Firm News

The CFPB has approved Bank of America’s no action letter application for its new short-term, payday loan program. Bank of America is the first major bank to receive such a letter. The application was based on the No-Action Letter Template issued by the CFPB on May 22, 2020…Read More

On Election Day, Californians voted in favor of Proposition 24, the California Privacy Rights and Enforcement Act of 2020 (“CPRA”,a/k/a “CCPA 2.0”). See our prior ALERTS of July 7, 2020, May 6,
2020 and September 26, 2019…Read More

On October 30th, the Consumer Financial Protection Bureau (“CFPB”) released part one of its final debt collection rule (known as Regulation F, to be codified at 12 C.F.R. Part 1006) under the federal
Fair Debt Collection Practices Act (“FDCPA”)…Read More

Only two months after the California Consumer Privacy Act (“CCPA”) implementing regulations went into effect, the California Attorney General’s Office has released a third set of proposed modifications. When the final CCPA Regulations went into effect on August 14, 2020, a handful of requirements were removed during the Office of Administrative Law’s review process. See our prior ALERT dated Aug. 14, 2020. Among the provisions that were removed were the requirements that (i) a business must provide notice to the consumer by an offline method and (ii) the method for submitting requests to opt-out must be easy for consumers to execute and require minimal steps to allow for opt-out.

In response to the removal of such provisions, the proposed modifications make the following changes:

• Requiring businesses that collect personal information offline must provide notice by an offline method. The proposed modifications include two illustrative examples of providing “offline” notice of right to opt-out;
• Requiring that a business’s method for submitting requests to opt-out must be easy for consumers to execute and providing five examples of how the method for submitting such requests should appear to consumers; and
• Allowing businesses to require that an authorized agent must provide proof to the business that the consumer gave the agent signed permission to submit the request.

The Attorney General’s office will accept written comments regarding the proposed changes until October 28, 2020. On November 3, 2020, Californians will vote on the California Privacy Rights Act ballot initiative, also known as “CCPA 2.0.” If the CCPA 2.0 receives a majority of “yes” votes, then it will become law and expand and amend the CCPA creating new consumer privacy rights, privacy requirements and enforcement mechanisms. See our prior ALERT dated July 7, 2020.

We continue to monitor updates on the CCPA. If you have any questions regarding the CCPA or need help developing a compliance program that complies with the CCPA, please let us know.

• Mike Tomkies and Lindsay Valentine

A federal court in New York has dismissed a class action filed against two credit card securitization trusts and a nonbank limited liability company finding that the National Bank Act (“NBA”) preempts New York usury claims. Peterson v. Chase Card Funding LLC, No. 19-00741 (W.D.N.Y. Sept. 21, 2020). In rendering its decision, the federal court distinguished Madden v. Midland Funding and deferred to the Office of the Comptroller of the Currency’s (“OCC”) new rule regarding the permissible interest rate on transferred loans (i.e., the “Madden fix” valid-when-made (“VWM”) rule; see our ALERT of June 26, 2020).

The plaintiff in Peterson had an unsecured credit card originated by a national bank located outside of New York. The national bank sold credit card receivables to a nonbank limited liability company, which then sold the receivables to two trusts. The trusts issued asset-based securities to finance the purchases of receivables and contracted with the originating national bank to service the credit card accounts. The national bank remained the owner of the credit card accounts. The plaintiff did not name the national bank as a defendant.

The federal court found that the plaintiff’s state usury claims are expressly and implicitly preempted by the NBA. With respect to express preemption, the court observed that, as the account owner, the national bank retained a substantial interest in credit card accounts, including the right to increase or decrease the interest rates on accounts. Application of the New York usury limit would conflict with the national bank’s powers under the NBA to charge the interest rate permitted under the laws of the national bank’s “home state.” Thus, the state usury claims were preempted.

