Alston & Bird Consumer Finance Blog

State Law

Rhode Island Requires Licensure for Virtual Currency Business Activity

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A&B Abstract:

Effective January 1, 2020, Rhode Island will regulate virtual currency under its money transmission laws.

Background

Forty-nine states and the District of Columbia regulate money transmission.  Almost all of those jurisdictions have different definitions and exemptions that determine whether their laws apply to certain businesses or activities. The result is a complex, patchwork regulatory landscape. Further complicating the issue is the question of whether virtual currency is considered money or monetary value for purposes of current state money transmitter laws.

States have started to answer this question. Through official guidance, regulatory agency opinion letters, and/or legislation, states are clarifying whether their laws apply to the sale, exchange or transfer of virtual currency.  On July 15, Rhode Island’s governor signed House Bill 5847, which clarifies that certain virtual currency business activities will be subject to the state’s money transmitter regime.  The measure also adds provisions to the current law related to currency transmissions and licensing requirements.

What Activity Is Regulated?

The bill generally requires a person engaging in “currency transmission” for a fee or other consideration to be licensed with the state. “Currency transmission” explicitly includes “maintaining control of virtual currency or transactions in virtual currency on behalf of others.” The bill provides several exemptions from licensure requirements, including for persons using virtual currency for personal, family or household purposes.

For purposes of the bill, virtual currency means “a digital representation of value that: (A)[i]s used as a medium of exchange, unit of account, or store of value; and (B) [i]s not legal tender, whether or not denominated in legal tender.” The definition excludes:

  • rewards or affinity program value that cannot be taken from or exchanged with the merchant for “legal tender, bank credit or virtual currency;”
  • digital representations of value used within online games;
  • “[n]ative digital token used in a proprietary blockchain service platform;” and
  • gift certificates, gift cards, and general-use prepaid cards.

The bill requires licensees engaging in virtual currency business activities to provide certain specified disclosures to residents.  Further, licensees must create and maintain certain compliance programs, including business continuity and disaster recovery programs, anti-fraud programs, anti money-laundering programs and information and operational security programs.

Student Loan Servicers Remain Liable Under State Law for Affirmative Misrepresentations to Borrowers

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The Seventh Circuit recently held that the federal Higher Education Act does not preempt state law consumer protection and tort claims where student loan servicers made affirmative misrepresentations to borrowers regarding repayment options. As such, student loan servicers should be aware that representations they make to borrowers may be subject to state consumer protection laws.

Background

The Seventh Circuit, in Nelson v. Great Lakes Educational Loan Services Inc., No. 18-1531 (7th Cir. June 27, 2019), reversed the dismissal of a class action brought by student loan borrowers alleging that their loan servicer misled them regarding their repayment options.  The plaintiff, Nelson, alleged that her loan servicer—which communicated with borrowers about the repayment of their loans and assisted borrowers with alternative repayment plans—steered borrowers away from income-driven repayment plans and towards more burdensome options like forbearance.

When Nelson contacted Great Lakes about alternative repayment plans, a Great Lakes representative did not inform her of income-driven repayment plans that were available, and instead steered her towards forbearance.  Nelson argued that forbearance was not appropriate for borrowers experiencing long‑term financial difficulties like those she was facing, and that Great Lakes intentionally steered her away from other plans that would have been more appropriate for her situation.

Procedural History

Nelson brought claims for violations of Illinois’s Consumer Fraud and Deceptive Business Practices Act, as well as claims for fraud and negligent misrepresentation under Illinois common law.  The district court granted dismissal in favor of Great Lakes, finding that each of Nelson’s claims were premised on Great Lakes allegedly failing to disclose certain information to her, and were thus preempted by the federal Higher Education Act (“HEA”) because the HEA expressly provides that student loan servicers are “not [] subject to any disclosure requirements of any State Law.” (See 20 U.S.C. § 1098g.)

The Seventh Circuit, however, held that the district court’s ruling was overly broad, and drew a distinction between a failure to disclose and an affirmative misrepresentation.

When a loan servicer holds itself out to a borrower as having experts who work for her, tells her that she does not need to look elsewhere for advice, and tells her that its experts know what options are in her best interest, those statements, when untrue, cannot be treated by courts as mere failures to disclose information.  Those are affirmative misrepresentations, not failures to disclose.

