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National Mortgage News--Houston Chronicle--Mike Morris and Matt Dempsey

One in five new homes permitted in Houston in the year after Hurricane Harvey is in a flood plain — some on prairie developed for the first time after the storm — even as new rainfall data showed existing flood maps understate the risk posed by strengthening storms.

The city Planning Commission also approved 260 plats in Houston's floodplains during the same period, signing off on developers' requests to redraw property lines to create hundreds more parcels awaiting development in flood-prone areas, a Houston Chronicle analysis found.

About 615 of the home construction permits were issued in the 100-year floodplain, the area deemed to have a 1 percent chance of being inundated in any given year, city data show. Another 600 were approved in the 500-year floodplain, the area deemed to have an annual 0.2% chance of inundation, according to the Chronicle analysis.

Many of these permits were issued to homeowners razing and elevating their flooded homes; more than 300 of the homes were approved on lots for which a demolition permit was issued after the storm. Others were issued to builders, many of whom tore down existing bungalows and replaced them with clumps of townhomes, packing more families into the floodplain. Still others were issued to developers building brand new subdivisions in areas that previously were open fields.

In many cases, the homes complied with new city regulations designed to better protect life and property only when builders did so voluntarily. That's because the rules the city council approved in April — which extended regulations from the 100-year floodplain to the broader 500-year floodplain and required new homes built in those areas to sit higher off the ground — didn't take effect until Sept. 1, more than a year after Harvey came ashore.

Residents in southern Timbergrove, dozens of whom flooded during Harvey, have rallied against one new development in the 100-year floodplain at the edge of their neighborhood near 11th Street at T.C. Jester along White Oak Bayou.

Lovett Homes, which is owned by prolific local developer Frank Liu, has planned a 77-townhome community called Stanley Park along a creek that neighbors said was overwhelmed during Harvey.

"We always knew that land had been platted for development. I think the outrage was all of this development is pushing to start not even a year after Harvey," said Andrew Schaefer, whose home borders the site. "You have this neighborhood devastated and you're just going to come put more townhomes in the immediately affected area. ... And they're going to get away with it. The city just lets it happen over and over again."

Residents' website, yard signs and pressuring of local officials have worked, to a point — the Harris County Flood Control District in August told Liu he must build a detention basin on the site, triggering a new round of permitting.

As a result, Liu, who declined to comment, must now re-engineer aspects of the development but may still build dozens of townhomes on the site as long as he satisfies all city and county regulations.

The same is true for the scores of townhomes Liu and other builders are adding in the floodplain a few miles upstream along White Oak Bayou in Shady Acres, and for a 900-home subdivision that MetroNational and Meritage Homes are developing along Brickhouse Gully.

When the city council unanimously approved last spring the developers' plan to build that west Houston neighborhood a few miles upstream of areas where houses have been bought out after repeated flooding, many citizens reacted with confusion or outrage. Council members defended the vote by saying that rejecting the measure would only have blocked the developers from their preferred method of financing the project, not from building the subdivision.

Lost amid the poor optics of the vote, however, was that the council had, just three weeks earlier, tightened the city's floodplain development rules by the tally of 9-7, an extreme rarity for a council that sees few close votes.

The new rules set more stringent standards for building in floodplains, but do not ban development there — that idea was never considered. Most of Houston, after all, was already built by the time the first floodplain maps were published in the 1980s. Today, there are roughly 165,000 buildings in the 235 square miles of mapped floodplains that cover the Bayou City.

Mayor Sylvester Turner said the way forward is to build homes higher and improve the region's drainage infrastructure, such as by adding more stormwater detention basins.

"Houston cannot and should not abandon a third of the city to avoid flooding any more than San Francisco should abandon numerous established neighborhoods that could be affected by earthquakes," Turner said. "Houston was founded on a system of bayous and the huge majority of existing development took place before floodplain maps existed. Now the maps are being redone, for good reason, meaning the lines will move — while residences will not."

Still, some civic leaders have called for the region to begin charting a path toward abandoning its floodplains, perhaps by pouring billions of dollars into buying out tens of thousands of at-risk homes.

Among them is Jim Blackburn, of Rice University's Severe Storm Prediction Education and Evacuation from Disasters Center. Blackburn said what most concerns him is that local officials seem no closer to a longterm plan to manage Houston's flood risk.

Setting aside sufficient funds to do widespread buyouts when the next flood hits would help empty the floodplains, he said, by giving flooded homeowners an option other than perpetuating the cycle of rebuilding only to flood again.

"No one is talking about floodplain development being dangerous — that it's unsafe, it's unwise," Blackburn said. "We basically talk about it on the one hand like it's red tape to be avoided and at worst it's an elevation to be met, and it's more than that. And what you hear from the city is there's a minimum requirement and you have to meet it. That's not leadership on this issue."

