CURRENT MONTH (August 2022)
Banking Law
Future of Minority Depository Institutions
By Tiyanna D. Lords and Lynette I. Hotchkiss, McGlinchey Stafford, PLLC
On July 26, 2022, the Office of the Comptroller of the Currency (OCC) issued an update to its 2013 policy statement on minority depository institutions (MDIs). Acting Comptroller Michael J. Hsu noted as follows concerning the reason for updating the policy: “MDIs are on the frontlines serving low-income, minority, rural and other underserved communities. They are a critical source of credit to support the financial needs and economic vitality of their communities. The OCC has a long history of recognizing the value of these institutions, and we will continue our efforts to ensure they remain a bedrock of financial access and inclusion.”
Changes to the policy statement include (i) clarifying the definition of an MDI, (ii) describing how an MDI may be formed de novo or by designating an existing bank as an MDI, and (iii) providing examples of support to MDIs. The updated policy statement streamlines descriptions of the OCC’s policies, procedures, and programs relative to MDIs.
FRB Proposes LIBOR Regulation
By Arthur Rotatori, Jeffrey Barringer, and Rachael Aspery, McGlinchey Stafford, PLLC
On July 28, 2022, the Board of Governors of the Federal Reserve System (the “FRB”) published a proposed regulation to implement the Adjustable Interest Rate (LIBOR) Act (“Act”). Due to problems with London Interbank Offer Rate (LIBOR) no longer being representative of the underlying borrowing costs of banks that LIBOR was intended to reflect, LIBOR is scheduled to be discontinued on June 30, 2023. While the federal banking regulators previously required that lenders stop writing new contracts using LIBOR as of December 31, 2021, there are a significant number of existing contracts that reference USD LIBOR that will not mature by June 30, 2023, and cannot be easily amended. Of particular concern are so-called “tough legacy contracts.” Tough legacy contracts not only reference LIBOR and will not mature by June 30, 2023, but also lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of LIBOR.
To provide a uniform solution to this problem, on March 15, 2022, Congress enacted the Act as part of the Consolidated Appropriations Act of 2022. Among other things, the Act lays out a set of default rules that apply to tough legacy contracts subject to U.S. law.
The Act authorizes the FRB to promulgate regulations to facilitate the implementation of the Act. While the recently proposed Regulation ZZ closely follows the text of the Act, it also provides additional guidance and clarification of some technical issues. Additionally, in the Section-by-Section Analysis in the proposed rule, the FRB noted that the Act may potentially not apply to a subset of tough legacy contracts, specifically those that contain fallback provisions that either identify a clear and practicable benchmark replacement or authorize a determining person to select a benchmark replacement, but that are triggered only when LIBOR is unavailable. The FRB is concerned that the fallback provisions in these contracts are not triggered when LIBOR is available but non-representative. The FRB has asked for public comment on whether its approach in the proposed regulation to provide a solution to those contracts is workable under the Act. The underlying concern of the FRB is the possibility that a “synthetic LIBOR” may be published after June 30, 2023, which could give lenders the impression that “LIBOR” is still available for use as the index for those contracts. It is likely that this issue will be resolved in the final rule.
Comments on proposed Regulation ZZ were due by August 29, 2022, and the Act requires the FRB to publish its final rule by September 11, 2022, so answers to the remaining questions around LIBOR phaseout will be available soon.
Consumer Finance
Third Circuit Adopts “Reasonable Reader” Standard for Credit Report Accuracy
By Joseph A. Apatov, Greg DeVries, Aaron P. Kouhoupt, and Gregg D. Stevens, McGlinchey Stafford, PLLC
The Fair Credit Reporting Act (FCRA) 15 USC 1681 et. seq. requires furnishers of information to report the information accurately. Recently, several payment rating/account status cases have been filed and litigated where the Plaintiff’s bar contends the industry’s reporting of account information is misleading and violates the FCRA. However, on August 8, 2022, the U.S. Court of Appeals for the Third Circuit outlined how district courts within the Circuit must analyze credit reports when determining whether an individual tradeline is inaccurate or misleading under the FCRA. This analysis may prove to be the first nail in the coffin of the so-called “payment rating” cases which began in 2015.