Sitting in the U.S. Court of Appeals for the Second Circuit’s jurisdiction and bound by the Second Circuit’s decisions, the federal court handled Madden in its analysis. The federal court determined that Madden involved “materially different facts” from the facts in Peterson. In Madden, the national bank forfeited all interests and rights in the loan accounts by selling whole loans to third-party debt

buyers that acted solely on their own. The court in Peterson recognized that the national bank, as the credit card account owner, retained a number of rights in the accounts. The federal court recounted that the Second Circuit distinguished the facts of Madden from the Eighth Circuit’s decision in Krispin v. May Department Stores on the basis that Krispin involved receivable sales where a bank retained “substantial rights.” The federal court said the national bank in Peterson is akin to the bank in Krispin. Therefore, the Madden ruling does not apply.

The federal court also found that the NBA implicitly preempts the plaintiff’s state usury claims because application of state usury laws against the credit card receivables purchasers (i.e., the defendants) would significantly interfere with the national bank’s exercise of its powers under the NBA. To support its conclusion, the federal court discussed the OCC’s recently finalized “Madden-fix” (VWM) rule and deferred to the OCC’s reasoned judgment in the rule that making transferred loans susceptible to state usury laws would prevent or significantly interfere with the exercise by the national bank of its NBA powers.

A similar ruling is expected in Cohen v. Capital One Funding, LLC, No. 1:19-cv-03479 (E.D.N.Y. filed June 12, 2019), which had substantially similar facts and allegations. The National Consumer Law Center (“NCLC”) was allowed to file amicus briefs in support of plaintiffs in both Peterson and Cohen. NCLC asked the courts not to make broad rulings and presented Professor Levitan’s arguments against VWM arguments.

The Peterson case is notable for a few reasons. First, the case should further insulate receivable sales and nonbanks involved in such sales from adverse Madden rulings especially given that Madden was potentially binding precedent in the Peterson case. Second, the federal court gave deference to the OCC’s “Madden-fix” (VWM) rule in the court’s implicit preemption analysis. The rule became effective on August 3, 2020. Few courts have had the opportunity to analyze the OCC’s rule and determine whether to defer to the OCC’s position regarding the permissible interest rates on transferred loans. Over the summer, the Federal Deposit Insurance Corporation (“FDIC”) finalized a similar rule for the permissible interest rates on transferred loans originated by insured state banks.

State Attorneys General Challenge OCC/FDIC VWM Rules

The Attorneys General (“AGs”) of California, Illinois and New York have joined to sue the OCC, and the AGs of California, Illinois, New York, North Carolina, Massachusetts, Minnesota, New Jersey, and the District of Columbia have sued the FDIC, over the federal banking agencies’ recently finalized VWM rules. See California v. OCC, No. 4:20-cv-05200 (N.D. Cal. filed July 29, 2020), and California v. FDIC, No. 4:20-cv-05860 (N.D. Cal. filed Aug. 20, 2020). The AGs ask the courts to declare the rules unlawful and to set them aside, arguing that the agencies have exceeded their authority in violation of the Administrative Procedure Act. The AGs assert that the new OCC and FDIC VWM rules would enable predatory lenders to circumvent the state caps through “rent-a-bank” schemes, in which banks act as lenders in name only, enabling non-bank payday lenders to evade state usury regulations. In the OCC’s case, the AGs assert that Congress has “clearly” rejected legislation to expand National Bank Act preemption to non-banks, further undermining the OCC’s attempt to rewrite federal law to suit its “extreme” policy preferences.