Julie Moore knows it sounds crazy: She and her husband spotted the house in Timbergrove when it hit the market before Hurricane Harvey, then watched as it flooded, was repaired at ground level, and went back on the market again.

She knows Houston floods — her father was the guy who used his boat to rescue flooded neighbors during storms when she was a kid. She knows her new home is nestled between White Oak Bayou and a small tributary, deep in the floodplain.

But Moore is due with her first child in November, their old house in the Heights was tiny, and her husband loved the home. They bought it and are still unpacking boxes. Her parents plan to rebuild the gutted house next door with a second story, providing a refuge when the rains come.

"The unfamiliar thing for me now is that it's my reality, because it never was — we were always the house in the front of the neighborhood that never floods and now I'm in the house that will flood again," Moore said. "I imagine it's going to be devastating, and I'm probably going to be attached to all of our things because I have a baby. Like, 'Oh she crawled right there for the first time,' and we have to rip up all the floors."

Often overlooked in the debate over where and how to build in floodplains is that developers would go broke if no one bought the homes they built.

Houston real estate agent Alex McCauley was shocked when a house she listed on the west side — repaired after being inundated by the dam release in the aftermath of Harvey — got six offers within 24 hours, all over the asking price. The year since the storm has taught her that builders and homebuyers alike see opportunity in devastation.

"Some of my clients tell me, 'Don't show me anything that flooded,' but the majority, if they see something that's pretty, they don't care," she said. "I have some people who are looking in the 100-year floodplain, homes that got six feet of water, and they're like, 'I don't care, my insurance will cover it and I'm getting a great deal on this house.' It makes me really nervous."

Jake Cover takes a practical view of the risk he faces in the home he bought in March in an Independence Heights floodplain.

Cover was told his block didn't flood during Harvey, he bought flood insurance, and his home is raised on a thick foundation. He's not concerned that city rules would require the home to sit higher if it were built today — many houses in floodplains were spared and others were not, he said.

With Harvey on his mind, however, Cover did push the builder to add drains to the backyard and improve his front culvert along the street before he moved in.

"I'm just comfortable with the risk involved," he said. "My parents' house flooded and, having flood insurance, it hasn't set them back very far. It wasn't something that worried me very much."

Yet there are concerns that not all buyers understand the risk they are taking on.

In Shady Acres, much of which is in the floodplain near the confluence of White Oak Bayou and Turkey Creek, clumps of townhomes are squeezed onto parcels between vacant lots and the original homes, nearly all of them sporting for sale signs.

Matt Zeve, director of operations for the county Flood Control District, says his staff hears regularly from buyers of new Shady Acres townhomes upset that their garages have repeatedly flooded, ruining their cars and possessions. Even the new city regulations apply only to living quarters, he noted, meaning garages need not be elevated.

"If developers and their customers are willing to live in homes that look different than how homes typically look in Houston-Harris County, and take the risk of not being able to leave their homes and possibly have their vehicles damaged when there's a major flood event, then that's OK to have development in the floodplain," Zeve said. "But a lot of people are uncomfortable with that situation. I wouldn't want to live that way."

Greater Houston Builders Association past president Mike Dishberger has always been reticent to build in floodplains, but he said there is no practical way to prevent development in flood zones through regulation without undermining established neighborhoods.

Dishberger, who owns Sandcastle Homes, opposed the city's new regulations, which he felt were unjustified and too costly. The last year of development aside, however, he said those regulations likely will limit future development in floodplains once all Harvey-related work is done.

"You'll see a rash of rebuilding happening for another year but as far as new construction I think you're going to start seeing fewer and fewer," he said. "Builders aren't going to be buying that kind of property just because of the rules and the cost of building the homes higher. There's a lot of land in Houston. There's no need to build in the 100-year floodplain that much."

Homebuilder Johnny Hollins is among the busiest builders in Independence Heights, much of which is in the 100-year floodplain. Harvey has shifted his thinking, however.

Hollins said all seven homes he has pending in the area will now meet the city's new height standard, though they were approved before the new rules took effect.

"I don't really want to build in the 100-year anymore -- there's too much that goes with it," said Hollins, of J.G. Hollins Builders. "It's the concern about flood risk, and it slows us down on the regulatory side."

Marcel Coley told his real estate agent he didn't want to consider homes in flood zones, but in April he bought a brand new home in Skyview Forest, a subdivision built on undeveloped land that partially sits in a 500-year floodplain south of Sims Bayou in south Houston.

Even though the bayou runs about 800 feet beyond his back fence, Coley said he did not know he had purchased in a flood zone. He wasn't required to buy flood insurance, which typically is required only for homes in the riskier 100-year floodplain.

