5 Tips to Consider When Performing Your Social Media Risk Assessment – Attend Our Upcoming Webinar to Learn More

5 Tips to Consider When Performing Your Social Media Risk Assessment – Attend Our Upcoming Webinar to Learn MoreAccording to the Pew Research Center’s Social Media Use in 2018, 73 percent of adults in the United States use at least one type of social media, and the typical American uses three. For 18 to 29 year olds, 80 percent use some form of social media. Given its prevalence, social media affords financial services institutions a unique opportunity to engage with consumers directly to provide information on products and services that consumers find interesting and to resolve consumer issues in real time. Forward thinking institutions are able to effectively utilize social media as a driving force for business generation and customer retention. But, social media also comes with a great deal of compliance risk for financial institutions. In 2013, the Federal Financial Institutions Examination Council (FFIEC) issued guidance highlighting some of the legal and compliance risks from social media use and requiring financial services companies to establish a “risk management program that allows [them] to identify, measure, monitor, and control the risks related to social media.” Set forth below are some items to consider when developing or updating your company’s social media risk management program.

1. Understand how your company is using or intends to use social media

Social media, like letters, emails, telephone calls, text messages, or advertisements, is merely a vehicle for interacting with consumers. While the use of social media can raise some unique issues, social media use is governed by the same laws and regulations that generally govern how financial services companies interact with consumers (e.g., ECOA, FCRA, RESPA, TILA, etc.). As a result, compliance and legal professionals should begin any risk assessment by understanding how the company uses or intends to use social media, as the company’s use of social media will drive the analysis. For example, if your company plans to use Facebook ads to introduce a new loan product, you should consider whether you have satisfied the various advertising requirements scattered across federal law and whether you have taken appropriate steps to address any fair lending concerns.

2. Remember that each social media platform is unique

Social media is often discussed as a broad topic, but compliance and legal professionals should not lose sight of the fact that each platform has its own unique features. For example, some social media platforms require users to attest that they are at least 13 years of age. The presence or absence of this type of assertion can impact how a company approaches compliance with the Children’s Online Privacy Protection Act (COPPA), which imposes specific obligations regarding the collection, use, and disclosure of a child’s personal information.

3. Consider compliance risks posed by social media’s unique features

Social media is a powerful tool because it allows companies to (1) engage in rich back-and-forth interactions with consumers; (2) quickly and directly communicate with significant numbers of consumers; and (3) utilize powerful data. However, the very features that make social media a powerful tool create compliance risks. For example, Facebook has recently faced allegations of discriminatory advertising based on the way it uses consumer data to target advertisements. While these allegations are directed at Facebook rather than the individual advertisers, they highlight the need to understand how social media companies use their data when advertising for your company.

4. Be mindful that you are not interacting with consumers on your platform

By using social media, your company is, by definition, choosing to interact with customers outside of its normal platform and IT environment. Therefore, many of the features that your company may take for granted (e.g., security measures that are built into your customer portal, storage protocols for company emails and letters, etc.) may not be available. As an example, the Community Reinvestment Act (CRA) requires certain depository institutions to store consumer comments related to the institution’s performance in helping to meet community needs. If your company is subject to the CRA and runs a social media site, it must consider how it will identify and store these comments.

5. Maintain a plan for addressing consumer comments and complaints

As the host of a social media site, your company often has limited control over (1) the materials posted to the site and (2) the accessibility of the site. Financial services companies must keep these facts in mind when developing risk management procedures. For example, companies must consider how they will address situations where a borrower posts personally identifiable information (e.g., an account number) to the company’s social media page. Companies must also consider how they will handle the reputational risks associated with responding, or not responding, to consumer complaints or negative comments posted to the company’s social media page.

Upcoming Webinar

If this is an area you would like to learn more about, we encourage you to join us for our “Navigating the Compliance Risks of Social Media” Webinar, which is scheduled for Tuesday, February 26 from 11:30 a.m. to 12:30 p.m. CST. This webinar will focus on the compliance risks associated with social media and offer valuable insights on the ways to mitigate those risks. Click here to RSVP to the webinar. Webinar login information will be provided one day prior to the event.

This will be the first webinar in our Payment Systems Webinar Series, which will cover hot topics and common pitfalls for entities navigating the compliance challenges of this dynamic industry — from traditional products (e.g., credit cards, debit cards, prepaid cards, gift cards, Automated Clearing House transactions, rewards programs) to emerging technologies (e.g., mobile payments, mobile wallets, cryptocurrencies).