Peterson Follows Other Notable Summer Developments

The Peterson decision is a welcome result for many industry participants and comes after the decision of another federal court in Rent-Rite Superkegs West LTD v. World Business Lenders, LLC, 1:19-cv-01552 (D. Colo., filed Aug. 12, 2020); see our ALERT of
Aug. 18, 2020. There, the court cited the OCC’s new “Madden-fix” (VWM) rule when it determined that a promissory note with an
interest rate that was valid when made by a federally insured state bank under Section 523 of the Depository Institutions Deregulation and Monetary Control Act of 1980, codified at 12 U.S.C. § 1831d (“Section 1831d”), remains valid upon assignment to a non-bank. The district court noted that the OCC’s VWM rule does not address which entity, in the case of assignment, is the “true lender”, a material factual dispute that was touched upon briefly in argument during the lower court proceedings but not specifically addressed by the bankruptcy court. The district court noted that Section 1831d could not apply to the promissory note when a non-bank is the “true lender” and returned the case to the bankruptcy court for further consideration of the “true lender” issue.

On August 18, 2020, Colorado Attorney General Phil Weiser announced the settlement of two pieces of related litigation through Assurance of Discontinuance (“AOD”) in the matters of Avant of Colorado, LLC and Marlette Funding, LLC (dated as of Aug. 7, 2020). See Fulford v. Avant of Colorado, LLC, No. 17CV30377, and Fulford v. Marlette Funding, LLC, No. 17CV30376 (both filed in Colo. Dist. Ct. Denver County); see our ALERT of Aug. 20, 2020. The comprehensive settlement addressed not only the specific programs at issue, but established a “safe harbor” for all future loans made through any programs operated by the banks involved in the AOD (the “banks”), provided that such a program complies with the terms of the safe harbor. The AOD followed a recent decision in the Marlette litigation in which the court ruled that even if the bank was the “true lender”, a nonbank assignee of the loan could not take advantage of the federal usury preemption enjoyed by the bank, nor could an assignee fully stand in the shoes of the bank with respect to the loan’s other terms. See Order Regarding Plaintiff’s Motion for Determination of Law, Marlette, supra (filed June 9, 20202).

Peterson involved a national bank, the OCC’s rule and the NBA. The case did not discuss the FDIC’s “Madden-fix” VWM rule, and was decided under different facts than those in Rent-Rite, Marlette and Avant. We are happy to discuss the affects of the Peterson decision (and others) on insured state banks and various fact patterns.

• Mike Tomkies and Susan Seaman

On September 25, 2020, the Governor of California signed into law SB 908, the Debt Collection Licensing Act, and AB 1864, the “Mini-CFPB” and California Consumer Financial Protection Law (“CCFPL”). See our prior ALERT dated Sept. 3, 2020, for more information.

Beginning January 1, 2022, the Debt Collection Licensing Act will require any person engaged in the business of debt collection in California to obtain a license, making California the 35th state to require collectors to obtain a license. The Debt Collection Licensing Act also amends the Rosenthal Fair Debt Collection Practices Act, as detailed in our prior ALERT.

The “Mini-CFPB” bill expands the current Department of Business Oversight’s authority to regulate and enforce various provisions regarding consumer financial products and services, California consumer financial laws and, to the extent permissible, federal consumer financial laws. The “Mini-CFPB” bill also enacts the CCFPL, a law meant to strengthen consumer protections by promoting nondiscriminatory access to consumer financial products and protecting consumers from discrimination and unfair, deceptive and abusive acts and practices in connection with financial practices and services.

Please let us know if you have any questions or would like more information.

• Mike Tomkies and Lindsay Valentine

In a recent opinion, the Eleventh Circuit joined the Sixth Circuit in holding that verifying the identity of a consumer is a “legitimate business need” under the Fair Credit Reporting Act (“FCRA”). Domante v. Dish Networks, LLC, 8:17-cv-00472 (11th Cir. Sept. 9, 2020).