Coley's home sits a bit above the street, its slab foundation laid on a pad of extra dirt. Neighbors say that was enough during Harvey, and that the floodwaters were mostly contained in the streets.

Coley's house would sit higher off the ground, likely on a pier-and-beam foundation, if it had been built only a few months later.

Still, he feels good about his choice. The area is developing quickly, and he expects his home value will rise.

"If it's going to flood it's going to flood, you just have to take precautions when the weather says something may potentially happen," he said. "I don't want to live scared of that. I want to live my life."

CounselorLibrary Alert

On September 28, the Connecticut Department of Banking issued a memorandum announcing its no-action position regarding one section of HB 5490/Public Act 18-173. That section requires sales finance companies to acquire and maintain adequate records of the ethnicity, race, and sex of any applicant or co-applicant for a retail installment contract, beginning October 1, 2018. The memo states that the DOB has asked the Bureau of Consumer Financial Protection for an official interpretation as to whether this new requirement is consistent with Regulation B, which implements the Equal Credit Opportunity Act. The memo further notes that until the DOB receives additional guidance from the BCFP, it will take a no-action position as to the enforcement of the new requirement.

   No-Action Position Memorandum

   HB 5490/Public Act 18-173

Ballard Spahr LLP--John D. Socknat 

We have been following closely efforts by state regulators, state legislatures and the courts to restrict, or in some cases prohibit, bank model lending programs, so the recent guidance from the Vermont Department of Financial Regulation (“Department”)  is welcome news.  On September 13, 2018, the Department issued an Order exempting loan solicitation companies from licensure when they partner with FDIC-insured banks to offer commercial loans.

The Order provides that a loan solicitation license is not required provided the following conditions are satisfied: 1) the loan solicitation company has partnered with an FDIC insured bank; 2) the loan solicitation company is soliciting commercial loans; 3) the commercial loan is made by the FDIC-insured bank and the bank is clearly identified as the lender in the loan documents; 4) the loan solicitation company is already subject to ongoing monitoring, training, and compliance programs by the FDIC-insured bank to manage the activities of the loan solicitation company; and 5) the loan solicitation company is subject to supervision, oversight, regulation and examination by the FDIC-insured bank’s state regulator (if any) and federal regulator.

Entities that wish to rely upon this exemption must, upon request, provide the Commissioner of the Department with evidence demonstrating that the company is subject to regulatory supervision, including examinations, by the bank’s regulators in a manner that is at least equivalent to the supervision and examination of a loan solicitation company licensed by the Department.  The Order does not provide details on what level of supervision would be deemed “equivalent” to that imposed upon a licensee.

While the Order is limited to commercial loans, it does represent an acknowledgment by one state regulatory agency that programs involving banks are subject to significant supervision and oversight, and do not necessarily require additional oversight and regulation.

Buckley Sandler, LLP--InfoBytes Blog

On September 30, the California governor signed AB 237, which establishes a pilot program under the California Financing Law with the stated purpose of encouraging lenders to provide affordable small dollar loans to consumers. Significant features of the program include: (i) an increase to the upper limit of a permissible loan, from $2,500 to $7,500; and (ii) the authorized imposition of specified alternative interest rates and charges on unsecured loans of at least $300 and less than $2,500.

Under California’s Pilot Program for Increased Access to Responsible Small Dollar Loans (Pilot Program), licensees who choose to participate in the Pilot Program will be required to apply and pay a specified fee to the Commissioner of Business Oversight (Commissioner). Participating licensees will also be required, among other things, to (i) determine a borrower’s ability to repay the loan, factoring in all verifiable outstanding credit and capping total monthly debt service payments at 50 percent of the borrower’s gross monthly income for loans of $2,500 or less and 36 percent for loans greater than $2,500; (ii) establish terms of 180 days or more for loans with principal balances of at least $1,500, but less than $2,500, upon origination; (iii) establish terms of no less than one year and no more than five years for loans with principal balances exceeding $2,500; (iv) implement policies and procedures for the purpose of answering borrower questions and performing reasonable background checks on any finders associated with the licensee’s participation in the Pilot Program (AB 237 permits approved licensees to use the services or one more finders); and (v) reduce the interest rate of each subsequent loan made to the same borrower by a minimum of one percentage point under certain conditions. In addition, AB 237 allows the Commissioner to charge a licensee certain fees associated with the use of a finder, stipulates examinations requirements for licensees and finders, and establishes deadlines and requirements for the Commissioner when submitting required findings from the Pilot Program. The Pilot Program will run through January 1, 2023.

Governor Brown issued a message in conjunction with his signing AB 237 expressing his concern, among others, that increasing the cap on small dollar loans without also providing stricter regulatory oversight may lead to “unintended consequences.” Governor Brown requested that the state’s Department of Business Oversight “increase their vigilance and more carefully oversee both lenders and finders to ensure their actions comply with existing law.”