Take It to the Limit: Increase in Chapter 13 Debt Limits

Take It to the Limit: Increase in Chapter 13 Debt LimitsIndividuals have several options when filing bankruptcy. Chapter 13 is often preferred for individuals with regular income who wish to keep their homes and other secured assets. In a Chapter 13 filing, the court will approve the debtor’s three-to-five-year payment plan, which generally provides for curing any pre-petition delinquency, maintaining payments on secured debt, and a pro rata payment to unsecured creditors based on the debtor’s disposable income. After a Chapter 13 debtor completes his plan, he will receive a discharge of some of his remaining, unpaid debts.

Increase in Chapter 13 Debt Limits

Debtors can only file for Chapter 13 if their total unsecured and secured debts are less than certain statutory amounts. The Bankruptcy Code provides for an increase of the Chapter 13 debt limits every three years. The new debt limits for Chapter 13 were published on February 12, 2019. Beginning April 1, 2019, the Chapter 13 debt limit increased to (a) $419,275 for a debtor’s noncontingent, liquidated unsecured debts, and (b) $1,257,850 for a debtor’s noncontingent, liquidated secured debts. This increase is about 6 percent, which is roughly double the increase in 2016.

Filing Alternatives

What options do debtors have who initially exceed the Chapter 13 debt limits? Many high-income individuals file Chapter 11; however, onerous administrative requirements, high quarterly fees, and uncertain litigation and professional fees and costs lead debtors to seek alternatives from filing Chapter 11. Some debtors file a “Chapter 20.” Under this strategy, the debtor first files a Chapter 7 to discharge much of his unsecured debts (assuming the debtor can meet the Chapter 7 means test). Once he obtains a discharge and lowers his total amount of unsecured debt, the debtor can file a Chapter 13 case to restructure the remainder of his debts.

Spouses may attempt to file two separate cases. By filing separate cases, the total amount of debt per debtor is decreased, which may result in meeting the debt limit requirements. If the debtors have individual debts, one debtor may seek a Chapter 7 discharge of unsecured debts while the other debtor may restructure secured and unsecured debts under a Chapter 13.

Depending on the jurisdiction, spouses may be successful in arguing that the Chapter 13 debt limits should be higher for spouses filing as joint debtors. A minority of courts will consider the total amount of debt attributable to each of the joint debtors to determine whether each debtor meets the Chapter 13 debt limits. If only one debtor meets the debt limits, he may remain in Chapter 13, while the debtor who exceeds the debt limits must either dismiss his case or convert it to a different chapter. Notably, while this strategy is effective in a minority of courts, some jurisdictions have specifically ruled that the joint debtors’ combined debts must meet the Chapter 13 debt limit requirements to remain in that chapter.

How Does This Affect Student Loan Debt?

Many individuals with regular income struggle with unmanageable student loan debt. According to a recent Bloomberg report, the number of individuals who are delinquent 90 or more days on student loan payments increased to a record high in the fourth quarter of 2018, despite the decreasing unemployment rates. Often, debtors with regular income but high student loan debts fail the Chapter 7 means test requirements while simultaneously exceeding the Chapter 13 debt limits. For such debtors, Chapter 11 may be the only bankruptcy relief available.

However, the Bankruptcy Court for the Northern District of Illinois recently indicated that courts are considering solutions to address these issues and offer more flexibility. The Chapter 13 trustee moved to dismiss the debtor’s case, arguing that his debts (largely student loan and credit card debt) exceeded the debt limits. The Bankruptcy Court held that the debtor could remain in Chapter 13, finding that, while section 109(e) sets standards for Chapter 13 eligibility, section 1307(c) is the section under which a Chapter 13 case could be converted or dismissed for cause. Further, after noting the legislative history of debt limits, which were intended to prevent large businesses from filing Chapter 13, the Bankruptcy Court held that, under these facts, no cause existed to dismiss the case. On appeal, the District Court for the Northern District of Illinois reversed the Bankruptcy Court’s decision, finding that exceeding the debt limits constituted cause to convert or dismiss the Chapter 13 case. Although the Bankruptcy Court’s decision was reversed, the case signals that professionals and courts are considering solutions to address unmanageable student loan debts and Chapter 13 debt limits.

So You Violated Sanctions, Now What? OFAC Offers a Tutorial on Remediating Violations.

So You Violated Sanctions, Now What? OFAC Offers a Tutorial on Remediating Violations. Two recent civil penalty actions by OFAC supply guidance for how entities should address sanctions violations after they are discovered.

