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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Debt Collection and Beyond in 2015

Aaron-Mahler Walt-Zalenski John Redding captionIn 2015, the CFPB further expanded its reach into debt collection through a number of enforcement actions. The CFPB also continues to conduct research on a potential rulemaking regarding debt collection activities, which may address information accuracy concerns involving debt sales and other collection activity, as well as many other issues regarding how creditors collect their own debts and oversee collectors working on their behalf. In addition to CFPB activity, this year’s Madden v. Midland Funding, LLC decision has important implications beyond the debt collection industry. Finally, developments regarding the Telephone Consumer Protection Act (TCPA) and collections will likely be of interest to regulatory agencies in the new year.

Debt Sale Consent Orders and Regulatory Guidance

Among the CFPB enforcement actions relevant to debt collection in 2015 were two consent orders with large debt buyers. These orders resolved allegations that the debt buyers, among other things, engaged in robo-signing, sued (or threatened to sue) on stale debt, made inaccurate statements to consumers, and engaged in other allegedly illegal collection practices. In particular, the CFPB criticized the practice of purchasing debts without obtaining supporting documentation or information, or taking sufficient steps to verify the accuracy of the amounts claimed due before commencing collection activities. Under the consent orders, one company agreed to provide up to $42 million in consumer refunds, pay a $10 million civil money penalty, and cease collecting on a portfolio of consumer debt with a face value of over $125 million. The second company agreed to provide $19 million in restitution, pay an $8 million civil money penalty, and cease collecting on a consumer debt portfolio with a face value of more than $3 million. In addition, both companies agreed to refrain from reselling consumer debt more generally. Read more…

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