Buckley Sandler, LLP--InfoBytes Blog

On October 2, the New York governor signed SB 2484, which prohibits auto lenders from remotely disabling a vehicle without first providing notice of the disabling to the debtor. The act amends the state’s uniform commercial code and the general business law, in significant part, by: (i) defining a “payment assurance device” (“any device installed in a vehicle that can be used to remotely disable the vehicle”); (ii) requiring written notice of the possible remote disabling of a vehicle “in the method and timetable” agreed in the initial contract between the parties; (iii) identifying permissible methods of notice transmittal; and, (iv) specifying the permitted period between the postmarking of the notice and the date on which the auto lender or its agent obtains the right to disable the vehicle. The act takes effect immediately.

Bankers Advisory--Rhona Kyeyune

The State of California amended its provisions relating to foreclosure as well as made changes to its Homeowner Bill of Rights. These provisions are effective on January 1, 2019.

The amendment prohibits an entity that foreclose on more than 175 real properties during the prior reporting year from recording a notice of default or notice of sale or conducting a trustee’s sale after a borrower submits a complete application for a first lien loan modification and that application is pending. The complete application must be submitted at least 5 business days before a scheduled foreclosure sale.

The prohibition on recording a notice of default or a notice of sale would continue until the borrower: (i) is provided a written denial of an application and the 30-day period to appeal the denial expires; (ii) does not accept a written offer to participate in a modification within 14 days; or (iii) defaults under an accepted modification.

The borrower is granted 30 days to appeal if the loan modification is denied and is required to provide evidence that the mortgage servicer’s determination was in error. The amendment prohibits the servicer from filing a notice of default, or if that notice has already been filed, from recording a notice of sale or conducting a trustee’s sale until the later of specified events  during the appeal period.

The mortgage servicer is required under the amendment to send a written notice to the borrower that identifies the reasons for denial and that includes certain information in connection with the denial.

The amendment  also requires that a notice of default include a specified declaration regarding contact with the borrower, and provides that a mortgage servicer satisfies specified telephone contact requirements in this regard if the borrower makes a written request to cease communications.  The amendment makes technical changes to provisions requiring a mortgage servicer to establish a single point of contact for a borrower requesting a foreclosure prevention alternative.

Section 12 of amendment provides that, except as specified, a mortgage servicer that offers a foreclosure prevention alternative must send a written communication containing specified information regarding the alternative to a borrower within 5 days after recording a notice of default.

The amendment under section 13 also requires a mortgage servicer to provide a borrower who submits a complete first lien loan modification application, or any document connected to that modification, written acknowledgment of receipt within 5 business days of receipt along with other information regarding the loan modification process. A borrower’s first lien loan modification application is deemed “complete” when a borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within the reasonable timeframes specified by the mortgage servicer.

Section 16 prohibits recording a notice of default if a foreclosure prevention alternative is approved in writing before the notice is recorded and other specified conditions are met. If a foreclosure prevention alternative is approved after recording the notice, then a mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent is prohibited from recording a notice of sale or conducting a trustee sale if specified conditions are met.

Furthermore, the amendment requires that a notice of default be rescinded or a pending trustee sale be canceled when a borrower executes a permanent foreclosure alternative. The amendment prohibits a mortgage servicer from charging fees for a first lien loan modification or other foreclosure prevention alternative and requires modifications and prevention alternatives previously approved to be honored following transfer or sale to another servicer.

The amendment provides that violations of the above provisions may result in liability to borrowers and permits a court to award the greater of treble actual damages or specified statutory damages in cases of intention or reckless violations. Additionally, violations of certain provisions by CFL, CRMLA, and REL licensees may be deemed violations of those respective licensing laws.

The amendment also provides that a mortgage servicer that engages in multiple and repeated filing of unsubstantiated documents related to foreclosure is liable for a civil penalty of up to $7,500 per mortgage or deed of trust and further administrative enforcement.

The law also generally subjects entities that foreclosed on fewer than 175 properties during the prior reporting year to similar, but in some cases less stringent, requirements and restrictions.

Ballard Spahr LLP--Sarah T. Reise

On September 28, 2018, the Maryland Commissioner of Financial Regulation issued a notice advising companies servicing student loans of Maryland borrowers to provide their contact information to the state’s new Student Loan Ombudsman by November 15, 2015.

Maryland’s “Financial Consumer Protection Act of 2018” went into effect on October 1, 2015. The Act imposes a number of new regulations, and also creates the post of Student Loan Ombudsman. Under the Act, all loan servicers engaged in servicing student loans made to Maryland residents must provide the Ombudsman with the name, phone number and e-mail address of the individual designated to represent the servicer in communications with the Ombudsman. The deadline to comply with this requirement is November 15, 2018.