In Bibbs v. Trans Union LLC, the Court of Appeals consolidated three cases and affirmed the district court’s orders granting judgment on the pleadings in favor of Trans Union. Each Plaintiff defaulted on student loans by failing to make monthly payments. Each student loan servicer transferred the borrowers’ accounts and, after the accounts were transferred, reported the accounts to the credit reporting agencies with a zero balance, noting that the payment obligations were transferred. They also indicated that the “Pay Status” field showed “120 Days Past Due” but also noted a $0 balance. It was undisputed that each borrower failed to make timely payments and that the accounts were correctly reported as delinquent until they were closed and transferred. It was also undisputed that none of the borrowers owed any balance to the transferring creditor after the transfer occurred, and at the time the transfers occurred, each account was past due. Each borrower argued that reporting a “Pay Status” of “120 Days Past Due” and a balance due of $0 was inaccurate and could mislead prospective creditors into incorrectly assuming each borrower was currently more than 120 days late on loans that have been closed.
Each borrower sent a dispute letter to TransUnion, arguing that it is impossible to be late on an account with a $0 balance, and requested that their respective tradelines be corrected or removed. TransUnion timely investigated the accounts and sent each borrower a letter stating each credit report was accurate.
The borrowers argued that the court should adopt a standard instructing District Courts to read “Pay Status” fields independently from the rest of the credit report when assessing the accuracy of the field. The borrowers argued that the standard applied by the District Court (the “reasonable creditor” standard) was not appropriate because unsophisticated employers, landlords, insurers, and other non-creditors may be misled by reports. The Court of Appeals agreed that the “reasonable creditor” standard was inappropriate, but it declined to adopt a standard that would look at credit reporting fields myopically. Instead, to determine whether the tradelines were inaccurate or misleading under the FCRA, the court adopted a “reasonable reader” standard. District Courts are therefore instructed to view a credit report from the perspective of a typical, reasonable reader viewing the tradeline in its entirety, not by reading a portion of the credit report in isolation.
In applying this reasonable reader standard, the court analyzed whether the “Pay Status” field showing “120 Days Past Due” was inaccurate or misleading given the “maximum possible accuracy” standard that the FCRA applies to the credit reporting agencies. The court held that a reasonable reader viewing each borrower’s credit report would see the multiple conspicuous statements noting that the accounts were closed and conclude no amounts were due to the creditors that transferred the accounts. The Court affirmed the judgment on the pleadings and held the credit reports were accurate under 15 U.S.C.S. § 1681e(b).
The court also resolved the two remaining issues in TransUnion’s favor. In assessing the reasonableness of TransUnion’s reinvestigation of the credit report, the court noted that a finding of inaccuracy was a prerequisite to recovery for a claim based on an unreasonable reinvestigation under 15 U.S.C.S. § 1681i(a). Because the court concluded the tradeline was accurate, it again affirmed the judgment entered by the District Court. As to the borrowers’ final claim that discovery was necessary to determine whether creditors would be misled or would make adverse credit decisions based on the reporting, the court held that because the reasonable reader standard is objective, discovery would not be necessary.
This holding should provide guidance to furnishers of credit information regarding how to accurately report closed or transferred accounts, as well as provide a strong defense to claims predicated upon idiosyncratic interpretations of credit reporting.
Director Chopra Compares For-Profit Colleges to Subprime Lenders in Remarks on ITT Tech Loan Cancellation
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On August 16, 2022, Consumer Financial Protection Bureau Director Rohit Chopra made remarks on the Department of Education’s recent move to discharge $3.9 billion in loans borrowers received to attend ITT Technical Institute. Likening for-profit colleges to subprime lenders prior to the 2008 foreclosure crisis, Chopra argued that some schools engaged in “widespread deception,” structured complex loan products that allowed them to “harvest profits even as they set up borrowers to fail,” and targeted veterans and servicemembers. Chopra closed his remarks with a vow to continue working with the Department of Education and other regulators to ensure that in-house institutional lending programs do not “strongarm” their students with illegal practices.
CFPB Issues Circular Indicating That Financial Companies May Violate Consumer Financial Protection Law When They Fail to Safeguard Data
By Eric Mogilnicki and Neal Modi, Covington & Burling LLP
On August 11, 2022, the Bureau released Circular 2022-04. In the Circular, the Bureau concluded that, in addition to other federal laws governing data security, entities can violate the prohibition on unfair acts or practices under the Consumer Financial Protection Act (CFPA) when they have insufficient data protection or information security.
