Maryland Legal Alert for Financial Services

In This Issue

Maryland OFR Issues Guidance on Earned Wage Access Programs

Lease Liability May Disqualify Debtors for Eligibility as a Small Business Chapter 11 Debtor

NCUA Changes Model Bylaws

Annual Maryland Law Monitoring for Financial Institutions

In Case You Missed It: New Maryland Laws Go into Effect on October 1
 

Maryland OFR Issues Guidance on Earned Wage Access Programs

On August 1, the Maryland Office of Financial Regulation (OFR) issued advisory regulatory guidance for entities offering earned wage access (EWA) programs.  Previously, we reported on the Consumer Financial Protection Bureau’s advisory opinion addressing how EWA programs may implicate Regulation Z and Truth in Lending Act requirements.

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 actually paid. This delay in payment often results in financial hardship for workers unable to access the wages they have earned when their expenses arise. EWA programs enable workers to access their earned wages before their regularly scheduled pay date.

The OFR guidance splits EWA programs into two ends of the spectrum: (i) employee benefit products that an employer offers to its employees; and (ii) products that an independent third party offers to consumers. The employer-offered product is typically paid via deduction from the employee’s next paycheck, whereas a third-party product is typically repaid via direct debit from the consumer’s bank account. The OFR further notes that an EWA product can take the form of one-time transactions on an as-needed basis or through a subscription model with advances occurring on a reoccurring basis.

From the OFR’s perspective, a key concern for evaluating an EWA program is whether the product is considered a loan or not under Maryland’s credit laws. The OFR states that if an EWA advance is considered a loan, it would fall under Maryland’s Consumer Loan Law (Maryland Commercial Law Title 12, Subtitle 3). Among other requirements, loans that fall under the Consumer Loan Law are subject to state licensing requirements and certain interest rate and fee limitations.

The OFR notes that an employer-offered EWA program is not likely to fall under the Consumer Loan Law since there is an exemption for loans by an employer to an employee. Also, to the extent that the advance is for truly earned wages, the OFR would not consider this a loan since those wages are owed to the employee (i.e., a debt owed to the employee).

The OFR cautions that the analysis gets more complicated for EWA products that are provided by employers through a connected third party. The OFR identified 3 factors that determine whether a third-party provider is truly a service provider to the employer and not a lender providing an advance (and thus subject to the Consumer Loan Law):

1.    Who bears the economic risk?
2.    What level of contact does the third party have with the consumer?
3.    Who benefits from any fees or “tips” the consumer pays?

In reviewing these factors, the OFR cautions that the further removed that the employer is from the product, the greater the chance that third party will be viewed by the OFR as the lender (subject to the Consumer Loan Law) and not a service provider to the employer.

Practice Pointer: While Maryland’s consumer credit laws offer unique challenges to companies engaging with EWA programs, other states are taking action to address potential consumer protection concerns related to this emerging product. Last year, the Arizona Attorney General’s Office issued guidance on EWA programs and in recent months, Nevada and Missouri passed laws governing EWA programs. Employers and EWA program providers should carefully review these emerging laws and guidance to evaluate whether and how they might affect their applicable EWA programs.
 
For any questions concerning this topic, please contact:

Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com

Back to In This Issue

Lease Liability May Disqualify Debtors for Eligibility as a Small Business Chapter 11 Debtor

During the height of the pandemic, Congress enacted a temporary increase to the debt limit from $2,725,625 to $7.5 million for debtors seeking to file a Chapter 11 bankruptcy petition as a small business debtor under the Subchapter V provisions in the Small Business Reorganization Act. Last year, Congress passed another extension of this debt limit increase, which is currently set to expire in June of 2024.

While some have expressed concern over the increased debt limit (and the ways that some savvy debtors have exploited this increase), a recent decision  from the United States Bankruptcy Court for the Eastern District of Virginia may prevent some larger enterprises from seeking relief under the debtor-friendly Subchapter V provisions.