The Ombudsman is charged with receiving and working to resolve complaints submitted by student borrowers. The Ombudsman will also analyze and compile data related to such complaints, and the analysis of that data will be disclosed to the public along with the names of student loan servicers engaging in any abusive, unfair, deceptive or fraudulent practices.

In addition to its responsibilities related to student borrower complaints, the Ombudsman will also engage in educational efforts with both students and the state legislature. With respect to students, the Ombudsman will help student loan borrowers to understand their rights and responsibilities under the terms of their student loans. The Ombudsman is also directed to establish a student loan borrower education course by October 1, 2019.

The Ombudsman will also provide annual reports to the governor and Maryland General Assembly, along with making recommendations for statutory and regulatory procedures to resolve student loan borrower issues. These recommendations are to include an assessment of whether Maryland should require licensing or registration of student loan servicers.

Ballard Spahr LLP--Rachel R. Mentz

On September 19, 2018, California enacted AB-3212.  The Bill amends the California Military and Veterans Code to expand the protections offered to qualifying servicemembers under state law and to impose new criminal penalties for certain violations of its provisions.  Some of the key changes, which go into effect January 1, 2019, are as follows:

Expanded Protections

• Extends most protections to 120 days after military service ends (prior provision extended protections for 60 days after the end of military service).
• Expands the 6% interest rate cap to include student loans, with the 6% rate to remain in effect for one year after the period of military service ends.
• Extends the ability to defer payments on certain obligations to include student loans.
• Clarifies that interest in excess of 6 percent per year that would otherwise be incurred but for the interest rate cap is “forgiven” and periodic payments “shall be reduced by the amount of interest forgiven”.
• Extends the right to terminate leases after entry into military service to include vehicle leases.
• Clarifies that penalties may not be imposed on the nonpayment of principal or interest during the period in which payments are deferred on an obligation pursuant to a court order.

Written Response Required

• Requires a person receiving a request for relief from a servicemember to respond within 30 days acknowledging the request, setting forth any reasons the person believes the request is incomplete or the servicemember is not entitled to the relief requested, specifying the specific information or materials that are missing from the request, and providing contact information the servicemember can use to contact the person regarding the request. If after receiving a request from the servicemember, the recipient does not respond within 30 days, the recipient waives any objection to the request and the servicemember is automatically entitled to the relief sought.

Prohibitions on Sales, Foreclosures, and Seizures of Property

• Extends the bar on sale, foreclosure, or seizure of property for non-payment to the period of military service plus one year (prior provision was for the period of nine months after the end of military service).
• Extends the bar on enforcing storage liens during the period of military service and for 120 days thereafter (prior provision was until three months after the end of military service).
• Requires a sworn statement of compliance by any person who files or completes a notice, application or certification of lien sale or certificate of repossession.

Protections Related to Court Proceedings

• Extends the ability of courts to stay proceedings involving servicemembers as a plaintiff or defendant to 120 days after the end of the military service (prior provision was until 60 days after the end of military service).
• Permits a service member who is granted an initial stay to apply for an additional stay by showing there is a “continuing military effect” on the servicemember’s ability to appear. If the court refuses to grant an additional stay, the court shall appoint counsel to represent the servicemember in the proceeding.
• Requires courts to stay for a minimum period of 90 days any proceedings in which (a) there may be a defense to the action that cannot be presented without the presence of the servicemember defendant; or (b) counsel cannot after due diligence contact the servicemember defendant to determine if a meritorious defense exists.
• Limits the ability of a court-appointed attorney to waive defenses that a servicemember may have or to otherwise bind the servicemember whenever the attorney cannot locate the servicemember through a new statutory provision.

Credit Reporting

• Prohibits a creditor or consumer reporting agency from making an annotation in the servicemember’s record that the person is on active duty status. A violation of this provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Debt Collections

• Prevents a debt collector from falsely claiming to be a member of the military in attempting to collect any obligation. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
• Expressly prohibits a debt collector from contacting the servicemember’s military unit or chain of command in connection with the collection of any obligation unless the debt collector obtains written consent from the servicemember after the obligation becomes due and payable. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Scope of Coverage

These provisions in the California Military and Veterans Code apply broadly to members of the Armed Forces (Army, Navy, Air Force, Marine Corps, and Coast Guard) who are on active duty as well as any member of the state militia (defined as the National Guard, State Military Reserve and the Naval Militia) who are on full-time active state service or full-time active federal service.  Creditors are advised to consult with counsel to determine whether these new provisions will apply to specific servicemember borrowers who have contacts with California.

troutman sanders--Alan D. Wingfield; Paige S. Fitzgerald; Troy K. Jenkins

Non-bank lenders to small businesses need to be on alert after Governor Brown signed California Senate Bill 1235 into law on September 30, 2018. The new law, Commercial Financing: Disclosures,” requires specific disclosures be made when commercial financing offers of $500,000 or less are presented to commercial borrowers. The new requirements will become effective when the California Commissioner of Business Oversight adopts final regulations to aid in the law’s implementation; the earliest date that this new law may be enforced is January 1, 2019. California’s law is important as it requires consumer-lending style disclosures in the commercial lending context.

