Legal Alert

Mortgage Banking Update - November 30, 2023

November 30, 2023
November 30, 2023 – Read the below newsletter for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. In this issue we discuss the effects on intermediate banks of the Final Rule by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency amending their regulations implementing the Community Reinvestment Act, as well as the upcoming U.S. Supreme Court oral arguments in the two cases discussing whether the Court should overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc.
In This Issue:


The New CRA: Understanding the Final Rule and Its Impact on Large, Intermediate, and Small Banks; Ballard Spahr to Hold Webinar on December 6

This is our second blog post on the final rule issued on October 24, 2023, by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency amending their regulations implementing the Community Reinvestment Act (CRA) (the Final Rule). In this blog post, we summarize the major changes impacting intermediate banks (those with assets of at least $600 million as of December 31 in the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years).

On December 6, 2023, from 3:30 p.m. to 4:45 p.m. ET, Ballard Spahr will hold a webinar, “Community Reinvestment Act Reform: A Discussion of the Final Rule.” For more information and to register, click here.

In our first blog post, we summarized the major changes impacting large banks (those with assets of at least $2 billion as of December 31 in the two prior calendar years). Our third and final blog post on the Final Rule will focus on the Final Rule’s impact on small banks (those with assets of less than $600 million as of December 31 in either of the two prior calendar years).

The Final Rule is effective April 1, 2024; however, compliance dates for a large portion of the Final Rule’s provisions is January 1, 2026. Until the January 1, 2026, compliance date, the current CRA regulations continue to apply.

Intermediate Bank Asset Size. Under the current CRA regulations, banks with assets of at least $376 million as of December 31 of both of the prior two calendar years and less than $1.503 billion as of December 31 of either of the prior two calendar years are classified as “intermediate small banks.” (Current 12 C.F.R. __.12(u).) Under the Final Rule, banks with assets of at least $600 million as of December 31 in the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years will now be defined as an “intermediate bank.” (Final §__.12.) According to the joint notice of proposed rulemaking issued in May 2022, approximately 216 banks currently classified as large banks will be reclassified as intermediate banks under the Final Rule.

Facility-Based Assessment Areas. The Final Rule maintains facility-based assessment areas as part of the CRA evaluation framework. All banks, regardless of size, will continue to delineate the areas where their main offices, branches, and deposit-taking remote service facilities are located (“facility-based assessment areas”). Unlike large banks, which must now delineate these areas based on whole counties, intermediate banks will continue to be allowed to delineate partial counties. (Final §__.16(b)(1),(2).) Intermediate banks may adjust the boundaries of their facility-based assessment areas to include only the contiguous census tracts within a county that they can reasonably be expected to serve, subject to certain limitations. (Final §__.16(b)(3).) Unless located in a multistate metropolitan statistical area (“MSA”), facility-based assessment areas may not extend beyond an MSA boundary or state boundary.

Outside Retail Lending Areas. As noted previously, the Final Rule implements a new type of assessment area—the retail lending assessment area— that is only applicable to large banks. (Final §__.16(b)(1)(includes the surrounding counties where the bank has originated a substantial portion of its loans and may include Loan Production Offices).) Intermediate banks, by contrast, that conduct a majority of their retail lending (by a combination of loan dollars and loan count) outside of their facility-based assessment areas will have their retail lending performance evaluated in an “outside retail lending area” (i.e., the nationwide area outside of the intermediate bank’s facility-based assessment areas, excluding certain nonmetropolitan counties). (Final §__.18(b).) Unlike large banks that will not be evaluated in their outside retail lending area if they did not originate or purchase loans in any product lines in the outside retail lending area during the evaluation period, an intermediate bank that originated or purchased more than 50% of its home mortgage loans, multifamily loans, small business loans, small farm loans, and automobile loans outside the bank’s facility-based assessment area in the prior two calendar years must be evaluated in its outside retail lending area. (Final §__.18(a)(1), (2).) Intermediate banks that do not meet the 50% standard may elect to have their retail lending in their outside retail lending area(s) evaluated. (Id. at (2).)

The CRA Tests. Under the Final Rule, intermediate banks will be evaluated under the Retail Lending Test and either the Intermediate Bank Community Development Test or, at the bank’s option, the Community Development Financing Test. Under the Retail Lending Test, the geographic and borrower distributions of an intermediate bank’s major product lines would be evaluated in its facility-based assessment areas and, where applicable, in its outside retail lending area against market and community benchmarks. (Final §__.22.)

Regarding its community development services, an intermediate bank that chooses the Intermediate Bank Community Development Test would have its community development performance evaluated—either within or outside its facility-based assessment areas—based on the number and dollar amount of the bank’s community development loans and investments, the extent to which community development services are provided, and the bank’s responsiveness to community development needs. (Final §__.30(a)(2).)

