CURRENT MONTH (July 2021)

Business Regulation & Regulated Industries

Lina Khan Selected as FTC Chair

By Barbara Sicalides and Daniel Anziska, Troutman Pepper Hamilton LLP

On June 15, 2021, the United States Senate approved Lina Khan’s nomination as a Commissioner of the Federal Trade Commission (“FTC”) by a 69-28 vote.  Her confirmation assured that the Democrats would hold a 3-2 majority of commissioners.  Later that day, in a move that surprised many, President Biden selected Ms. Khan to FTC.  At age 32, she is the youngest person ever to hold this office.

Chair Khan made a name for herself in 2017 while still a student at Yale Law School, with a paper critical of the concentration of technology companies and  which the New York Times described as “reframing decades of monopoly law.” In that paper, Khan argued that the current method for evaluating anticompetitive harm, the impact on prices paid by consumers, missed wide swathes of antitrust behavior in the modern economy, such as a company using predatory pricing aimed at lowering consumer prices in the short term to quickly capture market share.

Khan, an Associate Professor at Columbia University School of Law, was subsequently a central figure in last year’s House Judiciary subcommittee on an antitrust investigation of Amazon, Apple, Facebook and Google. During that investigation, she co-authored that subcommittee’s final report that recommended increased merger enforcement and the “rehabilitation” of monopolization law, in response to the growth of the “Dominant Online Platforms.” 

Although Chair Khan is often referred to as a “large tech critic,” the foundations of her views apply widely to other aspects of the economy and competition.  Specifically, her principal concern is the overconcentration of economic power in a market, even if such power results in market efficiencies or lower prices to consumers for a time.  She has written that the agencies have contributed to under-enforcement of the antitrust laws by interpreting and applying them too narrowly and “issuing guidelines that are highly permissive of market power or abuse.”  Further,  Khan has previously criticized the use of intellectual property to stifle competition; therefore, under her leadership, the FTC could attempt to crack down on patent rights and make it harder to enforce patents, particularly for non- practicing entities. 

Companies should expect Chair Khan to place a greater focus on smaller competitors and non-price dimensions of competition. Taken together with recent proposed legislation to expand federal antitrust laws, nascent state antitrust legislation and the potential for a similar proactive Assistant Attorney General for the Department of Justice, Antitrust Division (once that position if filled), U.S. antitrust enforcement is shaping up to be its most active in at least fifty years. 

FDIC Proposes Simplification of Deposit Insurance Coverage Rules

By Lynette I. Hotchkiss, McGlinchey Stafford, PLLC

On July 20, 2021, the FDIC issued a Notice of Proposed Rulemaking in which it proposed to simplify aspects of the FDIC’s deposit insurance coverage rules. Under the proposed rule, insurance coverage for deposits held in connection with revocable and irrevocable trusts would be merged, and a simpler common calculation would be applied to determine coverage for all trust accounts.  In its press release, the FDIC noted that it receives more inquiries about deposit coverage for trust deposits than all other types of deposits combined.

The proposed rule also would amend coverage for mortgage servicing accounts to allow principal and interest funds advanced by a mortgage servicer to be included in the deposit insurance calculation. 

The FDIC also provided a Fact Sheet regarding the proposed rule.  Comments on the proposal will be accepted for 60 days after the proposed rule is published in the Federal Register.

Federal Banking Agencies Propose Risk Management Guidance on Third-Party Relationships

By Lynette I. Hotchkiss, McGlinchey Stafford, PLLC

On July 13, 2021, the FDIC, Federal Reserve, and OCC (“Agencies”) requested public comment on proposed Interagency Guidance on Risk Management for Third-Party Relationships.  As stated in the proposal, “The proposed guidance would offer a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships.”  The proposed guidance points to competition, advances in technology, and innovation in the banking industry as contributing factors to banks’ increasing us of third parties to perform business functions, deliver support services, facilitate providing new products and services, or facilitate providing existing products and services in new ways.

