Both houses of Virginia’s legislature recently passed the Virginia Consumer Data Protection Act (S.B. 1392; H.B. 2307) (VCDPA). If approved by the state governor, the VCDPA would become the United States’ second comprehensive state privacy law behind the California Consumer Privacy Act (CCPA). For a comparison of the VCDPA to the CCPA and the European Union’s General Data Protection Regulation, see the Alston & Bird Privacy, Cyber and Data Strategy Blog.
State Law
Federal Court Dismisses Lawsuit Challenging Minnesota Eviction Moratorium
A&B ABstract: A federal district court dismissed a lawsuit filed by two landlords who sought to invalidate the Governor of Minnesota’s moratorium on evicting residential tenants for failure to pay rent during the pandemic.
The Eviction Moratorium
In an Executive Order dated March 23, 2020, Minnesota Governor Timothy Walz suspended landlords’ ability to file eviction actions and prevented them from terminating residential leases except where a tenant took actions that “seriously endangered” other tenants or violated certain state criminal laws. The Executive Order did not relieve tenants of their obligation to pay rent. The moratorium was to stay in place until the statewide COVID-19 emergency declaration elapsed or the Executive Order was rescinded.
The Governor issued several later clarifications to the eviction moratorium, including Executive Order No. 20-79 on July 14, which is the version currently in effect. It expanded certain tenant protections, and additionally permitted eviction of tenants who “significantly damage” rental property or overstay beyond a prior notice to vacate. Landlords who violate the moratorium are subject to criminal fines and imprisonment of up to 90 days.
The Lawsuit
Two companies that own rental properties in Minnesota, Heights Apartments and Walnut Trails, claimed to have “troublesome” tenants that they would seek to evict but for the moratorium. They sued the Governor in federal district court in Minnesota, seeking to invalidate Executive Order No. 20-79 for several alleged violations of their constitutional rights. The landlords also claimed that the moratorium was an unauthorized action under state law. The complaint sought a preliminary injunction against enforcement of the moratorium, pending its invalidation. The Governor filed a motion to dismiss.
The Decision
On December 31, 2020, the court granted the Governor’s motion to dismiss and denied the landlord’s request for a preliminary injunction. Much of the court’s opinion addresses – and rejects – standing, jurisdictional, and immunity arguments raised by the Governor. On the merits, the court concluded that nothing in the moratorium interfered with the landlords’ ultimate right to collect rent pursuant to their lease agreements, and that the moratorium therefore did not “substantial impair” their contractual rights or infringe their constitutional rights.
As the court explained:
But the fundamental nature of a lease of a residential unit is that the landlord provides the tenant a place to live; the tenant, in turn, pays the landlord rent. The landlord’s end of the contractual bargain is receiving rent payments. Nothing in the [executive orders] interferes with that right, and each of the eviction moratoria clearly states that it does not affect a tenant’s obligation to pay rent. And although, under the [executive orders], a landlord cannot enforce its contractual right to rent through an eviction proceeding, it can still sue tenants for rent owed.
The court found further that the executive orders advance an important state interest – preventing the spread of COVID-19 – and the court determined they “appropriately and reasonably advance that interest.” The court also noted that the moratorium does not completely prohibit evictions, which the court believed would not reasonably advance the state’s interest in protecting public health. For example, evictions may still be allowed if a tenant poses a risk to other residents or engages in dangerous criminal activity. On these grounds, the court also made short order of the landlords’ First Amendment and Takings claims.
Takeaways
This decision is in line with others from across the country that have upheld statewide eviction moratoriums against legal challenges. As a consequence, a large volume of eviction proceedings will likely be filed nationwide once the moratoriums expire, assuming tenants are unable to pay rent. Real estate entities and landlords should prepare for a backlog of these cases, and for the potential that they will take longer to adjudicate as a result.
OCC’s Final “True Lender” Rule Takes Effect
A&B ABstract:
On October 27, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a noteworthy final rulemaking that sets forth when a national bank or federal savings association originates a loan and is deemed the “true lender” in the context of a partnership between a bank and a non-bank third party, known commonly as a marketplace lending arrangement.
Under the rule, the OCC considers the bank the “True Lender” if it: (i) is named as the lender in the loan agreement, or (ii) funds the loan. The rule clarifies, however, that under these arrangements, the bank retains the compliance, underwriting, and credit risk obligations associated with the origination of such loans. The rule becomes effective on December 29, 2020.