The consumer had alleged that a television service provider negligently and willfully violated the FCRA by requesting and obtaining the consumer’s consumer report without a permissible purpose. According to the television service provider, it requested and obtained the consumer’s consumer report from a credit reporting agency (“CRA”) pursuant to its normal business practice after receiving a request for service submitted in the consumer’s name in connection with an event of identity theft that used some of the consumer’s personal information to submit the request for service. Online applicants are only asked to provide the last four digits of his or her social security number. To verify the online applicant’s identity and eligibility for servicing, the television service provider’s system automatically sends the applicant’s information to a CRA. If the CRA determines the submitted information matches, it provides a consumer report to the television service provider. After the television service provider learned that the request submitted in the consumer’s name was fraudulent, it requested that the CRA remove the inquiry.

In determining whether the television service provider violated the FCRA, the court reviewed the permissible purposes in for which a person may obtain a consumer report. The court determined that the exhaustive list of permissible purposes includes where a person has a legitimate business need for the information in connection with a business transaction that is initiated by the consumer.

The court noted that the Eleventh Circuit had not previously weighed in on what constitutes a “legitimate business need” in connection with a business transaction for FCRA purposes and turned to the Sixth Circuit for guidance. In Bickley v. Dish Network, LLC, 751 F.3d 724 (6th Cir. 2014), the Sixth Circuit held that the term “legitimate business need” includes verifying the identity of a consumer and assessing his or her eligibility for service. The Eleventh Circuit agreed with the Sixth Circuit and determined that the television service provider had a permissible purpose in obtaining the consumer’s consumer report and did not violate the FCRA.

In response to the consumer’s argument that the television service provider should have done more to verify the consumer’s identity before requesting a consumer report, the court stated that the FCRA does not explicitly require a user of consumer reports to confirm beyond doubt the identity of potential consumers before requesting a report.

The full text of the FCRA, as well as state fair credit reporting statutes, can be found in our Marketing and Privacy Digest https://www.dltlaw.com/multistate-digests/. Let us know if you have any questions.

• Mike Tomkies and Lindsay Valentine

State and federal regulators continue to wrestle with digital currency issues. Notable developments at the federal level include the following:

OCC ANPRM and Letter Regarding Cryptoassets

On July 7th, the Office of the Comptroller of the Currency (“OCC”) issued an advance notice of proposed rulemaking and requested comments by August 3rd related to its regulations on banking issues related to digital activities, use of technology and innovation. The notice posed a number of questions for the public to answer, including the following set of questions related to cryptocurrency:

1. What types of activities related to cryptocurrencies or cryptoassets are financial services companies or bank customers engaged?
2. To what extent does customer engagement in crypto- related activities impact banks and the banking industry?
3. What are the barriers or obstacles, if any, to further adoption of crypto-related activities in the banking industry?
4. Are there specific activities that should be addressed in regulatory guidance, including regulations?

The notice received over 90 comments, including comments from a few national banks. One national bank’s chief digital officer commented that the OCC and other banking regulators should issue guidance around the cryptocurrency market as well as the expectations for services conducted on distributed ledger technology, as the lack of clear regulations might result in both banks and customers being unwilling to invest or use cryptocurrencies and similar digital assets.

On July 22, the OCC released Interpretive Letter #1170 that states that a national bank may provide cryptocurrency custody services on behalf of customers, including holding the unique cryptographic keys associated with cryptocurrencies. The Interpretive Letter states that providing cryptocurrency custody services is a modern form of traditional banking activities, including providing safekeeping and custody services of customer assets. The Interpretive Letter states that the OCC recognizes that, as financial

markets become increasingly technological, there will likely be increasing need for banks and other service providers to leverage new technology and innovative ways to provide traditional services on behalf of customers.

The OCC is also expected to report further this Fall on a proposed special purpose national bank charter for payment companies and cryptocurrency exchanges. The anticipated charter would allow the payment companies and cryptocurrency exchanges to operate across state lines under a single set of rules as well as to expand the financial services they offer. The new charter is expected to be issued in two phases: First, a “Payments Charter 1.0” would be offered as, essentially, national money-transmitter license. Then, about 18 months later, a “Payments Charter 2.0” would become available that would include the ability to clear payments through the Federal Reserve System directly rather than through a correspondent bank, clearinghouse or financial institution.