In the first case, Kollmorgen Corporation settled civil liability for violations of Iranian sanctions for a mere $13,381. For perspective, the maximum statutory civil monetary penalty available for the violations was $1,500,000. So why the leniency from OFAC? The answer is swift and comprehensive remedial action. Specifically, Kollmorgen, an American company, acquired a Turkish company, Elsim. After the acquisition, Kollmorgen discovered that Elsim made sales to customers in Iran and continued to service the contracts on at least six different occasions. To make matters worse, Elsim employees actively concealed the Iranian transactions from Kollmorgen’s management. Elsim also falsified records to conceal the transactions.

Having uncovered the violations through a robust due diligence program, Kollmorgen took swift, strong, and effective remedial steps that fall into four broad categories:

  • Review – Kollmorgen’s due diligence program detected the violations (notwithstanding Elsim’s active suppression) in the first place. Then, having discovered the violations, Elsim implemented manual reviews of Elsim’s database to detect any other violations. Kollmorgen also implemented an ethics hotline for reporting future violations.
  • Control – In addition to firing the offending manager, Kollmorgen also required Elsim’s senior management to certify on a quarterly basis that no Elsim services or products were provided to Iran. Kollmorgen also hired outside counsel to investigate the matter.
  • Education – Kollmorgen conducted written and in-person training for Elsim employee’s on Kollmorgen’s trade compliance policies.
  • Blocking – Kollmorgen took steps to block the Iranian customers from future orders.

Contrast the Kollmorgen case against a $5,512,564 penalty against AppliChem, a German company acquired by Illinois Tool Works, Inc. There, AppliChem behaved in a similar manner to Elsim in that it actively masked blocked transactions, this time with Cuba, through an intermediary company. Although Illinois Tool Works self-reported, its response lacked the same sort of extensive preventative and remedial steps taken by Kollmorgen. AppliChem apparently lacked the robust due diligence program of Kollmorgen because it missed several red flags indicating that blocked transactions were ongoing. AppliChem also apparently failed to implement the same sort of strong remedial programs exemplified by Kollmorgen’s response. OFAC’s opinion of the two responses is exhibited by the divergence in the two penalties—AppliChem’s penalty represents 27% of the maximum civil penalty versus the penalty against Kollmorgen, which represents less than 1% of the possible penalty.

The message is clear—organizations that act proactively, swiftly, and decisively in response to discovery of likely sanctions will be granted greater lenience than those organizations that do not.

Part II: Navigating the Maze of Servicing Discharged Debt

Part II: Navigating the Maze of Servicing Discharged DebtWelcome to Part II of our series on the servicing of discharged mortgage debt (catch up on Part I). This part will discuss communications to discharged borrowers and evaluate various disclaimers that can be utilized.

The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications to borrowers who received a discharge of the debt. However, this drastic change in practice is not realistic. First, the discharge only eliminates the borrower’s personal liability – the servicer’s lien, and its right to foreclose on the collateral, still exists. A discharge of this personal liability does not preclude servicers from communicating information to the borrower that may be relevant to possible foreclosure or how to avoid foreclosure, and does not absolve the servicer of any existing requirement to send such notices. In fact, courts have found that statutorily required pre-foreclosure notices do not violate the discharge injunction (although a carefully worded disclaimer is still advisable). Second, where the borrower is still living in the home, and is still paying on the loan, the borrower may be seeking additional information about the loan, including how much they are required to pay to avoid foreclosure. Just as the discharge injunction does not absolve the servicer of sending statutorily required foreclosure notices, neither does it absolve the servicer of sending escrow statements as required by RESPA. Thus, servicers are left manipulating this required correspondence to such borrowers to mitigate the risk of violating the discharge injunction.

To determine whether a post-discharge communication violates the discharge injunction, courts embark on a fact-intensive inquiry into whether such communication was an attempt to collect the debt from the borrower personally. Courts heavily scrutinize the existence of, and language within, bankruptcy disclaimers on borrower communications. As part of this scrutiny courts will view such communications from the perspective of the unsophisticated consumer. Following such inquiries in cases involving correspondence to borrowers following their discharge, courts have found discharge violations where such correspondence included due dates, amounts due, and stated that a late fee would be charged for untimely payment. However, if the statement is for informational purposes only, and has a proper disclaimer, a court is less likely to find a violation. A proper disclaimer should include a statement acknowledging the effect of the discharge, that the creditor is not attempting to collect discharged debt against the borrower personally, and that any payments would be voluntary. However, a survey of relevant case law shows it is abundantly clear that there is no “magic shield” for a bankruptcy disclaimer, and even innocuous statements under the right facts may be found to violate the discharge injunction. In fact, similar disclaimers may appear on correspondence in a case where the judge finds no discharge injunction violation in one case, and where an opposite finding results in another case.