For intermediate banks that elect to be evaluated under the Community Development Financing Test, examiners will qualitatively review intermediate banks’ community development activities using standardized metrics and benchmarks to evaluate both community development loans and investments in their facility-based assessment areas, states, and multistate MSAs. A “Satisfactory” rating for intermediate banks evaluated under this test may be changed to “Outstanding” at the institution level if the bank receives additional consideration for community development activities that would qualify under the Retail Services and Products Test, the Community Development Services Test, or both.

In conclusion, although the changes under the final rule are less impactful for intermediate banks, banks with assets of at least $600 million as of December 31 in the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years that would have previously been subject to the large bank standards will now be evaluated under the intermediate bank standards and will no longer be evaluated under all four CRA tests. Rather, these banks will now only need to consider outside retail lending areas, the retail lending test, and, if so desired, the community development financing test.

Scott A. Coleman & Sarah B. Dannecker

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November 22 Podcast Episode: Consumer Finance Impact of a CFPB Run Amok

Switching from his usual role as frequent host of the Consumer Finance Monitor Podcast, Alan Kaplinsky, Senior Counsel in and former Practice Group Leader of Ballard Spahr’s Consumer Financial Services Group, was recently the special guest of Bloomberg Intelligence analysts Elliott Stein and Nathan Dean on their podcast, Votes and Verdicts. The episode begins with a discussion of (1) the CFPB’s impact on consumer financial services providers, (2) how, since the CFPB’s creation in 2010, its three Directors have used the CFPB’s supervisory, enforcement, and regulatory authorities, and (3) the differences in the three Directors’ approaches. This is followed by a discussion of the case pending before the U.S. Supreme Court involving a challenge to the constitutionality of the CFPB’s funding mechanism in which Alan shares his reactions to the oral argument in the Supreme Court and discusses potential remedies if the Court rules that the CFPB’s funding is unconstitutional. The episode concludes with a discussion of how the case has impacted ongoing CFPB activity, the potential impact of a Supreme Court ruling in favor of the CFPB on future CFPB activity, and potential future challenges the CFPB may face from industry.

To listen to the episode, click here.

Barbara S. Mishkin

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November 28 Podcast Episode: A Close Look At the Federal Trade Commission’s Proposed Rule to Regulate “Junk Fees”

In October 2023, the FTC issued a proposed “Rule on Unfair or Deceptive Fees” targeting what the FTC refers to as “junk fees.” Our special guest is Stacy Cammarano, Staff Attorney in the FTC’s Bureau of Consumer Protection, Division of Advertising Practices, and a lead attorney on the proposal. After reviewing how the FTC has previously used its enforcement authority to address “junk fees,” we discuss some of the key issues identified in comments received by the FTC on its October 2022 Advance Notice of Proposed Rulemaking on “junk fees.” We then look at the price and fee disclosures that would be required by the proposal, the businesses that would be covered, and examples of charges for mandatory ancillary goods or services by various industries that would have to be included in disclosed pricing. We also look at the relationship of the FTC’s proposal to “junk fees” initiatives of other federal agencies, such as the CFPB, and to state initiatives, and consider the impact of the U.S. Supreme Court’s AMG decision on the FTC’s use of rulemaking. We conclude with a discussion of likely next steps in the rulemaking process and what businesses can be doing now to reduce compliance risk.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation.

To listen to the episode, click here.

On November 28, we held a webinar, “The Biden Administration’s “Junk Fees” Initiative Continues: What the Latest Actions Mean for the Consumer Financial Services and Rental Housing Industries.” This webinar was a follow-up to our well-attended May 2023 webinar, “What the Biden Administration’s “Junk Fees” Initiative Means for the Consumer Financial Services Industry: A Look at the Fees Under Attack.” To listen to our two-part podcast episode which repurposes the webinar, click here and here.

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SCOTUS to Hear Oral Argument on January 17 in Cases Challenging Chevron Deference

The U.S. Supreme Court has scheduled oral argument for January 17, 2024 in the two cases in which the question presented is whether the Court should overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision produced what became known as the “Chevron framework”–the two-step analysis that courts typically invoke when reviewing a federal agency’s interpretation of a statute.

The two cases are Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. U.S. Department of Commerce. In May 2023, the Supreme Court granted the certiorari petition filed in Loper and briefing in that case is now complete. The Supreme Court granted the certiorari petition in Relentless in October 2023 and briefing in the case is ongoing, with the petitioners having filed their merits brief last week. Respondents’ brief must be filed by December 15 and the reply brief must be filed by January 5. (It has been suggested that the Supreme Court granted the certiorari petition in Relentless to allow Justice Jackson to participate in the decision in that case. Justice Jackson recused herself from Loper because it arose out of the D.C. Circuit, on which she previously served before becoming a Supreme Court Justice.)