This guidance, which is based on the OCC’s existing third-party risk management guidance from 2013,  would replace each Agency’s current guidance on third-party risk management.  The OCC’s 2020 FAQs, which were issued to clarify the OCC’s 2013 third-party risk management guidance, are attached as an exhibit to the proposed guidance.  The Agencies are seeking comment on the extent to which the concepts discussed in the OCC’s 2020 FAQs should be incorporated into the final version of the guidance.

Comments on the proposed guidance will be accepted for 60 days after the proposal is published in the Federal Register.

Illinois Adopts UETA

By Emily Honsa Hicks, McGlinchey Stafford, PLLC

On June 25, 2021, Illinois Governor Pritzker signed Illinois SB2176, repealing the Illinois Electronic Commerce Security Act and enacting the Illinois Uniform Electronic Transactions Act. The bill took effect immediately.

Illinois became the 49th U.S. State to adopt some form of the model Uniform Electronic Transactions Act (UETA)  drafted by the Uniform Law Commission. Though some states (in particular, California) have adopted UETA with deviations from the model form, Illinois appears to have adopted the model UETA without significant variation.

Because the Illinois UETA is consistent with the model UETA, preemption issues in connection with the federal Electronic Signatures in Global and National Commerce (ESIGN) have been largely extinguished. This is because ESIGN will not preempt any provision in a state’s adopted UETA that is consistent with the model UETA. Previously, because the former Illinois law was not an adoption of UETA, the question of ESIGN preemption remained unresolved.

UETA was adopted by the state of Washington in 2020 and has also been adopted by the Commonwealth of Puerto Rico, the Territory of Guam, and the Virgin Islands of the United States. New York remains the only state that has not adopted some form of UETA, and instead adopted the New York Electronic Signatures and Records Act (which is largely consistent with UETA).

State UETA adoption creates a consistent landscape of rules governing electronic signatures and transactions. That consistency enables more reliable, efficient, and enforceable electronic transactions.

HUD Implements “Third Set” Final Rule Amending the HUD Code

 Devin P. Leary-Hanebrink, McGlinchey Stafford, PLLC

On July 12, 2021, the HUD Code — the federal building code regulating the manufacture, installation, and overall safety standards of manufactured homes—completed its most comprehensive update in nearly a decade with implementation of HUD’s “third set” final rule. Initially set for implementation on March 15th, days before the effective date, HUD’s Office of Manufactured Housing Programs (OMHP) published a notice announcing it was postponing implementation until July in response to requests from manufacturers struggling with delays caused by the COVID-19 pandemic. The “third set” final rule was originally published on January 12, 2021.

In total, HUD has implemented 45 revisions to the HUD Code. Most of the changes—36 of the 45 updates—amend the Manufactured Home Construction and Safety Standards. Specifically, HUD has revised nine of the 10 existing Subparts under the Construction and Safety Standards and introducing a new Subpart: Subpart K – Attached Manufactured Homes and Special Construction Considerations. Subpart K is specific to homes that are structurally independent but have the appearance of a physical connection (i.e., a zero-lot line) reminiscent of terraced or row housing. The final rule also introduces new guidelines applicable to multi-story structures; revises standards for attached garages, carports, and accessory buildings; and introduces updated compliance requirements for fire and carbon monoxide alarm systems, among other changes. OMHP anticipates that these updates will provide flexibility and reduce industry reliance on the Alternative Construction process, which should lower input costs and other expenses.

OMHP has advised that any home entering the first stage of production on or after July 12, 2021, must comply with the updated HUD Code requirements, regardless of the date of manufacture listed on the home’s Data Plate. HUD has also launched a Frequently Asked Questions page that answers common questions.

Having now implemented the final rule, HUD has effectively transitioned to the 2021 HUD Code. Industry participants should anticipate activity at the state and local levels, as jurisdictions look to amend their respective building codes and installation requirements to incorporate (or at least accommodate) the revised federal standards.