The specific circumstances of the borrower-servicer relationship, and the facts presented by the borrower, weigh heavily into a judge’s decision of whether the servicer has violated the discharge injunction. One of the most critical facts is the volume of communication. Even where a servicer uses carefully crafted disclaimer language, if it sends a large quantity of letters offering alternatives to foreclosure in a short period of time, this will look more like coercive behavior than sending similar correspondence once. Further, if the borrower indicated an intent to surrender the property that fact will often tip the scales toward a finding of a discharge injunction violation. Lastly, if the borrower or his attorney has previously requested that the servicer cease sending such correspondence, the court is more likely to find a violation.

Crafting correspondence to discharged borrowers is further complicated where that correspondence requires an FDCPA disclaimer. While courts have generally found that statutorily required pre-foreclosure notices do not violate the discharge injunction, servicers still must take care to carefully review and craft disclaimer language. These FDCPA disclaimers often look to be in direct conflict with the bankruptcy code where they state that the correspondence is a communication from a debt collector, for the purpose of collecting a debt and that information obtained may be used for that purpose. The servicer of a discharged debt therefore looks like they are telling the borrower that they intend to collect the debt, but that they are also recognizing that they cannot do so. This dichotomy has led some courts to find that this type of disclaimer could be misleading to the least sophisticated customer. However, there is at least some case law support that it is permissible to include FDCPA disclaimers in addition to significant and prominent bankruptcy disclaimers.


  • Servicers should ensure that all communications to discharged borrowers are carefully tailored to acknowledge the discharge and the voluntary nature of continued payments, and contain other appropriate language and disclaimers. Such disclaimers should be prominently included and not part of the “fine print.” Where possible, disclaimers should not be generic or hypothetical.
  • Borrowers should be regularly reminded that all payments are voluntary and that they have no personal obligation to pay the servicer.
  • Repeated disclaimers are beneficial, and all correspondence related to payments of any type should have disclaimers.
  • Servicers should consider the totality of its communications with borrowers, such as spacing of all letters, loss mitigation overtures, monthly statements, escrow statements, and/or phone calls.
  • Servicers should avoid sending any unnecessary letters to discharged borrowers, including letters not otherwise required by non-bankruptcy law.

Part III of this series will discuss loan modifications for discharged borrowers and evaluate practices that servicers can employ to reduce risk.

CFPB Guts Major Component of Payday Lending Rule

CFPB Guts Major Component of Payday Lending RuleToday, the CFPB proposed amendments to its Payday, Vehicle Title, and Certain High-Costs Installment Loans Rule. As anticipated, the bureau is proposing to rescind the rule’s requirements that lenders make certain ability-to-repay underwriting determinations before issuing payday, single-payment vehicle title, and longer-term balloon payment loans on the basis that such restrictions would limit consumer access to credit. The bureau is also proposing to delay the August 19, 2019, compliance date for the mandatory underwriting provisions of the 2017 final rule to November 19, 2020.

The bureau further indicated that it will not reconsider changes to the rule’s payment provisions. Those provisions prohibit payday and certain other lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless the lender obtains a new consumer authorization to withdraw funds. The payment provisions also require such lenders to provide consumers with written notice before making their first attempt to withdraw payment from their accounts and before subsequent attempts that involve different dates, amounts, or payment channels. These new payment obligations are more restrictive than the current federal laws in place, including the NACHA rules, and will be very problematic for lenders.

There will be a 90-day public comment period for the proposed amendments to the underwriting provisions. On the other hand, there will be a 30-day comment period for the proposed extension to the implementation date for the underwriting provisions. That said, the bureau’s comments seem to suggest the payment provisions may still go live on August 19, 2019. Accordingly, lenders should take stock of the payment provisions and be prepared for an August 19, 2019, effective date until further  notice.

CFPB Proposes Reporting and Examination Authority Over Military Lending Act

CFPB Proposes Reporting and Examination Authority Over Military Lending ActThe Consumer Financial Protection Bureau on January 17, 2019, asked Congress to grant the bureau clear authority to supervise compliance-related issues for the Military Lending Act. CFPB Director Kathy Kraninger transmitted a legislative proposal to the speaker of the U.S. House of Representatives and Vice President Pence in his capacity as president of the U.S. Senate. She also shared copies with the chairs and ranking members of the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services, which have had revisions to their membership rolls in recent days.

