Alston & Bird Consumer Finance Blog

State Law

New York DFS Launches Research and Innovation Division

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A&B Abstract:

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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A&B Abstract: 

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.

 

 

Potential Changes to the CCPA; California Senate Considers Amendments

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On April 30, we detailed several proposed amendments to the California Consumer Privacy Act (the “CCPA”) that were advancing in the State Assembly (see our previous blog post here). Since then, a number of the proposed amendments passed the Assembly and moved to the California Senate, where they remain under consideration.

This past week the Judiciary Committee considered a number of the bills and proposed several key amendments. These amendments are discussed below.

• AB 25. The original version of this bill excluded employees, contractors and job applicants from the definition of “consumer” provided that personal information about those categories of persons was used only for limited purposes. The bill has now been amended to provide that employees, contractors and applicants are still consumers, but that certain personal information relating to them will not be subject to the statute as long as used only for purposes relating to their status as employees, contractors or applicants to the business in question. The bill has also been amended to require delivery of privacy notices to employees, contractors and job applicants which identify personal information collected concerning those individuals and the purposes of the collection. As with the version that passed the Assembly, the private right of action and statutory damages established by the CCPA for certain security incidents will continue to apply.

Most notably, the amendment is proposed to be operative only through 2020. The intent is to provide incentive to the legislature to draft and approve a law on employee privacy. But if a new employee privacy law is not approved, then personal information about employees will be subject to the full CCPA as of January 1, 2021.

• AB 846. The amendment seeks to clarify the treatment of consumers in retail loyalty programs under the CCPA. The bill previously stated that offering “a different price, rate, level, or quality of goods or services” under a retail loyalty program was permissible if (1) a consumer volunteered for the program or (2) the offering was for a specific good or service whose functionality was directly related to the collection, use or sale of the consumer’s data. The bill has been amended to only permit differential offerings under a retail loyalty program when a consumer volunteers for the program. However, a business is prohibited from offering a program that is “unjust, unreasonable, coercive, or usurious in nature.” A business is also prohibited from selling personal information collected as part of a retail loyalty program.

• AB 873. This bill has been amended to clarify the definition of “deidentified” information and the handling of such information. The bill was amended while in the California State Assembly to define “deidentified” information as that which “does not identify and is not reasonably linkable, directly or indirectly, to a particular consumer” as opposed to the previous definition of that which “does not reasonably identify or link, directly or indirectly, to a particular consumer….” The amendment failed to pass its first hearing on July 9 after advancing to the Senate, but it has been granted reconsideration.

• AB 981. This bill originally proposed to exempt from the CCPA insurance institutions, agents, and support organizations to the extent that those institutions were already subject to California’s Insurance Information and Privacy Protection Act (IIPPA). The bill has now been amended to remove this blanket exception from the CCPA, and it now provides that a consumer may not request a business to delete or not sell the consumer’s personal information if it is necessary for the business to retain or share the consumer’s personal information to complete an insurance transaction requested by the consumer.

• AB 1146. This amendment exempts a defined category of vehicle information from the CCPA’s right to deletion and do not sell requirements. The information includes name and contact information of a vehicle owner, VIN, make, model, year, and odometer reading shared between a “new motor vehicle dealer” and the manufacturer with respect to vehicle repairs relating to warranty work or recalls. The bill states that (1) the applicable vehicle information is exempt from the right to opt out of data sales provided that the business is not using such information for reasons other than ”effectuating, or in in anticipation of effectuating, a vehicle repair covered by a vehicle warranty or a recall” and (2) a business is not required to delete personal information that it is maintaining to “fulfill the terms of a warranty or a federally mandated recall covering a product purchased by the consumer.”

• AB 1564. The amendment previously changed a business’s obligation to make available two or more designated methods to just one method to submit requests for information concerning a business’s collection and disclosure practices. The bill has been amended to again require a business to make available two or more methods for submitting requests, including a toll-free telephone number at minimum. If a business maintains a website, the amendment requires a business to make that website available for a consumer to submit requests. If a business operates exclusively online and has a direct relationship with a consumer from whom it collects personal information, the business is also required to provide an email address for submitting request for information.

We will continue to monitor these amendments and provide further updates as they occur.

Connecticut Officially Becomes an Attorney Closing State

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A&B Abstract:

Effective October 1, 2019 only Connecticut licensed attorneys can conduct real estate closings in the state for certain mortgage loan transactions.