FRB Digital Currency Research

On August 13, 2020, Federal Reserve Governor Lael Brainard spoke during the Federal Reserve Innovation Office Hours at the Federal Reserve Bank of San Francisco about ongoing research and experimentation related to distributed ledger technologies and the potential use cases for digital currencies.

In the speech, Governor Brainard stated that the Board of Governors of the Federal Reserve System (“FRB”) is continuing to assess the opportunities and challenges of, as well as the use cases for, a central bank digital currency (“CBDC”). Before the FRB would issue a CBDC, a significant policy process would be required to consider the issuance of a CBDC, along with extensive deliberations and engagement with other parts of the federal government. Governor Brainard stated that the FRB has not made a decision whether to undertake such a significant policy process, as it is taking the time and effort to understand the significant implications of digital currencies and CBDCs around the globe.

This effort in in addition to the FRB’s continuing effort to implement its instant payment platform, FedNow, by 2023 or “as soon as practically possible”.

IRS Virtual Currency Question

On August 18, 2020, the Internal Revenue Service (“IRS”) released a draft Form 1040 containing the following question placed directly below the taxpayer’s personal information: “If at any time during 2020, did a taxpayer receive, sell, send, exchange or otherwise acquire any financial interest in any virtual currency?”

In 2019, the IRS introduced this same question as a cryptocurrency compliance measure, but the question was placed at the top of Schedule 1, Additional Income and Adjustments to Income. The question on Schedule 1 likely did not receive much attention as Schedule 1 is only for citizens who have income separate from the typical W-2 earnings from employment, such as business or rental income or alimony, or from unemployment compensation.

The IRS has released a list of 45 frequently asked questions on virtual currency transactions and a 2019 revised ruling discussing what cryptocurrency transactions are taxable. According to the frequently asked questions, when a person sells virtual currency, the person must recognize any capital gain or loss on the sale, subject to any limitations on the deductibility of capital losses.

The revised ruling further elaborated that a taxpayer has gross income as a result of an “airdrop” of a new cryptocurrency following a “hard fork” if the taxpayer receives units of new cryptocurrency. A “hard fork” occurs when a cryptocurrency on a distributed ledger undergoes a protocol change resulting in a new permanent diversion from the legacy or existing distributed ledger. A hard fork may result in the creation of a new cryptocurrency on a new distributed ledger in addition to the legacy cryptocurrency on the legacy distributed ledger. An “airdrop” is a means of distributing units of a cryptocurrency to the distributed ledger addresses of multiple taxpayers. Thus, if the taxpayer holds 50 units of Crypto R and Crypto R experiences a “hard fork” resulting in Crypto S, and 25 units of Crypto S are “airdropped” to the taxpayer’s distributed ledger address, the value of Crypto S is taxable gross income.

The draft Form 1040, frequently asked questions and revised ruling exemplify the importance and the emphasis the IRS is putting on cryptocurrencies. In 2019, the IRS sent more than 10,000 letters to U.S. citizens suggesting unpaid taxes on crypto transactions, based on information provided by exchanges. According to a letter shared by bitcoin tax software provider Cointrack, the IRS has sent out another wave of cryptocurrency tax warning letters in August 2020.

Federal regulatory agencies have been grappling with how to handle and regulate digital currencies for the past few years. See, e.g., our prior ALERTS of May 13, 2019 and March 28, 2018. As the interest in instant payments and the use of virtual currencies continue to evolve and increase, the use of virtual currencies would benefit from uniform regulation. If you have any questions about virtual currency regulation, please let us know.