Currently the Military Lending Act grants enforcement authority to the agencies specified in section 108 of TILA, including the Board of Governors of the Federal Reserve System, the CFPB, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Federal Trade Commission. The proposed legislation would allow the CFPB nonexclusive authority to require reports and conduct examinations specifically focusing on the Military Lending Act among consumer and small loan lenders. In her statement, Director Kraninger stated that, “The Bureau is committed to the financial well-being of America’s service members. This commitment includes ensuring that lenders subject to our jurisdiction comply with the Military Lending Act so our service members and their families are provided with the protections of that law.”

In addition to the legislative proposal introduced by Director Kraninger, the Senate and House of Representatives have each introduced bills to amend the Mortgage Lending Act. The Senate Bill – the Military Lending Improvement Act of 2018 (S. 3334) – was introduced last August and referred to the Committee on Banking, Housing, and Urban Affairs. The bill would, among other things:

  • Extend the Military Lending Act to recently discharged or released members of the armed forces;
  • Lower the maximum authorized annual percentage rate on applicable credit from 36 percent to 24 percent;
  • Extend the coverage of the Military Lending Act to credit for cars and other personal property; and
  • Implement certain privacy protections and provide enhanced protection from debt collector harassment.

The House of Representatives Bill – the Financial Protection for Our Military Families Act (H.R. 442) – was introduced on January 10, 2019, and has been referred to the Committee on Financial Services and the Committee on Armed Services. The bill would explicitly extend CFPB supervisory authority to allow the CFPB to assess compliance with the Military Lending Act with respect to insured depository institutions.

Cryptocurrencies: Currency, Commodity, Security or Something Else?

Crytpocurrencies: Currency, Commodity, Security or Something Else?Courts and regulators continue to struggle with how to define cryptocurrencies. The latest installment of this ongoing debate came from an unlikely source: a state appellate court’s opinion on a criminal matter. Specifically, on January 30, 2019, the Third District Court of Appeal for the State of Florida entered an order reversing a trial court’s dismissal of charges of illegal money transmission, finding that Bitcoin was a payment instrument under Florida law.

The State of Florida charged the defendant, who allegedly operated an unlicensed bitcoin-for-cash brokerage business, with one count of unlawfully engaging “in the business of money transmitter while not being registered as a money transmitter or authorized vendor” and two counts of money laundering. The trial court dismissed the charges, finding that Bitcoin did not fall within the ambit of the money transmission statute.

On appeal, the court of appeals reversed the trial court’s decision, finding that Bitcoin does not expressly fit within the definition of “currency,” but it does qualify as a payment instrument, defined as a “medium of exchange, whether or not redeemable in currency,” under Florida’s money transmission statute. In reaching this conclusion, the court noted that Bitcoin was accepted as a form of payment by several restaurants in the Miami area, a prominent Miami plastic surgeon, and the defendant’s own expert, who conceded he was paid in Bitcoin for his services. Additionally, the defendant marketed his business as an exchange of cash for Bitcoins. As a result, the defendant was required to be registered under the statute as a money transmitter.

This is a significant development under Florida law, as a person is prohibited by the Florida Money Services Businesses Law, Chapter 560, Florida Statutes (the “Florida MSB Code”) from engaging in, and in some cases merely advertising its engagement in, a Regulated Money Service in Florida without first obtaining a license from the Florida OFR or qualifying for a statutory exemption from licensure. This case appears to widen the scope of cryptocurrency businesses that must now register under the Florida MSB Code — holding even brokers who facilitate the buying/selling or exchange of cash for Bitcoin (or potentially other cryptocurrencies) with engaging in “selling or issuing payment instruments for compensation.”

Cryptocurrency businesses must navigate a fragmented state-by-state approach to permissible business practices, licensing requirements, and related know-your-customer procedures. The fragmented regulatory requirement is further complicated by the varying definitions of cryptocurrency itself.

This case is hardly the first instance where a court or regulator struggled to define the nature of cryptocurrency. In July 2017, the Securities and Exchange Commission (SEC) released a “Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO” (the “21(a) Report”). The 21(a) Report considered whether the DAO—a Decentralized Autonomous Organization, or virtual organization executed on a distributed ledger or blockchain—violated federal securities law by selling DAO tokens, which would then be used to fund projects, to investors. The SEC ultimately determined that the DAO tokens were securities under the Securities Act of 1933 and the Securities Exchange Act of 1934, and therefore should have been registered with the SEC. According to the SEC, the 21(a) Report was intended to stress that U.S. federal securities law may apply to “Initial Coin Offerings” (ICO) or “token sales” depending on the particular facts and circumstances, without regard to the form of the organization or technology used to effectuate a particular offer or sale.