After noting that no one particular security practice is required under the CFPA, the Circular provided examples of widely implemented data security practices which, if not implemented, might increase the risk that an entity’s conduct triggers liability under the CFPA. These practices include: multi-factor authentication, adequate password management, and timely software updates.
The Circular cites heavily to precedent from data security–related cases brought by the Federal Trade Commission (FTC), including the March 2022 enforcement action against the operators of CafePress, an online retailer of customizable T-shirts and other merchandise, as well as a 2019 CFPB settlement with a nationwide consumer reporting agency.
In an accompanying press release, the Bureau noted that it is “increasing its focus on potential misuse and abuse of personal financial data,” with CFPB Director Rohit Chopra also remarking that “[w]hile many nonbank companies and financial technology providers have not been subject to careful oversight over their data security, they risk legal liability when they fail to take commonsense steps to protect personal financial data.”
CFPB Warns Digital Marketing Providers Must Comply with Federal Consumer Finance Law
By Eric Mogilnicki and Neal Modi, Covington & Burling LLP
On August 10, 2022, the Bureau issued an interpretive rule, entitled “Limited Applicability of Consumer Financial Protection Act’s ‘Time or Space’ Exception with Respect to Digital Marketing Providers,” in which the Bureau determines that digital marketing companies working with financial firms are subject to federal consumer finance law. Specifically, the interpretive rule states that marketers engaged in identifying prospective customers or placing content to affect consumer behavior are considered “service providers,” are not otherwise excepted under the CFPA’s “time or space” exception, and can therefore be held liable if they engage in unfair, deceptive, or abusive practices.
In an accompanying press release, Director Chopra explained, “When Big Tech firms use sophisticated behavioral targeting techniques to market financial products, they must adhere to federal consumer financial protection laws.”
Republican Lawmakers Accuse the CFPB of “Collusion” with State Attorneys General to Bring Enforcement Actions
By Eric Mogilnicki and Neal Modi, Covington & Burling LLP
On July 28, 2022, Rep. Patrick McHenry (R-NC)—the ranking member of the House Financial Services Committee—and two other Republican lawmakers sent a letter to CFPB Director Rohit Chopra accusing the Bureau of “colluding with states contrary to the Consumer Financial Protection Act (CFPA)” and effectively “deputizing state attorneys general to enforce the CFPA on behalf of the CFPB.” Citing the CFPB and New York Attorney General’s recent joint lawsuit against MoneyGram in April 2022, the lawmakers noted that, although “[i]t is clear that state attorneys general may enforce the CFPA in cases where the CFPB has not . . . the statute does not allow for a state attorney general to become a party to an existing CFPB enforcement action,” and added that “[i]t is therefore inappropriate for the CFPB to recruit a state attorney general that is not otherwise investigating a company, to pursue enforcement as a means of intimidation.”
The letter, which asks for information from the Bureau regarding “the CFPB’s relationship with state attorneys general” by August 12, also references the Bureau’s May 22 interpretive rule (regarding CFPA Section 1042(a)), in which the Bureau assured states that they may bring “an enforcement action to stop or remediate harm that is not address[ed] by a CFPB enforcement action against the same entity.”
Banking Industry Groups Petition CFPB to Extend its Supervisory Authority to Non-Bank Data Aggregators
By Eric Mogilnicki and Neal Modi, Covington & Burling LLP
On August 2, 2022, the American Bankers Association, Consumer Bankers Association, The Clearing House Association and several other trade associations submitted a petition asking the Bureau to engage in a rulemaking to define larger participants in the market for aggregation services, including data aggregators, data holders, and data users, and thereby subject them to Bureau supervision and examination.
The petition explains that “[c]onsumer protection laws and regulations must be enforced in a fair and comparable way” and that ensuring “accountability across all providers of comparable financial products and services is a fundamental mission of the CFPB.”
The Bureau currently is engaged in rulemaking under Section 1033 of the Dodd-Frank Act, which authorizes the Bureau to establish standards for sharing consumer financial data. While financial institutions must meet significant federal data privacy requirements and are supervised by the Bureau for compliance with those rules, data aggregators are not subject to the Bureau’s supervision, even though they will covered by any new Section 1033 rules. The banking groups’ petition seeks to cure that imbalance.
