Maryland Legal Alert for Financial Services

IN THIS ISSUE:

OCC FINTECH CHARTER SETBACK

DEBTOR'S PREPETITION AGREEMENT NOT TO OPPOSE REQUEST TO LIFT AUTOMATIC STAY IS ENFORCED

DEBT COLLECTION NOTICE REFERRING TO CREDITOR AS "ASSIGNEE" MAY CONSTITUTE FDCPA VIOLATION

OCC Fintech Charter Setback 

In December 2016, the Office of the Comptroller of the Currency (OCC) announced the creation of a special purpose national bank charter under the National Bank Act (NBA) (see our Maryland Legal Alert - December 2016).

The OCC then announced in July 2018 that it was ready to accept applications from fintech firms for the new bank charter. The announcement was met with resistance from several state banking regulators, who believed the OCC had stepped beyond its authority under the NBA. 

In September 2018, the Superintendent of the New York State Department of Financial Services (NYDFS) filed suit in the U.S. District Court for the Southern District of New York against the OCC, challenging the OCC’s authority to create the new, special purpose charter.

In February 2019, the OCC moved to dismiss the NYDFS’s action.

In May 2019, the court denied the OCC’s motion to dismiss, in part, based primarily on the argument that bank charters are only available to institutions that take deposits because of language in the NBA concerning institutions involved in the “business of banking.”

On October 21, 2019, the court then issued a supplemental order confirming that all issues in the NYDFS complaint had been resolved in the May 2019 order, and the court entered judgment in favor of the NYDFS and closed the case.

Practice Pointer: This is a setback for the OCC’s efforts to provide the same preemptive authority for fintech firms to operate in multiple states with some degree of lending uniformity. The OCC has indicated that it intends to appeal the recent ruling in favor of the NYDFS. We will continue to monitor the case.

For questions concerning fintech charters and fintech regulation, please contact Christopher Rahl.

Contact Christopher Rahl | (410) 576-4222

Debtor's Prepetition Agreement Not to Oppose Request to Lift Automatic Stay is Enforced

In a forbearance agreement entered into before bankruptcy, the debtor, an owner of a church securing the loan, agreed that if it filed for bankruptcy, it would not oppose the lender’s motion for relief from the automatic stay (the Waiver). The debtor later defaulted under the forbearance agreement and filed a Chapter 11 case. The lender filed a motion for relief from the automatic stay and argued that the Waiver should be enforced. The Bankruptcy Court for the Northern District of Georgia granted the lender’s motion.

The court reasoned that while the Waiver would not be enforceable if it was included with the original loan documents, there is a policy in favor of enforcement where a Waiver is included in a forbearance agreement and the case is a single asset real estate case. The court noted that the Waiver is not self-executing and that the court would consider several factors in deciding whether to enforce it, including: (a) the sophistication of the parties, (b) the consideration for the Waiver, (c) whether other parties would be adversely affected by the Waiver, and (d) the feasibility of the debtor’s plan. Ruling in favor of the lender, the court was persuaded by the sophistication of the parties, the lender having agreed to a 10-month forbearance, the existence of little trade debt and thus minimal harm to other parties, and the debtor being unable to propose a feasible plan.

Practice Pointer: A bankruptcy court is more likely to enforce a provision in a forbearance agreement, in which a debtor agrees not to oppose relief from the stay than provisions prohibiting the filing of bankruptcy or terminating the stay upon a filing. This is particularly true where the collateral is single asset real estate and the parties to the agreement are sophisticated. The Maryland Bankruptcy Court enforced a similarly worded Waiver in the case of Massachusetts Mutual Ins. Co. v. Shady Grove Tech Center Associates L.P. (In re Shady Grove Tech Center Associates LP), 216 B.R. 386 (Bankr. D. Md. 1998).

Please contact Lawrence Coppel for more information concerning this topic.

Contact Lawrence Coppel | (410) 576-4238

Debt Collection Notice Referring to Creditor as 'Assignee' May Constitute FDCPA Violation

The Fair Debt Collection Practices Act (FDCPA) requires that a debt collector provide written notice to a debtor within five days after the initial communication with a consumer debtor. Among other disclosures, this initial notice must identify the name of the creditor to whom the debt is owed. A recent decision from the U.S. Court of Appeals for the Third Circuit held that a debtor stated a plausible claim for an FDCPA violation when the collection firm’s initial notice failed to identify the creditor’s identity explicitly and instead only referred to the creditor as an “assignee” of other listed entities.

The subject line of the collection firm’s notice listed the originating bank's name as assignee of three other entities. The notice also provided that the collection firm was a debt collector that represents the originating bank "in connection with [debtor’s] account." The debtor filed suit against the debt collector, alleging that the letter referenced at least four entities but failed to identify which of the entities was the creditor to whom the debtor was indebted. The trial court granted the collection firm’s motion to dismiss and the debtor appealed.

The Third Circuit reversed the dismissal, holding that the debtor had stated a plausible FDCPA claim. The court emphasized that the “least sophisticated debtor” standard governs the adequacy of collection notice disclosures. Applying this standard, the court reasoned that the notice’s identification of the creditor was deficient because: (1) the letter failed to explicitly state that the originating bank was the creditor, (2) identifying the originating bank as the assignee of three other entities did not disclose the creditor’s identity even to a sophisticated debtor since the term “assignee” is susceptible to different interpretations, and (3) read as a whole, the notice’s reference to three other entities overshadowed the creditor’s identity.

Practice Pointer: This case demonstrates the importance of the least sophisticated debtor standard in FDCPA cases. Although the collection notice identified the originating bank as the debt collector’s client and the assignee of several predecessors, the court reasoned that this description nonetheless could be confusing as to the identity of the actual creditor. Debt collectors should review their initial collection notices to ensure that the creditor’s identity is plainly stated and free from unnecessary legalese that could confuse the least sophisticated debtor.

Please contact Bryan Mull for more information concerning this topic.

Contact Bryan Mull | 410-576-4227