Supreme Court Restricts Ability to Sue in Federal Court for Statutory Violations; Clarifies that Each Member of a Class Must Have Article III Standing

By M. Brent Yarborough, Maurice Wutscher LLP

On June 25, 2021, the Supreme Court of the United States issued its ruling in TransUnion LLC v. Ramirez, in which it held that a plaintiff must suffer a concrete injury resulting from a defendant’s statutory violation to have Article III standing to pursue damages from that defendant in federal court. The Court also held that plaintiffs in a class action must prove that every class member has standing for each claim asserted and for each form of relief sought.

The plaintiff’s application to finance a vehicle was rejected when his credit report reflected a potential match with a name on a list of terrorists maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC). The plaintiff requested that the credit reporting agency (CRA) send him a copy of his credit file. The CRA complied with this request, but the format of its response violated the Fair Credit Reporting Act (FCRA) in two respects.

The plaintiff filed a class-action suit against the CRA. There were 8,185 people in the class, but only 1,853 of them had their credit reports sent to creditors. Plaintiff prevailed on all claims at trial and the verdict was affirmed by the Ninth Circuit.

The Supreme Court’s decision focused on whether each member of the class suffered a “concrete” injury and further developed its analysis of concreteness provided in Spokeo, Inc. v. Robins. The Court held that the 6,332 class members whose credit reports were not published to third parties did not suffer a concrete injury and thus lacked Article III standing. The Court also held that no class member had standing to recover damages related to the mailings because there was no evidence that any of them took or failed to take any action in response to those mailings.  

What Does the Homaidan Case Change about Private Student Loans in Bankruptcy?

By Arthur J. Rotatori, Jon Ann H. Giblin, and Emily Honsa Hicks, McGlinchey Stafford, PLLC

The non-share dischargeability of private student loans in bankruptcy proceedings has long been assumed to be almost absolute, but a July 15, 2021 decision (Homaidan v. Sallie Maeby the U.S. Court of Appeals for the Second Circuit suggests that is not always the case.  Contrary to many headlines surrounding this case, however, the Appeals Court did not generally hold that private student loans are dischargeable. Rather, the Court narrowly held that the exception to discharge the creditor relied upon for its appeal was not, as a matter of law, applicable to the private student loan at issue in the case.

To review,  the U.S. Bankruptcy code (the Code) makes certain educational debts non-dischargeable (excepted from discharge) absent a showing of undue hardship on the debtor and the debtor’s dependents. In relevant part, Section 523 of the Code lists the three non-dischargeable educational debts as:

  • An educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.
  • An obligation to repay funds received as an educational benefit, scholarship, or stipend.
  • Any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual.

The issue in Homaidan was whether the borrower’s loan fell under the exception for “funds received as an educational benefit.” The creditor argued that the debt should be excepted from discharge under that exception, but the appeals court found that argument unpersuasive, in large part because the exception for funds received as an educational benefit did not expressly refer to loans (unlike the other two exemptions that use the word “loan”) and was instead limited to conditional grant payments similar to scholarships and stipends.  Based on that rationale, the appeals court affirmed the denial of the defendant creditor’s motion to dismiss.

It is important to note that the only issue decided by the court was whether the exception to dischargeability related to an obligation to repay funds received as an educational benefit applies to private student loans. The court said that it did not, but the court did not analyze the scope of the “qualified educational loan” exception to dischargeability.  We therefore think that this case should not be read as a significant change with respect to the dischargeability of private education loans.  Most private education loans will meet the definition of a “qualified education loan,” the typical exception relied upon by private student loan creditors.  In most instances, the practical effect of this exception will mean that the borrower will not be able to discharge the loan unless the borrower is able to show the court that repayment of the loan would be an undue hardship.  The Homaidan case did not change that outcome.

