Maryland Legal Alert for Financial Services

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CFPB Issues PACE Loan Guidance

CFPB Warns Against Creating "Fake" Deposit Accounts

Ninth Circuit BAP: Alter Ego Claim Against Principals of Discharged Debtor Does Not Violate Discharge Injunction
 

CFPB Issues PACE Loan Guidance

Property Assessed Clean Energy (PACE) loans give an individual an avenue to borrow money for home improvements that generally relate to energy efficiency or natural disaster preparation. For example, a PACE loan may be used to finance solar panel installation or insulation improvements to a home.

PACE loans are unique because they are repaid through property taxes, as opposed to a traditional loan payment. Even though local governments oversee these PACE loans, private companies generally handle operation and issuance of these loans. PACE loans remain tied to the property, even if the borrower later sells the property. This has resulted in buyers being unwilling to purchase properties, or their mortgage agreement restricting these purchases.

Consumers have made several complaints with respect to the financing of these loans and misleading marketing tactics. Due to the super-priority liens that accompany a PACE loan, critics allege that PACE companies are incentivized to maximize the PACE loan amount, with little regard toward consumer knowledge or financial literacy.

In response to these concerns, the Consumer Financial Protection Bureau (CFPB) has proposed a rule that would implement heightened consumer protection requirements for PACE loans under the Truth in Lending Act’s (TILA) ability-to-repay rules.

The proposed rule amends commentary regarding the definition of credit in Regulation Z, making it clear that TILA applies to PACE loans. The proposed rule adds definitions for a “PACE company” and a “PACE transaction,” requires PACE creditors and PACE companies to consider a consumer’s ability to repay when issuing a new PACE loan, and outlines notification requirements specific to PACE loans. The proposed rule also provides model forms and clauses for the notices.

Additionally, the proposed rule excludes PACE transactions from eligibility for the qualified mortgage categories under Regulations Z’s Ability-to-Repay/Qualified Mortgage Rule, and exempts PACE transactions from the Higher-Priced Mortgage Loans Escrow Rule and the periodic statement requirement under the Mortgage Servicing Rule.

The comment period on the proposed rule closes July 26, 2023.  The final rule would take effect one year after publication in the Federal Register and apply to covered transactions for which creditors receive an application on or after the effective date.

Practice Pointer: Entities engaged in PACE transactions will need to be aware of the final rule’s effective date to ensure compliance with the updated requirements.

For more information concerning this topic, please contact:

Tonya R. Foley
410-576-4238 • tfoley@gfrlaw.com

Maxwell T. Cooke
410-576-4141 • mcooke@gfrlaw.com

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CFPB Warns Against Creating “Fake” Deposit Accounts

In yet another example of the Consumer Financial Protection Bureau’s emphasis on “junk fees,” the CFPB issued a circular addressing the re-opening of a customer’s closed deposit account to “harvest fees.”

As described in the circular, the situation arises where a customer has closed her account with the institution, but the institution later receives a debit or deposit directed to the now-closed account. The CFPB cautions that an institution may be engaging in an unfair act or practice if the institution unilaterally re-opens the account to process debits or deposits.

The CFPB cites three potential substantial harms that a customer may face if an institution unilateral reopens an account: (i) the customer may incur penalty fees if the post-closure debit is processed against a reopened account with insufficient funds; (ii) reopening an account increases the chances that an unauthorized third party may obtain access to the customer’s funds; and (iii) overdraws on the reopened account could lead to negative credit reporting.

The CFPB contends that consumers cannot reasonably avoid these harms, reasoning that consumers cannot control whether or not a third party properly follows the consumer’s instructions to cease automated deposits or debits directed to the closed account.  The CFPB further stated that any benefit of reopening the accounts does not outweigh the risk of harm, since there are other actions that an institution can take when it receives a debit or deposit to a closed account; namely, the creditor can decline the transaction.

Practice Pointer: It appears that, in the CFPB’s view, the only response that an institution can take if it receives a debit or deposit after account closure is to decline the transaction. While some institutions’ account agreements may authorize this practice, the circular views these agreements as unenforceable “take it or leave it” contracts. Depository institutions should review their current practices for account closure and post-closure transaction processing in light of this guidance.

For more information concerning this topic, please contact:

Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com

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Ninth Circuit BAP: Alter Ego Claim Against Principals of Discharged Debtor Does Not Violate Discharge Injunction

Under the Bankruptcy Code, once a debtor obtains a discharge, a creditor is prohibited from pursuing a pre-petition debt as a personal liability of the debtor. While it is well-established that this “discharge injunction” does not extend to a non-debtor guarantor of the pre-petition debt, a recent case from the Bankruptcy Appellate Panel of the Ninth Circuit Court of Appeals (BAP) examined a related but distinct scenario. Namely, whether the discharge injunction prevents a creditor from asserting claims against a non-debtor party under an “alter ego” liability theory relating to the discharged debtor’s pre-petition conduct.

In this case, an LLC filed a bankruptcy petition on the eve of a trial in a breach of contract action by a creditor against the LLC. The creditor later filed a new complaint against the LLC’s principals. In this new complaint, the creditor did not name the LLC as a defendant but alleged that the LLC was “conclusively liable” to the creditor as to the underlying debt. The creditor sought judgment against the principals declaring that they were alter egos of the LLC and therefore liable to the creditor for the debt owed by the LLC to the creditor.

The LLC later received a discharge and then filed a motion for contempt against the creditor for violating the discharge injunction. The LLC (along with the principals) argued that the alter ego suit sought to recover a discharged debt because the alter ego claim necessarily treats the LLC and the principals as being one and the same.  The Bankruptcy Court denied the motion for contempt and the LLC appealed to the BAP.

The BAP confirmed the Bankruptcy Court’s ruling. The BAP reasoned that Section 524 of the Bankruptcy Code is clear that the discharge order discharges a debtor’s personal liability, not the underlying debt. Moreover, the discharge does not affect the liability of non-debtor parties, except for an exception that does not apply to the alter ego claim in this case. Similarly, the BAP rejected the LLC’s argument that the alter ego litigation would violate the discharge injunction by forcing the LLC to participate in discovery, since the suit does not seek recovery from the LLC.

For more information concerning this topic, please contact:

Bryan M. Mull
410-576-4227 • bmull@gfrlaw.com

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