As such, the court held that the HEA does not preempt the state law consumer protection and tort claims of a borrower who reasonably relied on a loan servicer’s representations.

Takeaway

As a result of this ruling, student loan servicers should be aware going forward that representations they make to borrowers regarding alternative repayment plans may very well be subject to state consumer protection laws.  The Seventh Circuit’s ruling suggests that just because a representation by a student loan servicer involves the disclosure of information, it does not necessarily fall under the preemptive protections of the HEA which shield student loan servicers from complying with state disclosure requirements. Rather, in contrast to merely failing to make a disclosure that would otherwise have been required under state law, student loan servicers remain liable for affirmative misrepresentations.

 

Maryland Clarifies New Net Worth Requirements for Mortgage Servicers

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A&B Abstract:

Effective October 1, 2019, the Maryland Commissioner of Financial Regulation will impose new net worth requirements on licensees. Importantly, Maryland servicing licensees without GSE approvals may not use a line of credit to satisfy the net worth requirements. However, mortgage servicers may include mortgage servicing rights in the calculation of tangible net worth.  The minimum net worth requirements for mortgage lender and broker licensees remain unchanged, but must be met with tangible net worth (excluding intangible assets such as copyright, trademark or goodwill).

Background

Since the financial crisis, the rapid growth of nonbank mortgage servicers has led regulators to call for enhanced oversight of such entities.  The Financial Stability Oversight Council (charged under the Dodd-Frank Act with identifying risks to the stability of the U.S. market) recommended in its 2014 annual report that state regulators work collaboratively to develop prudential and corporate governance standards.

In 2015, state regulators through CSBS and AARMR, proposed baseline and enhanced prudential regulatory standards (including capital and net worth requirements) for nonbank mortgage servicers. Although those standards were not finalized, several states – including Oregon and Washington – have imposed new net worth requirements on nonbank servicers.  Maryland is the latest state to update its law.

Maryland House Bill 61 and Advisory Notice

Maryland House Bill 61 takes effect October 1, 2019, and, among other changes adds net worth requirements for licensed mortgage servicers.  This means that current licensees must meet the revised requirements during the 2020 renewal cycle of November 1  to December 31, 2019.  Licensed servicers that meet the capital requirements of and are approved by a government sponsored entity (such as Fannie Mae or Freddie Mac) satisfy Maryland’s net worth requirements.

Maryland licensees without GSE approval must maintain a minimum tangible net worth that varies according to portfolio volume.  Specifically, the minimum net worth requirements are:

  • $100,000 if the unpaid principal balance of the entire servicing portfolio is less than or equal to $50,000,000;
  • $250,000 if the unpaid principal of the entire servicing portfolio is greater than $50,000,000  but less than or equal to $100,000,000
  • $500,000 if the unpaid principal balance of the entire servicing portfolio is greater than $100,000,000 but less than or equal to $250,000,000, or
  • $1,000,000 if the unpaid principal balance of the entire servicing portfolio is great than $250,000,000.

Limitations on Net Worth

Importantly, a servicer may not use a line of credit to satisfy the net worth requirements of a licensed mortgage servicer.  This is an important distinction from the requirements for mortgage lenders and broker net worth requirements, where a working line of credit (but not a warehouse line of credit) can be used to satisfy a portion of the net worth requirements.  It is also important to recognize that the new law requires tangible net worth for licensees.  The calculation of tangible net worth excludes intangible assets, such as copyrights, trademarks or goodwill.

Takeaway

The regulators have clarifies that mortgage servicing rights may be included in the calculation of tangible net worth. With the continued focus on nonbank mortgage servicers, capital and net worth requirements are worthy of attention.

New York DFS Launches Research and Innovation Division

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In an effort to position itself as the “Regulator of the Future,” the New York State Department of Financial Services (“NYDFS”) recently launched the Research and Innovation Division, which will be responsible for ensuring that the NYDFS keeps pace with the rapid changes in all sectors of the financial services industry.

Earlier this year, the NYDFS announced the creation of two other divisions, Consumer Protection & Financial Enforcement Division and the Cybersecurity Division of the NYDFS.  We addressed those developments in a previous post.