In November 2018, the SEC announced a settlement with two companies that sold digital tokens in ICOs and imposed civil penalties for ICO securities offering registration violations. And, in September 2018, the SEC settled an enforcement action with a self-described “ICO superstore” for operating as unregistered broker-dealers.

As a result of the SEC’s position on ICOs, Basis, a stablecoin startup with $133 million in funding, announced in December 2018 that it was shutting down and returning funds to investors because it would be unable to avoid securities classification by the SEC.

While the SEC appears to take a broad view of what constitutes a security in the cryptocurrency space, not all regulators and courts agree. In 2015, the U.S. Commodity Futures Trading Commission officially categorized Bitcoin as a commodity, which puts Bitcoin in the same classification as gold. This classification has been upheld by the U.S. Bankruptcy Court for the Northern District of California and recently received further support from a decision by the U.S. District Court for the District of Massachusetts.

The proper categorization of a particular cryptocurrency is a complex legal issue. Nonetheless, companies with existing cryptocurrency businesses, cryptocurrency brokers, those considering an ICO, or businesses considering expanding into cryptocurrencies should carefully consider the regulatory guidance in this area to ensure they do not run afoul of U.S. securities law or related state money transmitter and money broker laws. Additionally, cryptocurrency exchanges should also consider registration requirements under U.S. securities laws and state money transmitter statutes.

CFPB Settles with Payday Lenders for Deceptive Practices

Last week, in CFPB v. NDG Financial Corp. et al., the Consumer Financial Protection Bureau (CFPB) entered into a proposed settlement with several payday lenders and corporate officials based in Canada and Malta. As background, the corporate defendants consisted of a network of affiliated companies, known as the NDG Enterprise, which extended high-cost, short-term payday loans over the internet to consumers in all 50 states. The CFPB alleged the NDG Enterprise defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, and abusive acts and practices by (1) failing to obtain necessary licenses, (2) exceeding state usury limits, (3) making false threats to consumers, (4) deceiving consumers about their debts, and (5) using illegal wage-assignment clauses in violation of the Credit Practices Act.

As for the settlement, the CFPB permanently barred the entities from advertising, marketing, promoting, offering, originating, servicing, or collecting any consumer loan issued to any consumer residing in the United States. The CFPB also barred the entities from assigning, selling, or transferring any existing debt to another company and from disclosing, using, or benefiting from customer data. The proposed settlement covers NDG Financial Corp., E-Care Contact Centers, Ltd., Blizzard Interactive Corp., New World Consolidated Lending Corp., New World Lenders Corp., Payroll Loans First Lenders Corp., New World RRSP Lenders Corp., Northway Financial Corp., Ltd., and Northway Broker, Ltd., as well as some corporate officials.

Of note, this case was filed, litigated, and ultimately settled under three different directors – Richard Cordray, Mick Mulvaney, and Kathy Kraninger. It also comes in the midst of Director Kraninger’s recent statements that the CFPB will revise certain aspects of the Payday, Vehicle, Title, and High-Cost Installment Loan Rule. While this case doesn’t shed any light on the pending revisions, it should be a wake-up call to the small dollar industry. The CFPB, under Director Kraninger, will continue to take a hard line stance against unfair, deceptive, and abusive acts and practices.

Some of Florida’s Regulatory Restrictions on the Cannabis Industry Could Soon Be a Thing of the Past

Some of Florida's Regulatory Restrictions on Cannabis Industry Could Soon Be a Thing of the PastOn January 17, 2018, Florida’s new governor, Ron DeSantis, delivered news that could supercharge the growth of Florida’s medical-cannabis industry. Governor DeSantis indicated he may drop the State’s appeal from a trial court’s ruling that the statutory cap on the number of licenses for “medical marijuana treatment centers” (MMTCs), and the requirement that MMTCs be vertically-integrated companies that cultivate, process, and dispense cannabis, violate the medical-cannabis amendment to Florida’s Constitution. Further, Governor DeSantis asked the Florida Legislature to remove the statutory ban on smoking medical cannabis, and stated he would drop the State’s appeal from another ruling that the ban was unconstitutional absent legislative action.

Eliminating these restrictive licensing requirements would allow new companies to enter Florida’s medical-cannabis market, and eliminating the smoking ban would allow MMTCs to cultivate and sell a new product. Both changes to Florida law would provide additional opportunities for cannabis companies and the financial institutions that provide services to them.