This appears to be the first time any party has utilized the Bureau’s new petition for rulemaking process since that process was first launched in February 2022.
Department of Justice Announces Title II ADA Rulemaking Regarding Website Accessibility
By Erica Kramer and Megan Nicholls, Hudson Cook, LLP
The Department of Justice has announced plans to publish a Notice of Proposed Rulemaking (NPRM) to amend the Title II Americans with Disabilities Act regulations to “provide technical standards to assist public entities in complying with their existing obligations to make their websites accessible to individuals with disabilities.” Title II of the ADA applies to state and local governments.
Though the rule will not directly impact businesses governed by Title III of the ADA (i.e., “public accommodations,” a broadly defined term that includes businesses such as auto dealerships, banks, insurance offices, and other sales, rental, and service establishments), a subsequent Title III rulemaking is likely to incorporate the same or similar standards and principles as those applied to state and local governments and could even be used as a guide for enforcement actions taken by the agency. Thus, businesses should be sure to stay abreast of any developments and to closely examine the rulemaking when it is published.
The DOJ’s announcement includes anticipated timing of April 2023 for publication of the NPRM and June 2023 for the end of the comment period on the proposed rule.
California AG Announces Settlement Against Major RTO Provider Regarding “Virtual RTO”
By Dailey Wilson, Hudson Cook, LLP
On August 2, 2022, the California attorney general announced a $15.5 million settlement with a rent-to-own (RTO) company for alleged violations of the Karnette Rental-Purchase Act and other state consumer protection laws.
In a business model sometimes called “virtual RTO,” the RTO provider partners with third-party retailers to offer rental-purchase transactions to the retailer’s customers who choose not to pay cash for the item. The California AG alleged that the RTO provider violated California law by:
- using an inflated “cash price” for merchandise that was 15% higher than the retail price paid by non-leasing customers of the third-party retailer;
- failing to provide lessees with required notices regarding early purchase options;
- using credit terminology such as “financing,” “interest,” and “down payment” to describe aspects of the rental-purchase transaction;
- stating, either expressly or by implication, that part of the consumer’s rental payment was a “down payment,” when down payments are not permitted under the KRPA; and
- misleading consumers regarding their right to return the rental property at any time.
In addition to the $15.5 million monetary settlement, the stipulated judgment, which is subject to court approval, imposes several other requirements and prohibitions. For example, the RTO provider:
- may not charge or list a cash price that is higher than the lowest advertised price offered to the consumer by the third-party retailer;
- may not charge or list any fee, including a processing fee, that is not reasonable and an actual cost incurred by the provider;
- cannot prevent or limit a customer from returning the rental property;
- must clearly and conspicuously disclose that the transaction is a rental-purchase transaction;
- must refrain from using credit terminology in connection with the transaction; and
- must provide each customer with a “Know Your Rights” disclosure that informs consumers about key terms of a rental-purchase transaction.
Colorado Becomes Fourth State to Approve Digital License Plates
By Devin P. Leary-Hanebrink, McGlinchey Stafford, PLLC
Effective August 10, 2022, the owner of a Colorado registered vehicle may display a “digital number plate” in lieu of one or both of the plates traditionally issued by the Colorado Division of Motor Vehicles (“DMV”), as long as the registration number and expiration date are clearly visible at a distance of one hundred feet in normal sunlight. The legislation was signed by the Governor on April 22, 2022. Colorado is the fourth state to enact such legislation, following Arizona, California, and Michigan.
Traditionally, vehicle registration or vehicle number plates—commonly known as license plates—are made of metal or plastic with an alphanumeric unique identifier engraved directly into the plate. (Several states also offer digitally printed “flat” plates, but the concept is the same.) To title and register a vehicle or renew title and registration, vehicle owners must visit the DMV in person or complete the process online and wait for the items to arrive via mail. Then, the owner is responsible for physically replacing the plates and/or affixing the decals.
However, as technology continues to become an ever-present aspect of our daily lives, more states are embracing digital license plates.