Creation of the Division

On July 23, 2019, Linda A. Lacewell, the Superintendent of the New York State Department of Financial Services (“NYDFS”), announced the establishment of a new Research and Innovation Division  (“Division”). Superintendent Lacewell remarked; “The financial services regulatory landscape needs to evolve and adapt as innovation in banking, insurance and regulatory technology continues to grow. This new division … position[s] the DFS as the regulator of the future, allowing the [NYDFS] to better protect consumers, develop best practices, and analyze market data to strengthen New York’s standing as the center of financial innovation.”

Division Responsibilities

Superintendent Lacewell established the Division so that New York “remains the jurisdiction of choice for innovators.” The Division is tasked with supporting internal transformation and market innovation. Importantly, the Division will be responsible for:

  • Licensing and supervising virtual currencies;
  • Assessing new efforts to use technology to address financial exclusion;
  • Identifying and protecting consumer data rights; and
  • Encouraging innovations in the financial services marketplace to preserve New York’s competitiveness as a financial innovation hub.

Division Leadership

Along with the creation of the Division, Superintendent Lacewell announced several leadership appointments within the Division. Matthew Homer will lead the Division as Executive Deputy Superintendent. Prior to this appointment, Mr. Homer was the Head of Policy and Research at Quovo, a New York fintech company providing open banking functionality for the financial services ecosystem, leading up to the company’s acquisition by fintech company Plaid, where he has worked since. Matthew Siegel and Olivia Bumgardner will be Deputy Superintendents of the Division. Mr. Siegel most recently served as a Trial Attorney in the Antitrust Division of the U.S. Department of Justice. Ms. Bumgardner is currently Director of Research for the NYDFS.  She has served as an economist responsible for the analysis of the NYDFS’ most complicated financial transactions and a leader of the NYDFS’s key initiatives relative to virtual currency, cybersecurity and financial inclusion. Andrew Lucas will serve as Counsel to the division. Previously, Mr. Lucas served as the Director of the NYDFS’s Department of Financial Innovation.

Takeaway

The creation of the Division marks a substantial change in the NYDFS’s relationship with rapidly evolving financial services technology companies. We believe that this will impact such companies that do business in New York, particularly those seeking BitLicenses with the NYDFS. We are actively monitoring the development of the Division, and are hopeful that this results in more favorable treatment of fintech companies by the NYDFS.

Will Maine begin to regulate passive, secondary market investors in student loan debt?

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Maine’s New Student Loan Bill of Rights requires the licensing of any person acting as “directly or indirectly” as a student loan servicer.  What might that mean for passive, secondary market investors in student loan debt?

Background

On June 20, 2019, Maine Governor Janet Mills signed into law LD 995, Maine’s “Student Loan Bill of Rights.” The legislative measure aims to protect student loan borrowers and imposes a new licensing obligation on “student loan servicer[s]” in the State of Maine.

Effective January 1, 2020, LD 995 adds a new Article 14 to Title 9-A of Maine Revised Statutes that, among other things:

  • Creates a student loan ombudsman with responsibilities that include reviewing and possibly resolving complaints from borrowers, analyzing borrower data, and helping borrowers understand rights and responsibilities; and
  • Provides that a person may not act as a student loan servicer, “directly or indirectly,” without first obtaining a license from the Maine Bureau of Consumer Credit Protection (the “Bureau”).

LD 995 bears certain similarities to other states’ efforts to regulate the student loan servicing industry and passive, secondary market investors in student loan debt, in particular Maryland’s SB 1068, which took effect on October 1, 2018. Although it appears that the Bureau has not yet released formal guidance regarding the applicability of LD 995’s licensing obligations to passive, secondary market investors in Maine student loan debt, the language of the new laws appears to be broad enough to allow the Bureau to regulate such persons upon a recommendation from the student loan ombudsman and raises the question of whether the Bureau will require such persons to be licensed or registered to engage in business.