Real Estate Closings

The process of closing a loan generally involves four core functions:

  • transferring title to the buyer;
  • transmitting payment to the seller (usually through an escrow agent);
  • discharging any outstanding liens on the property; and
  • creating a lien on the property in favor of the buyer’s lender.

In a mortgage transaction, the “closing agent” is the person responsible for coordinating the activities of various parties involved in the transaction.  Several states – whether by case law or bar opinion – hold that it is the unauthorized practice of law for someone other than a duly licensed attorney in the relevant jurisdiction to conduct real estate closings.

Impact of New Connecticut Law

Historically, no explicit authority has held that only an attorney may act as a closing agent in Connecticut.  However, as a general matter, almost all loans in Connecticut are closed by an attorney.  Connecticut Senate Bill 320 (Public Act No. 19-88) has codified that long-standing practice.  As a result, as of October 1, 2019, only a duly licensed Connecticut attorney in good standing may conduct real estate closings.

The measure defines “real estate closing” as a closing for:

  • a mortgage loan transaction, other than a home equity line of credit transaction or any other loan transaction that does not involve the issuance of a lender’s or mortgagee’s policy of title insurance in connection with such transaction, to be secured by real property in Connecticut, or
  • any transaction wherein consideration is paid by a party to such transaction to effectuate a change in the ownership of real property in Connecticut.

A violation of the new requirement constitutes a Class D felony, punishable by a $5,000 penalty or five years in jail.

Takeaway

Lenders should ensure that only a Connecticut licensed attorney conducts the closing on any first- or second lien mortgage loan, other than a home equity line of credit, that require the issuance of title insurance.

Maine Creates Mortgage Servicer Duty of Good Faith

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Maine is joining the ranks of states whose requirements for mortgage servicers may exceed those of the CFPB’s Mortgage Servicing Rules.  Effective September 19, Senate Paper 415 (2019 Me. Laws 363) creates a mortgage servicer duty of “good faith,” meaning honesty in fact, and the observance of reasonable commercial standards of fair dealing.  This duty applies to the servicing of a residential mortgage (including in any related foreclosure action).  Further, the measure applies the duty to existing provisions of Maine law relating to the conduct of foreclosure mediation, permitting a court to impose sanctions on a servicer who fails to participate in good faith in mediation.

What Activities Are Covered?

“Servicing,” for purposes of the new requirement, means any combination of:

  • receiving a periodic payment from an obligor under the terms of an obligation, including an amount received for an escrow account;
  • making or advancing payments to the owner of an obligation on account of an amount due from the obligor under a mortgage servicing loan document or a servicing contract;
  • making a payment to the obligor under a home equity conversion mortgage or reverse mortgage;
  • evaluating the obligor for, or communicating with the obligor with respect to, loss mitigation;
  • collecting funds from a homeowner for deposit into, and making payments out of, an escrow account; and
  • taking any other action with respect to an obligation that affects the obligor’s payment or performance of the obligation or that relates to enforcement of the obligation.)

What Entities Are Covered?

While the duty of good faith applies broadly, certain entities are exempt.  For purposes of the new requirement, a “mortgage servicer” is a person responsible for:

  • receiving scheduled periodic payments from an obligor pursuant to the terms of a mortgage, including amounts for escrow accounts;
  • making or advancing payments to the owner of the loan or other third parties with respect to amounts received from the obligor pursuant to a loan servicing contract; and
  • evaluating obligors for loss mitigation or loan modification options.

The term includes a person that holds, owns, or originates a mortgage loan obligation if the person also services the obligation.  However, among others, the term does not include a “supervised financial organization,” a “financial institution holding company,” a “credit union service organization,” or a subsidiary of any such entity.  Accordingly, for purposes of the good faith requirement, the term is limited to non-depository entities (i.e., state-licensed servicers).

Penalties

The measure creates substantial penalties for a servicer’s failure to act in good faith.  A violation in connection with a foreclosure action may be remedied by dismissal or stay of the action, or by the imposition of other sanctions that the court deems appropriate for so long as the violation continues.  For violations more generally, an injured homeowner or obligor may recover actual damages and the costs and attorney’s fees incurred in bringing such an action.  Additionally, statutory damages of up to $15,000 are available if the servicer has engaged in a pattern or practice of violating the duty of good faith.  The measure further prohibits a servicer from charging a loan owner for, or adding to the amount of the obligation, any attorney’s fees or other costs incurred as the result of its violation of the duty of good faith.