receive a notice of inability to deliver the notice before furnishing information to a credit reporting agency. If the collector receives a notice of inability to deliver the notice, it must resubmit the debt information to the consumer before furnishing information to a credit reporting agency.
• Time-Barred Debt — The final rule prohibits debt collectors from bringing or threatening to bring a legal action to collect a debt that is barred by applicable statute of limitations. This rule sets forth a strict liability standard for these violations. The final rule does not prohibit the filing of a proof of claim in consumer’s bankruptcy case with respect to a time-barred debt.

Practice Point: The final rule becomes effective on November 30, 2021. Debt collectors should pay careful attention to the model form validation notice and consider revising their notices, accordingly. Debt collectors should also review their policies for evaluating any applicable statute of limitations.

Please contact Bryan M. Mull with any questions concerning this topic.

Editor's note: This article was updated January 27, 2021, to correct the effective date of the final rule.

Contact Bryan M. Mull | 410-576-4227

CFPB Issues Guidance for Earned Wage Access Programs

Recently, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion, addressing regulatory uncertainty surrounding earned wage access (EWA) programs. Specifically, the advisory opinion addresses whether the definition of credit under Regulation Z (Reg. Z), which implements the Truth in Lending Act (TILA), applies to certain EWA programs.

EWA programs seek to remedy a common dilemma for wage earners, namely, the lag between when a worker earns wages and when the worker is paid. This delay in payment often results in financial hardship for workers unable to access the wages they have earned when expenses arise. EWA programs seek to enable workers to access their earned wages before their regularly scheduled pay date.

TILA and Reg. Z generally require parties offering credit to provide consumers with certain disclosures. In the advisory opinion, the CFPB determined that certain “covered EWA programs” do not fall within the definition of credit under Reg. Z. To constitute a covered EWA program, it must satisfy the following criteria:

• The EWA program provider (Provider) must contract with the employer, not the employee, to offer EWA programs to employees;
• An EWA transaction cannot exceed the accrued cash value of the employee’s earned wages based on information provided by the employer to the Provider;
• The employee is not charged fees in connection with the EWA transaction;
• The Provider can only recover the amount advanced to the employee through an employer-facilitated payroll deduction from the employee’s next paycheck;
• The Provider has no recourse against the employee for payment;
• Before an EWA transaction, the Provider must warrant to the employee that it will not charge the employee fees, that it has no remedies against the employee for payment, and that it will not engage in debt collection activities related to the EWA transaction; and
• The Provider will not assess the employee’s credit to determine an employee’s eligibility.

The CFPB also recently issued an approval order under its compliance assistance sandbox policy, authorizing certain elements of a EWA provider’s proposed EWA program.

Practice Point: The guidance sets forth a safe harbor for covered EWA programs from TILA/Reg. Z concerns, but the CFPB did not state that EWA programs that do not meet the above requirements automatically fall within the scope of TILA/Reg. Z. As these programs continue to rise in popularity, providers and employers should review their programs to ensure compliance with the myriad laws and regulations that might govern this practice.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227

Landlord’s Lender Lacked Authority to Enforce Terms of Lease

A recent decision from the U.S. Bankruptcy Court for the Eastern District of Virginia highlights some of the challenges that arise when a retail tenant files a bankruptcy petition.

In this case, a large department store retailer filed a bankruptcy petition in the wake of the novel coronavirus-related store closures. Five years before the bankruptcy, the debtor’s landlords had entered into a loan agreement with several lenders, under which the landlords pledged as security for the loan the debtor’s leases and rents under a master lease for 24 of the debtor’s stores. The debtor, in turn, executed a subordination, non-disturbance and attornment agreement (SNDA), under which it acknowledged that its rents secured the landlords’ loan and agreed to pay rent into a lockbox account. The original lenders consummated a securitization of the loan and assigned their rights in the loan to an investment trust.

Payment defaults occurred under the loan and the trust moved for an order from the bankruptcy court compelling the debtor to pay rent pursuant to the master lease. The trust argued that it had standing to request such relief as a third-party beneficiary under the master lease. The bankruptcy court disagreed, reasoning that the SNDA did not create an obligation for the debtor to pay rent to the lender/trust. Instead, the debtor’s obligation to pay rent was owed solely to the landlords under the master lease. The court also held that the trust’s security interest in the rent did not give rise to a right to compel payment from the debtor under the Uniform Commercial Code or in connection with the landlords’ assignment of rents.