Responsibilities of the Student Loan Ombudsman

Effective January 1, 2020, Maine Revised Statutes, title 9-A, section 14-104 requires the Superintendent of the Bureau to support, maintain, and designate a “student loan ombudsman” to provide timely assistance to student loan borrowers. In consultation with the Superintendent, the student loan ombudsman must:

  • Receive, review, and attempt to resolve complaints from student loan borrowers;
  • Compile and analyze data on such student loan borrower complaints;
  • Assist student loan borrowers to understand their rights and responsibilities under the terms of their student education loans;
  • Provide information to the public, agencies, Legislators and others regarding the problems and concerns of student loan borrowers and make recommendations for resolving those problems and concerns;
  • Analyze and monitor the development and implementation of federal, state, and local laws, ordinances, regulations, rules, and policies relating to student loan borrowers and recommend any necessary changes;
  • Review the complete student education loan history for a student loan borrower who provides written consent for such a review;
  • Disseminate information concerning the availability of the student loan ombudsman to assist student loan borrowers and potential student loan borrowers, public institutions of higher education, student loan servicers, and any other participants in student education loan lending with any student education loan servicing concerns;
  • Establish and maintain a student loan borrower education course within existing resources that includes educational presentations and materials regarding student loans; and
  • Take any other actions necessary to fulfill the duties of the student loan ombudsman as set forth in new Article 14.

Section 14-104 grants the student loan ombudsman broad authority to regulate Maine’s student loan industry, particularly with respect to those that service Maine student education loans. With respect to the bolded language above, it appears that the student loan ombudsman will have the ability to recommend changes to Maine’s regulation of passive, secondary market investors in Maine student loan debt, which is further supported by the new student loan servicer licensing requirements in Section 14-107.

Licensing of Student Loan Servicers

Section 14-103(4) defines the term “student loan servicer” to mean “a person, wherever located, responsible for the servicing of a student education loan to a student loan borrower,” and Section 14-103(1) defines the term “servicing” to mean:

(A) Receiving scheduled periodic payments from a student loan borrower pursuant to the terms of a student education loan;

(B) Applying the payments of principal and interest and such other payments with respect to the amounts received from a student loan borrower as may be required pursuant to the terms of a student education loan; and

(C) Performing other administrative services with respect to a student education loan.

Section 14-107 provides that “[a] person may not act as a student loan servicer, directly or indirectly, without first obtaining a license from the superintendent[,]” unless otherwise exempt. Importantly, this section provides that only “[a] licensed bank or credit union, a wholly owned subsidiary of such a bank or credit union and an operating subsidiary of such a bank or credit union as long as each owner of the operating subsidiary is wholly owned by that bank or credit union” is exempted from this licensing requirement.

For those readers tracking the development of state regulatory agencies’ policies on state licensing requirements applicable to entities that (1) invest in student loan debt (e.g., Maryland) or (2) invest in stand-alone mortgage servicing rights (“MSRs”), this language may raise some concerns. State legislators across the country have enacted laws containing broad language, similar to the language in LD 995, that gives state regulatory agencies the latitude to develop formal or informal policies to regulate passive, secondary market investors in those types of debt without the passage of new laws or regulations. Specifically, persons tracking such developments may be concerned by the fact that LD 995 provides that a “student loan servicer” includes a person “responsible” for the servicing of a student education loan, as that terminology could be read by the Bureau to include those entities that hold the servicing rights in Maine student education loans and contract with appropriately-licensed or exempt third-party subservicers to handle the servicing functions on the loans and borrower-facing interactions. Further, such persons also may be concerned that the licensing obligation extends to those “indirectly” acting as a student loan servicer, as many state regulatory agencies have used this specific verbiage to require entities that passively invest in MSRs to be licensed to engage in business, even if they do not directly service such MSRs or maintain any borrower contact.

Expectations for Future Regulation of Investors in Student Loan Debt

As noted above, neither the Bureau nor the Maine Legislature has released any formal determination as to whether this licensing requirement applies to passive, secondary market investors in student loan debt; however, as we watch other states’ legislative measures and regulatory policies unfold in the context of student loan debt and MSRs, it would not be surprising to see the Bureau or student loan ombudsman release such a determination.

We will continue to monitor the state’s efforts to regulate student loan servicers, particularly as they relate to passive, secondary market investors in Maine student loan debt, in the months to come.