In the case, the debtor (an IT solutions provider) had entered into two separate commercial leases for office space prior to the onset of the pandemic. As with many businesses over the last few years, the debtor reduced its employee headcount, and its entire remaining workforce has shifted to remote work. Leading up to the debtor’s February 2023 bankruptcy filing, the debtor unsuccessfully attempted to negotiate releases from its lease obligations to its landlords. At the time of the bankruptcy filing, the debtor’s obligations due under the remaining lease terms totaled over $14 million.

A debtor seeking relief as a small business debtor under the Subchapter V provisions of Chapter 11 must meet certain requirements, including that their total noncontingent liquidated liabilities cannot exceed the $7.5 million limit.  In this case, the debtor immediately moved to reject the leases and had scheduled its lease-related debts at a lower amount (below the $7.5 million limit) based on what would ultimately be the lease rejection claim amounts as capped under Section 502(b)(6) of the Bankruptcy Code (this provision limits lease rejection damages to the greater of one year’s rent or 15% of the remaining lease term (not to exceed 3 years)).

The lessors moved to dismiss the case, arguing, among other things, that the debtor was ineligible for Subchapter V because the lease obligations exceeded the debt limit. The debtor argued that future rent was a contingent debt as of the filing date and that the lease claim should factor in the rejection damages cap.

The Bankruptcy Court agreed with the lessors, finding that the debtor was ineligible for Subchapter V because the lease obligations exceeded the $7.5 million debt limit.  The Bankruptcy Court reasoned, at the time of the bankruptcy filing, the debtor had an existing debt due under the leases and, thus, those claims must be considered noncontingent liquidated claims. The Bankruptcy Court further reasoned that a potential post-petition event (i.e., lease rejection) should not alter the fact that the debtor’s prepetition liability under the leases exceeded the debt limit.  Though the Bankruptcy Court determined that the debtor was ineligible to proceed as a small business debtor, the court allowed the debtor to proceed under the standard chapter 11 procedures instead of dismissing the case.

For more information concerning this topic, please contact:

David S. Musgrave
410-576-4194 • dmusgrave@gfrlaw.com

Back to In This Issue

NCUA Changes Model Bylaws

Effective August 25, 2023, the National Credit Union Administration (NCUA) adopted a final rule that expanded the ways in which a federal credit union (FCU) can expel members. Prior to the adoption of the final rule, an FCU could expel a member (a) pursuant to the FCU’s non-participation policy or (b) through a special meeting of the members called for the purpose of voting on the expulsion of the member. The final rule provides a third method of expelling members. Specifically, an FCU may now amend its bylaws to permit the FCU’s board (by a 2/3 vote) to expel a member for “cause” without a special meeting of members. The “cause” definition includes substantial/repeated violation of the FCU’s membership agreement, substantial disruption to the FCU’s operations, and fraud/attempted fraud.  Under the final rule, an FCU that amends its bylaws to permit this third method of expulsion is required to make certain disclosures regarding the amendment to all members, including with respect to certain rights that a member has following a decision by the FCU’s board to expel that member.

If you have questions about the final rule, please contact:

Andrew Bulgin
410-576-4280 • abulgin@gfrlaw.com 

Christopher Rahl
410-576-4222 • crahl@gfrlaw.com

Back to In This Issue

Annual Maryland Law Monitoring for Financial Institutions

A number of our clients have asked that we provide quarterly updates concerning Maryland law changes that are likely to impact financial institutions.  For these engagements, we typically compile activity from the Maryland Banking Commissioner’s office (industry alerts/guidance), Maryland statutory/regulatory changes, and relevant Maryland caselaw. We send this information quarterly for a nominal annual fee.  

If you are interested in learning more about an arrangement like this, please contact:

Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com

Back to In This Issue

In Case You Missed It: New Maryland Laws Go into Effect on October 1

Each year, we are proud to publish the Maryland Laws Update, our review of the new Maryland laws that are set to affect financial services providers. In case you missed it, here is our edition of the 2023 legislative session.

While some of the laws have already gone into effect, most new laws default to an effective date of October 1. With that date quickly approaching, now is a great time to review our analysis and ensure that your organization is prepared.

As always, Gordon Feinblatt's Financial Services Team is able to assist you with any questions.

Back to In This Issue