CFPB Issues Enforcement Compliance Bulletin Regarding Credit Reporting of Rental Information

Eric Mogilnicki and Wilson Parker, Covington & Burling LLP

On July 1, 2021, the CFPB released an “Enforcement compliance bulletin and policy guidance” (available here) “reminding landlords, consumer reporting agencies (CRAs), and others of their critical obligations to accurately report rental and eviction information.”  The Bureau expressed concern “that the end of the CDC eviction moratorium could mean both an increase in negative rental information in the consumer reporting system and an increase in consumers seeking rental housing.”  In light of these likely trends, the Bureau explained that “accuracy in consumers’ credit reports will help to increase rental application acceptances, support housing security, and promote a fair and equitable recovery.”  The CFPB plans to pay special attention to whether furnishers are reporting arrearages that include “amounts already paid on behalf of a tenant through a government grant or relief program” and/or “fees or penalties prohibited by” the CARES Act.

The Bureau has previously issued compliance bulletins and policy guidance, but the label “Enforcement compliance bulletin and policy guidance” appears to be a new one.  It may suggest, as the bulletin itself does, that the Bureau intends to move immediately to take enforcement (rather than supervisory) action “if the Bureau determines that a CRA or furnisher has engaged in any acts or practices that violate the FCRA, Regulation V, or other Federal consumer laws” in this area.

Senate Banking Committee Republicans Send Follow-Up Letter Regarding Concerns About Treatment of Bureau Employees

Eric Mogilnicki and Lucy Bartholomew, Covington & Burling LLP

On July 13, 2021, Republicans on the Senate Banking Committee sent a second letter to CFPB Director nominee Rohit Chopra regarding the Bureau’s treatment of senior CFPB career employees.  This letter expresses concern with Chopra’s failure to respond to the requests for information included in their June 17 letter.  The Republican Senators state that this “refusal to answer basic questions about whether you were privy to the troubling and possibly unlawful actions described in the press is unacceptable from a federal nominee and in our view should disqualify you from consideration as CFPB Director.”  The letter adds that “if you are refusing even to respond to congressional inquiries while your nomination is pending before the Senate, there is little doubt about how you will treat such inquiries if confirmed,” and that Chopra’s “refusal to simply deny such knowledge creates the appearance that you are attempting to conceal what you knew about this matter.”

CFPB Celebrates 10th Anniversary

Eric Mogilnicki and Uttara Dukkipati, Covington & Burling LLC

On July 21, 2021, the Bureau celebrated its 10th Anniversary.  Acting Director Uejio delivered prepared remarks at the Americans for Financial Reform celebration two days prior and published a blog post on July 21.  Both the remarks and the blog post characterized the Bureau’s accomplishments as including $14.4 billion in relief to consumers, $1.7 billion in civil penalties, and processing over three million consumer complaints.

CFPB Files Motion to Lift Stay on Payday Rule’s Compliance Date

By Eric Mogilnicki and Uttara Dukkipati, Covington & Burling LLP

In 2017, the Community Financial Services Association of America, Ltd. and Consumer Service Alliance of Texas brought a suit to challenge the CFPB’s “Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule.”  Since that time, the Bureau has rescinded the portion of the Rule relating to underwriting, and sought to lift a stay relating to the effective date of the remaining payment provisions of the Rule.  Instead of lifting the stay, the Court sought briefing on cross-motions for summary judgment, which were filed on December 18, 2020.

On July 22, 2021, the CFPB again filed a motion seeking an end to the “stay of the compliance date so that the Payment Provisions’ important and reasonable consumer-protection measures can finally take effect.”      

Biden Executive Order Aims to Promote Competition by Curtailing Non-Compete Agreements

By Charles E. Stoecker, McGlinchey Stafford, PLLC

As part of the broad Executive Order on Promoting Competition in the American Economy issued Friday, July 9, 2021, President Biden is requesting that the Federal Trade Commission (FTC) ban or limit non-compete agreements. The order (which also calls on the FTC to ban unnecessary occupational licensing) aims to provide American workers with options and flexibility in their employment and to encourage innovation in the economy. According to White House press secretary Jen Psaki, the move will fulfill Biden’s “campaign promise to promote competition in the labor markets.”