Under the new law, non-bank lenders that facilitate commercial financing transactions equal to or less than $500,000 must make new disclosures to commercial borrowers at the time of presenting a commercial offer of financing and must obtain the borrower’s signature on the disclosure prior to consummating the transaction. The law also applies to a “nondepository institution that enters into written agreements with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient through an online lending platform that is administered by the nondepository institution.”

The law exempts from its coverage traditional depository institutions, such as banks and credit unions; lenders regulated by the Farm Credit Act; commercial transactions secured by real property; and floor plan financing transactions in which the borrower is a motor vehicle dealer or an affiliate. In addition, the law exempts entities that make no more than one commercial financing transaction within the state in a 12-month period or that make five or fewer commercial transactions in the state that are incidental to the entity’s business.

“Commercial financing” as regulated by the new law includes not only traditional loans, but also “an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes.”

A lender regulated under the new law that offers commercial financing of $500,000 or less to a borrower will be required at the time of extending the financing offer to disclose the following:

1. The total amount of funds provided;

2. The total dollar cost of the financing;

3. The term or estimated term;

4. The method, frequency, and amount of payments;

5. A description of prepayment policies; and

6. The total cost of the financing expressed as an annualized rate.

The law provides for similar disclosures to be made in asset-based lending and factoring commercial financing offers. Finally, providers of commercial financing must obtain the recipient's signature on the disclosure statement before consummating the commercial transaction.

Non-bank lenders offering commercial financing in California should monitor the status of the final regulations to be promulgated by the California Commissioner of Business Oversight and should put procedures in place to implement these new disclosure requirements when the implementing regulations are promulgated. Commercial financing providers should seek advice from legal counsel to ensure compliance with this new law.

Ballard Sparh, LLP--David M. Stauss; Kristen Poetzel; Malia K. Rogers

Less than three months after California passed the California Consumer Privacy Act of 2018 (CCPA), Governor Jerry Brown signed SB 1121 this week, making a number of technical and substantive changes to the law.

Of particular note: SB 1121 modifies the financial institution carve-out language in CCPA section 1798.145(e). While the change is a welcome development for entities subject to regulation under the Gramm-Leach-Bliley Act (GLBA), it does not grant full exemption from the CCPA. Therefore, GLBA-regulated entities that collect information online will need to analyze the CCPA's requirements and how they apply to a specific business.

The original carve-out language provided that:

"This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, if it is in conflict with that law."

As we have previously discussed, that language raised a number of issues, such as what would constitute a "conflict" between the GLBA and the CCPA, and whether the language was even consistent with the GLBA insofar as personal information is not collected, processed, sold, or disclosed pursuant tothe GLBA. The provision also failed to address the relationship between the CCPA and California's Financial Information Privacy Act.

The new language tries to resolve some of those issues, stating:

"This title shall not apply to personal information collected, processed, sold, or disclosed pursuant to the federal Gramm-Leach-Bliley Act (Public Law 106-102), and implementing regulations, or the California Financial Information Privacy Act … . This subdivision shall not apply to Section 1798.150."

The new language removes the phrase "if it is in conflict with that law," incorporates the California Financial Information Privacy Act, and adds a sentence providing that financial institutions are still subject to Section 1798.150. The preamble explains those changes as follows:

"The bill would also prohibit application of the act to personal information collected, processed, sold, or disclosed pursuant to a specified federal law relating to banks, brokerages, insurance companies, and credit reporting agencies, among others, and would also except application of the act to that information pursuant to the California Financial Information Privacy Act."

While the revised language is no doubt welcomed by GLBA-regulated entities, it should not be interpreted as a full exemption. Rather, GLBA entities will remain subject to the provisions and requirements of the CCPA if they engage in activities falling outside of the GLBA—which they almost certainly do.

By way of explanation, the GLBA regulates financial institutions' management of nonpublic personal information, which is defined in 15 U.S.C. § 6809 as personally identifiable financial information: 1) provided by a consumer to a financial institution; 2) resulting from any transaction with the consumer or any service performed for the consumer; or 3) otherwise obtained by the financial institution.