The Tension Between Florida’s Constitutional Amendment and the Implementing Statute

Florida’s cannabis regime is grounded in a voter-approved amendment to Florida’s Constitution (Amendment). The Amendment authorizes licensed physicians to prescribe cannabis to patients with certain medical conditions, who can then purchase cannabis from licensed MMTCs. The Amendment charges Florida’s Department of Health with implementing regulations regarding the “[p]rocedures for registration of MMTCs,” but is silent regarding the number of MMTCs that can operate in the state. However, the Amendment requires that the Department of Health’s regulations “ensure the availability and safe use of medical marijuana by qualifying patients.”

Following the Amendment, the Florida Legislature enacted Florida Statute 381.986 (Statute), which provides a host of restrictions on how medical cannabis is cultivated, dispensed, prescribed, and consumed, including a ban on smoking cannabis. The Statute initially provided for 10 MMTC licenses, and requires that four additional licenses be issued each time 100,000 additional patients are added to Florida’s medical marijuana use registry. There are 14 MMTCs currently operating in Florida.

Florigrown, LLC v. Florida Dept. of Health

Florigrown, LLC, a company seeking an MMTC license, filed suit in December 2017, contending that the Statute’s licensing requirements were unconstitutional under the Amendment. Florigrown first moved for a temporary injunction on April 30, 2018, seeking to enjoin the Department of Health from registering MMTCs pursuant to the “blatantly unconstitutional” Statute, and requiring that the Department register MMTCs in accordance with the Amendment’s “plain language,” which, according to Florigrown, did not allow the licensing cap or the vertical-integration requirement found in the Statute.

While the court initially denied the motion, it found that Florigrown had a substantial likelihood of success on the merits of its core claims – that the Statute’s licensing cap and vertical-integration requirement are unconstitutional.

Florigrown renewed its motion for a temporary injunction, and on October 5, 2018, the trial court granted it, finding that the Department of Health’s failure to “cure the serious Constitutional problems” the court outlined in its order denying Florigrown’s first motion showed the injunction would serve the public interest. The court thus entered an order that:

(1) [I]mmediately enjoined the Department of Health from registering or licensing any MMTCs pursuant to the unconstitutional legislative scheme set forth in [the Statute], (2) requir[ed] the Department … to commence registering MMTCs in accordance with the plain language of the [Amendment], and (3) require[d] the Department to register Florigrown as an MMTC … unless the Department [could] clearly demonstrate to th[e] court that such registration would result in unsafe use of medical marijuana by qualifying patients.

The Department of Health appealed, which automatically stayed the injunction while the appeal is pending.

While the order’s language is far from clear, reading it in conjunction with the court’s previous order outlining the Statute’s constitutional infirmities indicates that it strikes down the Statute’s vertical-integration requirement and its cap on the number of MMTC licenses. If the State drops its appeal, it appears the Department would no longer be limited in the number of MMTC licenses it could issue, and that entities could obtain a license to operate exclusively as a cultivator, processor, or dispensary, rather than all three, allowing smaller businesses to enter Florida’s medical-cannabis market.

State Senator Jeff Brandes has announced he will file a bill to remove the Statute’s licensing cap and vertical-integration requirement during the next legislative session, which begins on March 5, 2019.

People United for Medical Marijuana v. Florida Dept. of Health

People United for Medical Marijuana (PUMM) filed suit in July 2017, seeking a declaration that the Statute’s ban on smoking cannabis was unconstitutional under the Amendment. The trial court agreed with PUMM, and entered an order declaring the Statute’s smoking ban unconstitutional on May 25, 2018. The Department appealed, which automatically stayed the order while the appeal is pending.

On January 28, 2019, State Senator Jeff Brandes introduced a bill that, if enacted, would remove the smoking ban from the Statute.


The Statute’s restrictive licensing and smoking ban have curtailed the growth of Florida’s medical-cannabis industry. That industry is beginning to take flight nonetheless – the number of cannabis patients in Florida rose from 65,310 at the start of 2018 to approximately 209,000 at the end of the year, and the number of dispensaries grew from 25 to 83 during the same period. Lifting the Statute’s limit on the number of MMTCs, its requirement that MMTCs be vertically integrated, and its smoking ban – whether through legislation or the State dismissing its appeals – should accelerate that growth by allowing more entrants into the market and allowing those in the market to sell additional products.

