100 Days Until the MLA: Compliance Challenges and Open Questions Before the New MLA’s Rule Implementation

Sasha-LeonhardtWith only 100 days until the new Military Lending Act (MLA) rule takes effect on October 3, 2016, many financial institutions have begun enacting procedures to ensure they are compliant with the new regulation by the effective date. With the implementation of this new rule, financial institutions continue to work towards full compliance with the requirements imposed by the Department of Defense (DoD), but there are growing pains. As this deadline draws near, there are several important compliance concerns that financial institutions must keep in mind and a number of issues where the industry is concerned about unclear language.

What types of credit are covered by the new MLA rule?

The 2007 MLA rule was limited to three specific types of products: payday loans, vehicle title loans, and refund anticipation loans. However, under the new rule, the MLA will cover a far broader range of products. The DoD sought to match the definition of credit under the Truth in Lending Act’s (TILA) implementing regulation—Regulation Z—so the new MLA rule will cover any credit that is (i) primarily for personal, family, or household purposes, and (ii) either subject to a finance charge under Regulation Z or payable by written agreement in more than four installments.

However, the new MLA rule excludes four specific types of transactions: Read more…

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Spotlight Article: Work Continues on the Model Regulation of Virtual Currencies Act

Dana-Syracuse-with-captionOn April 2-3, 2016, the third meeting of the Uniform Law Commission (ULC) Drafting Committee on the Regulation of Virtual Currencies (the “Committee”) was held in Chicago, Illinois. Dana Syracuse was in attendance as an official Observer along with Committee members, industry stakeholders, thought leaders, and government representatives. The Committee’s work in Chicago reflects comments received in response to drafts generated in previous meetings in Washington, D.C. last fall and Palo Alto in February. The Committee’s primary goal is to establish a common set of standards regulating certain types of virtual currency companies, including transmitters, custodians, and exchangers of virtual currency.

Subsequent to that meeting the Committee released an updated Draft Model Act reflecting all comments received to date. The current version of the Draft Model Act is divided into eight articles, as summarized below.

Article 1 (General Provisions): This Article includes definitions, which are important for laying out the scope of the Draft Model Act. Of significance is the revised definition of “control,” which states that “control means possession of sufficient virtual currency credentials or authority on a virtual currency network to execute unilaterally or prevent indefinitely virtual currency transactions, but does not control possessing, for a reasonably time-limited period, virtual currency credentials sufficient to prevent virtual currency transactions to provide a service such as an escrow function or transaction management.” This definition is significant because it arguably takes some of the more interesting features of the blockchain, such as escrow functions and some multi signature implementations, outside of licensure. Other significant definitions include custody, storage, transfer, virtual currency, and virtual currency business activity. This Article also contains exemptions for certain categories of institutions including government agencies, banks charted under state law or the jurisdiction of the United States, certain payment systems, those dealing in foreign exchange, those engaged in personal use of virtual currency, miners, and those who fail to meet a minimum threshold of monetary activity. Read more…

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Spotlight Article: California Supreme Court Holds that Borrowers Have Standing to Challenge an Allegedly Void Assignment of the Note and Deed of Trust in an Action for Wrongful Foreclosure

Daniel Paluch Fredrick-LevinYesterday, the California Supreme Court held in Yvanova v. New Century Mortgage Corp, Case No. S218973 (Cal. Sup. Ct. February 18, 2016) that borrowers have standing to challenge an allegedly void assignment of a note and deed of trust in an action for wrongful foreclosure.  In reaching this decision, the Court reversed the rule followed by the overwhelming majority of California courts that borrowers lacked such standing.  The Court’s decision may have broad ramifications for lenders, investors, and servicers of California loans.

The Court’s Holding

In Yvanova, the borrower challenged the validity of her foreclosure on the ground that her loan was assigned into a securitized trust after the trust closing date set forth in the applicable pooling and servicing agreement, allegedly rendering the assignment void.  To date, California courts have rejected hundreds of similar claims.  In Yvanova, the Court held that “a borrower who has suffered a nonjudicial foreclosure does not lack standing to sue for wrongful foreclosure based on an allegedly void assignment merely because he or she was in default on the loan and was not a party to the challenged assignment.”  Slip. Op. at 2.  The Court’s ruling thus breathes new life into this favorite theory of the foreclosure defense bar. Read more…

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Vendor Management in 2015 and Beyond

Jon-Langlois caption ASValerie-Hletko caption 2With evolving regulatory expectations and increased enforcement exposure, financial institutions are under more scrutiny than ever. Nowhere is this more evident than in the management and oversight of service providers. When service providers are part of an institution’s business practice, understanding the expectations of regulators, investors, and counterparties for compliance with consumer financial laws is critical.

Jeff-Naimon caption AS Chris-Witeck caption ASCFPB Guidance

In 2012, the CFPB issued Bulletin 2012-03, which outlines the CFPB’s expectations regarding supervised institutions’ use of third party service providers. Banks and nonbanks alike are expected to maintain effective processes for managing the risks presented by service providers, including taking the following steps:

  • Conducting thorough due diligence of the service provider to ensure that the service provider understands and is capable of complying with federal consumer financial law
  • Reviewing the service provider’s policies, procedures, internal controls, and training materials
  • Including clear expectations in written contracts
  • Establishing internal controls and on-going monitoring procedures
  • Taking immediate action to address compliance issues

Implementing consistent risk-based procedures for monitoring third party service provider relationships is an extremely important aspect of meeting the CFPB’s expectations and mitigating risk to the institution. Read more…

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Credit Cards 2016: Consumer Protection in Focus

Manley-Williams captionValerie-Hletko caption 2The past year has seen heightened CFPB interest in the following areas: (i) deferred interest and rewards, (ii) limited English proficiency consumers, and (iii) the recent revisions to the Military Lending Act (MLA). Pursuing simplicity in the design of product features and closely following limited English proficiency issues will help credit issuers mitigate their regulatory risk. Also on the horizon in 2016 is the effective date of the MLA revisions, which were announced in July 2015.

Deferred Interest and Rewards

The Bureau has been focused on the marketing and design of deferred interest products and issued a strong admonition in September 2014 relating to the potential for consumer surprise.  However, there has been relatively little enforcement activity in this regard.  Instead, enforcement generally has focused on technical violations of law.  For example, an August 2015 consent order arose out of point-of-sale disclosures as opposed to the product features themselves. Some deferred interest issues, such as “old fashioned mistakes,” (e.g., “if paid in full” is dropped from the marketing copy) may represent low-hanging fruit for the CFPB and should be addressed to mitigate enforcement risk.  The Bureau has also expressed concern about technical issues that may complicate deferred interest for consumers, such as expiration of the promotional period prior to the payment due date.

The Bureau has suggested that consumers base their choice of credit card more on the nature and richness of the rewards than on the interest rate.  Accordingly, the Bureau has expressed concern about various aspects of rewards programs, including the expiration of points and complexity surrounding how they are earned and redeemed.  While simplicity may reduce regulatory risk, it undoubtedly makes rewards programs more expensive for issuers, and makes it more difficult for consumers to distinguish among them. Read more…

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