Non-compete agreements are widely used in the private sector. According to a 2019 study by the Economic Policy Institute, the White House estimates that non-compete agreements are used by roughly half of private-sector businesses for at least some of their employees, affecting anywhere between 36 and 60 million workers.

A broad-sweeping federal rule would represent a significant departure and will likely be challenged by businesses. There is also a question as to whether the FTC has the authority to enact a non-compete ban. To date, the regulation of non-compete agreements has largely been left to the states. Some states, such as California, already ban non-compete agreements, and a number of states prohibit their use particularly with low-wage workers. Given the likelihood of legal challenges, the FTC may take a narrow approach in lieu of an outright ban, such as banning non-compete agreements for low-wage workers only, for example. (Of note, the term “low-wage worker” does not have any official definition in the federal context.)

While this executive order does not have an immediate impact on existing private-sector non-compete agreements, we can expect further guidance from the FTC to illuminate what the future may hold. For now, employers are encouraged to review any non-compete agreements in place, and prepare for the possibility that changes or revisions may be required in the near future.

Big Win for Small Refineries

By Michael R. Blumenthal, McGlinchey Stafford, PLLC

On June 25, 2021, the U.S. Supreme Court sided with small oil refineries by making it easier for the companies to win exemptions from the existing mandate that they mix ethanol and other renewable fuels into gasoline and diesel, known as the Renewable Fuel Program (RFP). When these mandates were adopted in 2005 and 2007, Congress granted temporary exemptions to small refineries and authorized those refineries to apply for extensions at any time.

The question in HollyFrontier Cheyenne Refining, LLC v. Renewable Fuels Assn. was whether the U.S. Environmental Protection Agency (EPA) may grant an extension of the hardship exemption to a small refinery that has not received continuous extensions of the initial exemption for every year since 2011. Congress expressly gave small refineries a temporary exemption from complying with the requirement to use increasing amounts of renewable fuel under the RFP, provided they can prove economic harm related to compliance with the RFP.

In a 6-3 decision, the Court overturned the 10th Circuit U.S. Court of Appeals’ prior holding that the EPA exceeded its authority in granting dozens of small refineries waivers from the mandate under the RFP. The appeals court found that the EPA had exceeded its authority “because there was nothing for the agency to extend” and held “refineries could receive a waiver only if they already had been granted one and it had been continually renewed.”

The case turned on the justices’ interpretation of just a few words in the Renewable Fuel Standard law — specifically its provision allowing a small refinery to petition the EPA “at any time” for an “extension” of its initial, automatic exemption. Biofuel producers unsuccessfully argued the law’s use of the word “extension” inherently meant refineries can only qualify if they have an existing exemption to prolong.

Justice Neil Gorsuch, authoring the majority opinion, wrote:

“It is entirely natural — and consistent with ordinary usage — to seek an ‘extension’ of time even after some lapse. … Think of the forgetful student who asks for an ‘extension’ for a term paper after the deadline has passed, the tenant who does the same after overstaying his lease, or parties who negotiate an ‘extension’ of a contract after its expiration. … The plain meaning of ‘extension’ does not require unbroken continuity…”

The broader implication of the Court’s decision is the potential impact it will have on the EPA when it releases its preliminary 2021 blending mandate in July, 2021. To date, there are 32 pending Small Refinery Exemption petitions (SREs) for 2019, and 18 SREs for 2020, according to the EPA’s website. The release of the 2021 blending data may result in a significant uptick in the number of SREs, especially if the EPA decides to increase the amount of ethanol and other renewable fuels otherwise mandated to be blended into refineries’ products.

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