The CCPA defines "personal information" much more broadly to include "information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household." The CCPA identifies numerous examples such as online identifiers, Internet Protocol addresses, email addresses, browsing history, search history, geolocation data, and information regarding a consumer's interaction with a website or online application or advertisement. Notably, the CCPA's definition also includes any "inferences drawn" from any personal information that is used "to create a profile about a consumer reflecting the consumer's preferences, characteristics, psychological trends, predispositions, behavior, attitudes, intelligence, abilities, and aptitudes."

Therefore, to the extent that GLBA-regulated entities are using targeted online advertising, tracking web page visitors, and/or collecting geolocation data—to name a few examples—either through their web pages or apps, they will need to analyze the CCPA's requirements.

As for the new statutory language providing that "[t]his subdivision shall not apply to Section 1798.150," the impact of that sentence cannot be overstated.

Section 1798.150 sets forth a private right of action for consumers to seek statutory damages of not less than $100 and not greater than $750 "per consumer per incident or actual damages, whichever is greater" if the consumer's information "is subject to an unauthorized access, exfiltration, theft, or disclosure as a result of the business's violation of the duty to implement and maintain reasonable security procedures and practices." In other words, GLBA-regulated entities will still be subject to millions of dollars of potential damages if they experience a data breach.

Members of Ballard Spahr's Privacy and Data Security Group provide a full range of counseling, transactional, regulatory, investigative, and litigation services across industry sectors and help clients around the world identify, manage, and mitigate cyber risk. Our team of nearly 50 lawyers across the country includes investigators and advocates with deep experience in cyber-related internal and governmental investigations, regulatory compliance and enforcement matters, cyber-related crisis management, and civil and criminal litigation.

Ballard Sparh, LLP--Stacey L. Valerio 

Noting, among other things, “retrenchment” on the federal level, the Maryland Financial Consumer Protection Act of 2018 (HB 1634) was signed into law on May 15, 2018.

The Act’s provisions take effect October 1, 2018 and include the following:

• Maryland Consumer Protection Act (MCPA):  Adds “abusive” practices to the existing proscription against “unfair and deceptive trade practices” and adds violations of the federal Military Lending Act and the federal Servicemembers Civil Relief Act to the list of statutes that are considered to be per se violations of the UDAAP proscription.  Increases the maximum civil penalties for violations of the MCPA by merchants to $10,000 for a violation and $25,000 for a repeat violation. 

• Increases in civil penalty amounts.   The law increases permissive civil penalty amounts for violations of laws, regulations, rules or orders over which the Commissioner of Financial Regulation has jurisdiction to a maximum of $10,000 for a first violation and a maximum of $25,000 for each subsequent violation.  Similar amendments were made throughout the statutes governing activity within the jurisdiction of the Commissioner; in some instances (e.g., collection agency, mortgage lending, mortgage loan originators, money transmission, debt management services), the amendments increase the maximum civil penalties that may be imposed when a violator fails to cease and desist or take affirmation action to correct the violation required by an order. 

• Requires the Office of the Attorney General and the Commissioner of Financial Regulation, whenever considered appropriate, to use their authority under Section 1042 of the Dodd-Frank Act to bring civil actions or other appropriate proceedings and requires appropriation of at least $1,000,000 in general funds (at least $700,000 for the Attorney General, and at least $300,000 for the Commissioner) for purposes of enforcing consumer protection laws. 

• Changes relating to collection activity.   The law changes the definition in the Maryland Collection Agency Licensing Act of “licensed collection agency” from a person who is licensed to a person who is required to be licensed, regardless of whether the person is actually licensed, and also provides, under the Maryland Debt Collection Act that it is a prohibited activity for a collector to engage in unlicensed debt collection in violation of the Maryland Collection Agency Licensing Act or to engage in any conduct in violation of Sections 804 to 812 of the federal Fair Debt Collection Practices Act (“FDCPA”). (Sections 804 to 812 of the FDCPA: impose requirements and restrictions on debt collectors when communicating with any person other than the consumer for the purpose of acquiring location information about the consumer; impose requirements and restrictions on debt collectors when communicating with the consumer or with third parties in connection with the collection of any debt; prohibit debt collectors from engaging in conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt; prohibit a debt collector from using false, deceptive, or misleading representations or means in connection with the collection of any debt; prohibit a debt collector from using unfair or unconscionable means to collect or attempt to collect any debt; and prohibit the design, compilation and furnishing of any form knowing that such form would be used to create the false belief in a consumer that a person other than the creditor is participating in the collection or attempted collection of a debt allegedly owed to such creditor when in fact such person is not so participating.  The cited FDCPA provisions also govern: the timing and content of required written notices to consumers and the required conduct of a debt collector when a consumer notifies the debt collector that it disputes any portion of the debt or requests information regarding the original creditor; application of single payments where a consumer owes multiple debts and a debt has been disputed; and venue for legal actions brought by debt collectors.)   