Practice Point: The court also stressed that, aside from the legal issues, it was unreasonable to expect a debtor to confer with its landlords’ creditors who had declined to enforce their own right to stand in the landlords’ shoes with respect to the master lease. Lenders of landlords must take a more active role, whether through foreclosure or receivership, if they want to stand in their landlord-borrowers’ shoes with respect to a distressed tenant. Alternatively, lenders should consider drafting their loan documents in a manner that might afford them greater control over rent collection.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227

Federal Relief Bill Includes Several Amendments to the Bankruptcy Code

The Consolidated Appropriations Act, 2021 (HR 133) — the latest effort by Congress to address the COVID-19 pandemic — was enacted December 27, 2020. Among many other provisions, HR 133 included several notable amendments to the Bankruptcy Code, including:

• Relief Payments Excluded from the Estate — Federal stimulus rebates are excluded as property of the bankruptcy estate.
• Possible Access to PPP Loans — As we previously reported, disputes arose across the country between the Small Business Administration (SBA) and debtors in bankruptcy cases over the SBA’s rule prohibiting bankruptcy debtors from obtaining Paycheck Protection Program loans (PPP Loans) while in bankruptcy. HR 133, which contains additional PPP Loan funding, attempts to address this dispute by providing that certain small business debtors may be able to obtain a PPP Loan while in bankruptcy. Crucially, however, this may only occur if the SBA issues guidance to the U.S. Trustee program that the SBA acquiesces to this practice.
• Forbearance Period Proofs of Claim — The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides borrowers with certain federally backed mortgages to obtain forbearance relief under their loans. HR 133 provides a mechanism for creditors to file a proof of claim based on losses associated with those forbearance periods. In turn, HR 133 affords a Chapter 13 debtor with the ability to make a limited modification to their Chapter 13 plan to account for such a forbearance proof of claim.
• Treatment of Unexpired Commercial Leases — A debtor in a “Subchapter V” small business case may seek leave to delay performance of its post-petition rent obligations for a 120-day period (extended from 60 days) if the debtor is experiencing a COVID-19 hardship. Also, an unexpired commercial lease is deemed rejected if not assumed within 210 days (extended from 120 days).
• Preferential Transfers — HR 133 excludes from preferential transfer liability certain deferred payments made to commercial landlords and suppliers of goods and services after March 13, 2020, excluding fees, penalties and interest that would not have been incurred had the payments been timely made.
• Chapter 13 Plan Defaults — HR 133 enables a Chapter 13 debtor under a confirmed plan to obtain a discharge, notwithstanding the occurrence of up to three mortgage payment defaults after March 13, 2020, if the missed payments resulted from a coronavirus hardship. The debtor must still repay the missed mortgage payments, but the discharge would cover the other debts covered by the plan.

Practice Point: The above amendments are generally temporary and set to expire in one to two years. Given that the economic fallout of the COVID-19 emergency is still unfolding, additional revisions to the Bankruptcy Code may also be on the horizon. One such bill that has garnered headlines is the Consumer Bankruptcy Reform Act of 2020. This ambitious bill proposes to rewrite the consumer bankruptcy system and create a new “Chapter 10” filing that would be the exclusive avenue for a consumer bankruptcy filing, among many other revisions. We will continue to monitor this bill and other pending bankruptcy legislation.

Please contact Bryan M. Mull with any questions concerning this topic.

Contact Bryan M. Mull | 410-576-4227

For additional information on the impact of the coronavirus, visit our information hub for a list of up-to-date content.

Banks Urged to Transition Away from LIBOR

On November 30, 2020, the Federal Deposit Insurance Corporation, the Federal Reserve Board and the Office of the Comptroller of the Currency (the Agencies) issued a joint Statement of LIBOR Transition, encouraging banks to transition away from using the London InterBank Offered Rate (LIBOR) for new contracts before December 31, 2021.

LIBOR’s administrator previously announced that it will cease publishing one-week and two-month U.S. dollar (USD) LIBOR rates following publication on December 31, 2021, and that it will cease its remaining USD LIBOR rates after June 30, 2023.

The Agencies warned that for new contracts entered into before December 31, 2021, banks should use a replacement rate or include robust fallback language containing a clearly defined alternative reference rate once LIBOR is discontinued. The Agencies further warned that banks are jeopardizing their safety and soundness if they fail to plan for LIBOR disruption, especially if banks enter into new contracts after December 31, 2021, that use USD LIBOR as a reference rate.

Please contact Christopher T. Magette with any questions concerning this topic.

Contact Christopher T. Magette | 410-576-4191

Maryland Sets Lower Minimum Interest Rate for Escrow and Special Purpose Accounts

Maryland law requires depository institutions doing business in Maryland that make first lien residential real property loans and maintain escrow accounts for those loans to pay a minimum rate of interest on those escrow accounts.

Maryland law also requires Maryland-chartered banks that offer certain short-term “special purpose” deposit accounts (for example, Christmas Club accounts) to pay a minimum rate of interest on those deposit accounts. The minimum rate of interest on these accounts is based on the weekly average yield of U.S. Treasury Securities adjusted to a constant maturity of one year as of the first business day of the calendar year.

The minimum rate of interest to be paid on these accounts for 2021 is 0.11% (i.e., the statutory prescribed rate as of January 4, 2021, the first business day of 2021). This is down from 1.56%, the minimum rate to be paid in 2020.

Please contact Christopher R. Rahl if you have any questions about this topic.

Contact Christopher R. Rahl | 410-576-4222