This growth, in turn, will provide additional opportunities for financial institutions seeking to serve Florida’s medical-cannabis industry. As we’ve noted in previous blogs, many banks are unwilling to provide financial services to state-legal cannabis companies given that cannabis remains illegal under federal law. However, this lack of supply provides a potentially lucrative opportunity for financial institutions willing to work with the cannabis industry. Such institutions would be wise to keep a close eye on Florida given the DeSantis Administration’s apparent willingness to loosen Florida’s restrictions on the medical-cannabis industry.

Part I: Navigating the Maze of Servicing Discharged Debt

Part I: Navigating the Maze of Servicing Discharged DebtMortgage servicers are plagued by their nebulous relationships with the borrowers who discharge their personal liability in bankruptcy. Issues arise when the borrower whose debt has been discharged continues to engage with the mortgage servicer. These activities include making monthly payments and requesting and participating in loss mitigation. There are few, if any, bright line rules regarding this common scenario. Instead, courts generally employ an “I know it when I see it” approach to evaluate whether such activity violates the discharge injunction and/or the Fair Debt Collection Practices Act.

This is the first post in our four-part series where we will address issues that arise when servicing discharged debt, including credit reporting and loan modifications. Case law and regulatory guidance do not provide crystal clear answers, yet the sanctions and damages highlight the risk of engaging with discharged borrowers. Decisions regarding how to service these accounts should be determined based on the company’s risk tolerance in light of the potential liability and the fact-based nature of these cases. This series will highlight some of the risks, as well as the minimal guidance surrounding these issues.

Chapter 7

A Chapter 7 debtor has several options regarding real property. The Bankruptcy Code provides three specific options: (1) redeem the loan by paying it off, (2) surrender the property, or (3) reaffirm the loan and agree to be personally liable for the debt while maintaining ownership and possession of the property. For debtors who are current on their loan and have filed in certain jurisdictions, a fourth option also exists: a ride-through loan. A real property ride-through loan in bankruptcy converts a mortgage into a non-recourse obligation, meaning the filer chooses neither to redeem, surrender, nor reaffirm the loan. There is no nationally accepted official form or procedure for electing the ride-through in the statement of intention, but some debtors using this option have made it a practice to write in their own fourth option by stating an intention to have their loan ride through the bankruptcy instead of choosing to redeem, surrender or reaffirm.

Chapter 13

Most Chapter 13 debtors elect to file a Chapter 13 case, as opposed to Chapter 7, to keep their home and catch up on past due mortgage payments. However, some Chapter 13 debtors elect to surrender their property via their bankruptcy plan. Similar to a surrender in the Chapter 7 context, this results in a discharge of personal liability of the mortgage debt upon entry of the discharge. Poorly written plans that remain in effect may also result in a discharge of personal liability. For instance, if a borrower indicates that they intend to cramdown the value of the claim to the value of the property, but do not end up paying the entire claim over the life of the plan, the servicer may be stuck with a claim against the property but with no recourse against the borrower personally if the case later discharges.

Discharge of Personal Liability

The Chapter 7 discharge relieves individual debtors from personal liability of mortgage debt and prevents the creditor from taking any collection actions against the debtor personally (unless the debt was reaffirmed). A Chapter 13 discharge following surrender of property and the limited instances described above operates in a similar manner. However, while the debt becomes non-recourse to the debtor, the security interest (i.e., servicer’s right to proceed in rem against the property) survives the discharge. This surviving mortgage interest corresponds to an obligation of the debtor who wishes to retain possession of the property. Accordingly, while preserving the creditor’s right to proceed in rem, Congress has allowed creditors to retain the ability to take certain actions with the respect to the mortgage outside of foreclosure.

In 2005, Congress enacted 11 U.S.C. § 524(j), which excludes ordinary course of business activities where a creditor holding a secured claim in the debtor’s principal residence seeks to collect periodic payments in lieu of pursuit of in rem relief to enforce the lien. This limited safe harbor is not a bulletproof vest against discharge injunction violations arising from communications relating to collecting payments and/or other servicing costs. If servicers elect to accept payments in lieu of foreclosing on the property post-discharge, it is critical to ensure that all servicing activity, particularly communications, are narrowly tailored to eliminate the risk that these activities are viewed as coercive, and that any attempts to collect payment only inform of, rather than demand, payments. Sanctions and damages for discharge injunction violations range from minor slaps on the wrist to millions of dollars based on the particular facts of the case.

Part II of this series will discuss communications to discharged borrowers and evaluate various disclaimers that can be utilized, including how courts have reacted to such disclaimers.