• Mike Tomkies and Lindsay

On August 31, 2020, the California legislature passed AB 1864, a bill that has been nicknamed the “Mini-CFPB” as it creates a state regulatory agency resembling the Consumer Financial Protection Bureau (“CFPB”). The bill would rename the “Department of Business Oversight” (“DBO”) as the “Department of Financial Protection and Innovation” (DFPI”). In addition to the existing powers already executed by the DBO, the new DFPI would also have the authority to bring a civil action to enforce the provisions of the federal Consumer Financial Protection Act of 2010 or regulations issued by the CFPB thereunder, with respect to an entity that is licensed, registered or subject to oversight by the DFPI.

The bill would also enact the California Consumer Financial Protection Law (“CCFPL”). The purpose of the CCFPL is to promote consumer welfare, fair competition and wealth creation in California by doing all of the following:

1. Promoting nondiscriminatory access to responsible, affordable credit on terms that reasonably reflect consumers’ ability to repay;
2. Promoting nondiscriminatory access to consumer financial products and services that are understandable and not unfair, deceptive or abusive;
3. Protecting consumers from discrimination and unfair, deceptive and abusive acts and practices in connection with financial practices and services; and
4. Promoting nondiscriminatory consumer-protective innovation in consumer financial products and

The CCFPL prohibits (i) the use of or engaging in unfair, deceptive or abusive acts or practices with respect to consumer financial products or services and (ii) offering or providing any financial product or service to a consumer that is not in conformity with any consumer financial law.

The CCFPL applies to “covered persons,” which means to the extent not preempted by federal law, any of the following: (i) any person that engages in offering or providing a consumer financial product or service to a resident of California, (ii) any affiliate of such a person if the affiliate acts as a service provider to the person or (iii) any service provider to the extent that the person engages in the

offering or provision of its own consumer financial product or service. “Service provider” is defined as any person that provides a material service to a covered person in connection with the offering or provision by that covered person of a consumer financial product or service, including a person that either: (i) participates in designing, operating or maintaining the consumer financial product or service or

(ii) processes transactions relating to the consumer financial product or service, other than unknowingly or incidentally transmitting or processing financial data in a manner that the data is undifferentiated from other types of data of the same form as the person transmits or processes.

The CCFPL does not apply to (i) a bank when acting under the authority of a charter under federal law or the laws of another state and (ii) persons acting under the authority of certain licenses, certifications or charters issued by the DFPI, including any person licensed as a finance lender, broker, program administrator or mortgage loan originator under Division 9 of the Financial Code (commencing with Section 22000) and any person licensed as a residential mortgage lender, mortgage servicer or a mortgage loan originator under Division 20 of the Financial Code (commencing with Section 50000).

CALIFORNIA LEGISLATURE PASSES COLLECTOR LICENSING LAW

On August 31, 2020, the California legislature passed SB 908, the Debt Collection Licensing Act, which would, beginning on January 1, 2022, provide for licensure, regulation and oversight of debt collectors by the DBO (or DFPI if AB 1864 is enacted).

The Debt Collection Licensing Act would prohibit any person from engaging in the business of debt collection in California without first obtaining a license. A person is acting in California if the person is located in California and is seeking to collect from a debtor that resides inside or outside California, or is located outside of California and is seeking to collect from a debtor that resides in California.

The bill would also amend the Rosenthal Fair Debt Collection Practices Act to include placing a telephone call without disclosing the caller’s identity and sending digital or written communications that do not display the license number of the debt collector in at least 12- point type as prohibited debt collection practices.

The bill would establish the Debt Collection Advisory Committee, consisting of seven members appointed by the commissioner to advise the commissioner on matters relating to debt collection.

Both AB 1864 and SB 908 have been delivered to Governor Newsom to sign. Governor Newsom has 30 days from the date a bill is passed to approve or veto it. We will keep you updated on the status of each bill. If you have any questions please let us know.

• Mike Tomkies and Lindsay

The Office of the Comptroller of the Currency (“OCC”) has proposed a rule that addresses when a national bank or federal savings bank will be deemed to make a loan under federal banking law and is the “true lender” in partnerships with third parties…Read More