Digital license plates typically include a processing unit, storage media, and wireless connectivity all built into an electronic display—similar to an e-reader and roughly the same size as a traditional license plate. However, while digital license plates may look like a traditional plate, they represent the crossroads of fintech, privacy, and auto finance. For example, they make it easier for owners to complete and/or renew title and registration (eliminating altogether physical plates and decals); disable and report a stolen vehicle; or just locate one in a crowded parking garage. They can also help broadcast public safety messages, such as AMBER alerts. Conversely, the technology makes it easier for creditors to locate and disable vehicles (such as for repossession); for parents, spouses, or significant others to track their children or partners; and for the state to monitor citizens’ driving habits or general whereabouts—all of which raise legal, privacy, ethical, and safety concerns.
Over the coming years, industry participants should anticipate more jurisdictions introducing similar laws. Georgia is likely next, with new regulations scheduled for October. After that, Florida, Illinois, and Texas are on deck, as all three jurisdictions have launched initiatives to explore this technology.
Intellectual Property
Federal Circuit Affirms a Patent Inventor Must Be a Natural Person
By Dredeir Roberts, esq., General Counsel at Core States Group
The Federal Circuit confirmed, in Thaler v. Vidal, the district court’s summary judgment grant that an inventor stated in a patent application must be a natural person. This decision comes after Thaler filed two patent applications on behalf of the DABUS artificial intelligence (AI) system. Thaler’s applications attempted to register a patent with the stated inventor being an AI system instead of a natural person. The PTO rejected Thaler’s applications due to their lack of a stated human inventor. Thaler has appealed that rejection all the way up to the Federal Circuit, which again confirmed the inventor stated in a patent application must be a natural person.
Tax Law
The Inflation Reduction Act and Corporate Taxation
By Timothy M. Todd, Liberty University School of Law
On August 16, 2022, President Biden signed the Inflation Reduction Act (“IRA”) of 2022 (Pub. L. No. 117–169). The Act contains several tax-related provisions, including a corporate alternative minimum tax on adjusted financial statement income, a new stock-repurchase excise tax, and funding for the IRS. This short summary will discuss the new corporate alternative minimum tax and the new excise tax on certain stock repurchases.
The IRA imposes a new corporate alternative minimum tax on adjusted financial statement income (“AFSI”); the tax is the excess of fifteen percent of AFSI over the corporate AMT foreign tax credit for the taxable year. The tax applies to an “applicable corporation,” which is defined as a corporation, with some exceptions, that meets the “average annual adjusted financial statement income test” for one or more taxable years. A corporation meets this test generally if its average annual adjusted financial statement income for the three-taxable-year period ending in the taxable year exceeds $1,000,000,000. Adjusted financial statement income is defined as the “net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement for such taxable year” with certain adjustments.
This new corporate alternative minimum tax applies to tax years beginning after 2022. For fiscal years 2022 through 2031, the Joint Committee of Taxation estimated the corporate alternative minimum tax to raise more than $222 billion.
The Act also contains an excise tax on certain domestic stock repurchases (i.e., buybacks). The tax applies to applicable buybacks that occur after December 31, 2022. For fiscal years 2022 through 2031, the Joint Committee of Taxation estimated the excise tax to raise more than $73 billion.
The excise tax is “equal to 1 percent of the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year.” The tax is levied on “covered corporations.” A covered corporation is a domestic corporation whose stock is traded on an established securities market, which is defined by reference to § 7704. The term “repurchase” is defined generally as a redemption of the covered corporate stock within the meaning of § 317(b). The Act also provides rules for specified affiliates and foreign corporations. The amount that is treated as repurchase, moreover, is adjusted (reduced) by the amount of fair market value of stock issued by the corporation in the same taxable year.
There are several statutory exceptions provided. For example, the excise tax does not apply to the extent a repurchase is part of a reorganization under § 368(a). It also does not apply to the extent stock is repurchased (or an equivalent amount of stock) and is contributed to an employer-sponsored retirement plan or employee stock-ownership plan. There is also a $1,000,000 floor, meaning that if the total value of repurchased stock during the taxable year is less than that, the tax does not apply. There is also contemplated an exemption for repurchases by dealers of securities, though this needs to be prescribed by regulations. There are also exemptions for regulated investment companies and real estate investment trusts. Finally, the excise tax does not apply if the repurchase is treated as a dividend.