• Requires a Student Loan Ombudsman.  The Ombudsman, in consultation with the Commissioner of Financial Regulation, must:

• receive and review complaints from student loan borrowers;
• attempt to resolve complaints;
• compile and analyze complaint data;
• disseminate information about student education loans and servicing by helping student loan borrowers understand their rights and responsibilities, providing information to the public, state agencies, elected officials and others relating to borrower problems and concerns, and by providing information about the availability of the Ombudsman to borrowers and potential borrowers, state higher education institutions, and student loan servicers; and
• establish a student loan borrower education course on or before October 1, 2019.

The Ombudsman is also tasked with:

• analyzing and monitoring federal, state, and local laws, regulations and policies on student loan borrowers and reporting its findings to the General Assembly;
• disclosing to the General Assembly the complaint data it compiles, noting trends in the data and identifying the names of student loan servicers engaging in any abusive, unfair, deceptive, or fraudulent practices; and
• making recommendations to the General Assembly regarding methods to resolve borrower issues/concerns and for any necessary changes to state law to ensure a fair, transparent, and equitable industry, including whether licensing or registration of student loan servicers should be required in Maryland.

The Commissioner is required to report annually on the implementation and effectiveness of the Ombudsman.  The Ombudsman may refer any matter that is abusive, unfair, deceptive or fraudulent to the Office of the Attorney General for civil enforcement or criminal prosecution.

• Requires “student loan servicers,” as defined, to designate an individual to represent the servicer in communications with the Ombudsman and provide contact information to the Ombudsman.  

• Requires the Office of the Commissioner of Financial Regulation to study Fintech regulation.  The law requires the Office of the Commissioner of Financial Regulation to assess whether it possesses enough statutory authority to regulate “Fintech firms” or “technology-driven nonbank companies” who compete with companies engaged in the delivery of financial services using traditional methods, to identify gaps in the regulation of Fintech firms, including any specific types of companies that are not subject to regulation under Maryland law, and to report its findings and recommendations to the General Assembly by December 31, 2019. 

• Requires the Maryland Financial Consumer Protection Commission to conduct various studies and include recommendations in its 2018 report to the Governor.   The Commission’s studies are to include: crypotcurrencies, initial coin offerings, cryptocurrency exchanges and other blockchain technologies; the Model State Consumer and Employee Justice Enforcement Act and similar laws adopted in other states; the possible exemption of retailers of manufactured homes from the definition of mortgage originator in federal law; and the U.S. Department of Labor rule and any SEC actions addressing conflicts of interest of broker-dealers offering investment advice by aligning the standard of care for broker-dealers with that of the fiduciary duty of investment advisors.

Compliance Monitor--Zachary Pearlstein

The Florida Department of Financial Services has recently adopted provisions relating to fee waiver procedures for military personnel, veterans, and spouses seeking a loan originator license or renewal of a loan originator license. These provisions are effective on September 25, 2018.

The new provisions waive the initial application, assessment, and renewal fees for current and former military members and their spouses or surviving spouses, who apply for or renew or reactivate a mortgage loan originator license, or register as an associated person of a securities dealer or investment advisor.

Under Florida law, in order to obtain a loan originator license, an applicant must be at least 18 years of age and have a high school diploma or its equivalent; complete a 20-hour prelicensing class approved by the registry; pass a written test developed by the registry and administered by a provider approved by the registry; submit a completed license application form as prescribed by commission rule; submit fingerprints to the Registry for submission to the Federal Bureau of Investigation for a federal criminal background check; and authorize the Registry to obtain and make available to the Office an independent credit report on the applicant.

In addition, when applying for a new license, an applicant must submit a statutory nonrefundable application fee of $195 filed through the Registry, as well as a statutory nonrefundable mortgage guaranty fund assessment fee of $20. When applying to renew an active loan originator license, a licensee must submit a $150 nonrefundable renewal fee, a $20 nonrefundable mortgage broker guaranty fund fee, and $6 to cover the cost of fingerprint retention. And, finally, when applying to reactivate a loan originator license that has reverted to inactive status, a licensee must submit a $150 nonrefundable renewal fee, a $150 nonrefundable reactivation fee, a $20 nonrefundable mortgage broker guaranty fund fee, and $6 to cover the cost of fingerprint retention.

Under the new provisions, military personnel, veterans, and spouses seeking a loan originator license or renewal or reactivation of a loan originator license are entitled to reimbursement of these fees. To obtain a reimbursement of licensure fees, a licensee must submit to the Office of Financial Regulation, via electronic filing through the Registry, a completed Office of Financial Regulation Active Military Member/Veteran/Spouse Fee Waiver and Military Service Verification, Form OFR-MIL-00.  This form must be submitted within one hundred eighty days after payment of licensure fees, and is available online at http://www.flrules.org/Gateway/reference.asp?No=Ref-09912.