Background
Marketplace lending arrangements involve a partnership between a bank and a non-bank third party to offer consumers or small businesses, as the case may be, a variety of often non-traditional consumer and business loan products that are marketed and originated through innovative technologies. The advantage of these products is that consumers and small businesses are able to access credit quickly, in certain cases from their smart phones, without the laborious underwriting and approval procedures associated with traditional brick and mortar lending.
The bank partner, who is the named originator in the lending documents, is able to export the often very favorable interest rate of the state where it is located without regard to state usury and fee limits, and is in most instances, exempt from state loan originator/servicer licensing requirements by virtue of being a bank.
Scrutiny of Marketplace Lending Arrangements
Marketplace lending arrangements have faced scrutiny from governmental regulators and courts over the past several years, and some have been derided as “rent-a charter” schemes under which the non-bank partner essentially offers the particular loan products with minimal input from the bank partner to, among other things, evade state usury and fee limitations and licensing requirements that would ordinarily be applicable to the non-bank partner.
The OCC Rulemaking
In the rule, however, the OCC observed that marketplace lending arrangements expand credit opportunities beyond the reach of the customary lending traditionally offered by banks. The OCC recognized some of the challenges raised about such arrangements, and issued the rule to provide “legal certainty” regarding these partnerships and to encourage banks to enter into them. Under the rule, a bank makes a loan when, as of origination, the bank (i) is names as the lender in the loan agreement or (ii) funds the loan.
To dispel any notion that the rule will facilitate “rent-a-charter” arrangements, the OCC clarifies that when making loans under these marketplace arrangements, banks are responsible for:
establishing and maintaining prudent underwriting practices that (1) are commensurate with the types of loans the bank will make and consider the terms and conditions under which they will be made; (2) consider the nature of the markets in which the loans will be made; (3) provide for consideration, prior to credit commitment, of the borrower’s overall financial condition and resources, the financial responsibility of any guarantor, the nature and value of any underlying collateral, and the borrower’s character and willingness to repay as agreed; (4) establish a system of independent, ongoing credit review and appropriate communication to management and to the board of directors; (5) take adequate account of concentration of credit risk; and (6) are appropriate to the size of the institution and the nature and scope of its activities.
Lenders’ Compliance Obligations
Notably, the OCC also tasks banks with the responsibility to (i) undertake comprehensive loan documentation practices, (ii) adopt internal risk management controls, and (iii) ensure compliance with all laws applicable to the marketplace lending programs offered. Further, the OCC warns banks to ensure that they adequately supervise their third-party partners, and that the loans offered under such arrangements do not contain predatory, unfair or deceptive or abusive features.
Takeaways
The OCC rulemaking is a significant victory for marketplace lending arrangements, and provides needed guidance regarding ensuring that these partnerships comply with applicable law. The OCC rule, like the recent OCC and FDIC rulemakings affirming the “Valid-When-Made” doctrine, has been harshly criticized by certain state regulators and consumer groups for circumventing state usury, licensing and consumer protection laws. Further, this OCC rulemaking may be amended or withdrawn by the incoming Biden Administration, especially since the current OCC Director serves in an acting capacity, and could be replaced by a more consumer-oriented leader.
Consistent with the OCC rule, we recommend that parties in marketplace lending arrangements heed the following to ensure that the bank is deemed the “true lender”:
- the bank must play the primary role in underwriting and making credit decisions;
- the bank must play a major role in creating, branding and marketing the program; these tasks may not be performed exclusively by the non-bank partner;
- the bank needs to make the required disclosures to the consumer in its name;
- The consumer should be aware that it’s receiving a loan from the bank; not the non-bank partner;
- the bank should hold the predominant economic interest in the transaction through an examination of the totality of the circumstances and
- at a minimum, the non-bank partner should be licensed under applicable state law to buy the loans from the bank and to service the loans.
California AG Proposes Regulatory Changes to CCPA
On December 10, the California Attorney General’s office provided “Notice of Fourth Set of Modifications” to regulations under the California Consumer Privacy Act. The new proposed regulatory text would modify the current regulations which took effect in August. The latest proposal responds to comments on a prior draft and primarily addresses the presentation of the right to opt out of sales of personal data. The California AG has provided a web page with full details on this latest rulemaking effort.
Alston & Bird Analyzes New Guidance on Remote Work in Client Alert
As the COVID-19 pandemic continues to persist across the nation, some state regulators have begun to consider, or have adopted, measures to allow employees of licensed entities to work from home, both during the pandemic and permanently thereafter.
Alston & Bird has issued a client alert unpacking a pair of state rules that extend or make permanent regulations authorizing financial institutions to allow employees to work from home.