Both cases involve a regulation of the National Marine Fisheries Service (NMFS) that requires certain vessels to pay the salaries of the federal observers that they are required to carry. The regulation implements the Magnuson-Stevens Act (MSA) which authorizes the NMFS to require fishing vessels to carry federal observers. In both cases, the petitioners are owners of fishing vessels who challenged the NMFS regulation as exceeding the agency’s authority under the MSA. The district court in each case, applying the Chevron framework, upheld the NMFS regulation. In Loper, a divided D.C. Circuit panel affirmed the district court and in Relentless, a unanimous First Circuit panel affirmed the district court.

In their merits brief, the petitioners in Relentless make the following principal arguments:

  • Chevron violates the Constitution by compromising judges’ independence when interpreting the law. Article III vests the judicial power exclusively in the federal courts. Inherent in this judicial power is the duty of federal judges to apply their own independent judgment when determining what federal statutes mean.
  • The Administrative Procedures Act reinforces the judicial duty to exercise independent judgment by providing that “the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning and applicability of the terms of an agency action.”
  • Chevron directly contradicts the duty of Article III courts to exercise independent judgment when interpreting federal law by telling judges “to defer to inferior-but-tenable” agency interpretations of ambiguous federal statutes. By requiring judges to accept an agency’s interpretation so long as it “falls within an ill-defined zone of reasonableness—even if the judge believes the agency’s interpretation is wrong”, Chevron forces judges to abdicate their duty to faithfully apply the law.
  • Chevron violates the Fifth Amendment due process guarantee. By requiring courts to resolve ambiguities in favor of the government, Chevron introduces systemic bias in the adjudication of cases.
  • Stare decisis does not support Chevron because Chevron provides an interpretive method and such methods, as distinct from substantive holdings applying those methods to particular statutes, are not entitled to stare decisis effect. Chevron is also incompatible with the “rule-of-law values” that the doctrine of stare decisis is supposed to protect because while stare decisis seeks to settle the meaning of federal law, Chevron leaves the meaning of federal law perpetually unsettled. Chevron allows agencies to change their minds about what statutes mean and requires courts “to flip flop along with them,” thus creating uncertainty about the law.
  • Whether or not the Court overrules or narrows Chevron, the judgment below should be reversed because the NMFA regulation violates any sensible reading of the MSA.

In June 2023, we released an episode of our Consumer Finance Monitor Podcast, “A Look at the current challenge to judicial deference to federal agencies and what it means for the consumer financial services industry.” Our special guest for the episode was Craig Green, Professor, Temple University School Of Law. To listen to the episode, click here.

On September 7, 2023, at the ABA Business Law Section Fall Meeting in Chicago, I moderated a program, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC, and Federal Banking Agency Regulations.” A recording of the program is now available on the ABA’s website at no charge to members of the ABA Business Law Section and a modest charge for others.

Alan S. Kaplinsky

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CFPB/Fed/OCC Increase Exemption Thresholds for Appraisal Requirement, Regs Z and M

The CFPB, Fed, and OCC have announced that they are increasing three exemption thresholds that are subject to annual inflation adjustments. Effective January 1, 2024, through December 31, 2024, these exemption thresholds are increased as follows:

Not surprisingly, the CFPB continues not to make any adjustments to the credit card penalty fees safe harbors, which are set forth in Regulation Z Section 1026.52(b)(1)(ii)(A) and (B) and last adjusted for inflation in 2022. We expect the CFPB to soon finalize its proposed rule regarding credit card late fees that was issued in February 2023. In the proposal, the CFPB has proposed to amend Regulation Z to reduce the safe harbor dollar amount for credit card late fees to a flat $8 amount that would apply to both first and subsequent late payments.

John L. Culhane, Jr. & Richard J. Andreano, Jr.

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Predatory Loan Prevention Bill Introduced in Florida to Codify “True Lender” Analysis

Florida SB 146, a bill that would add a “Predatory loan prevention” section to the Florida Consumer Finance Act has been introduced in the Florida Senate, seeking to curb bank-model lending programs and codify a “true lender” analysis with language similar to legislation enacted in Minnesota and other states within the past three years. The Florida bill closely tracks the Minnesota law’s language, including a general “anti-evasion” provision and a mandate that if a consumer loan’s rate exceeds Florida’s consumer usury limit, a person is deemed to be a lender if any of the following applies:

  1. The person holds, acquires, or maintains, directly or indirectly, the predominant economic interest, risk, or reward in the loan.
  2. The person:
    1. Markets, solicits, brokers, arranges, facilitates, or services loans; and
    2. Holds or has the right, requirement, or first right of refusal to acquire the loans, a share of receivables, or another direct or indirect interest in the loans or loan program.
  3. The totality of the circumstances indicates that the person is the lender and that the transaction is structured to evade the requirements of this chapter. Circumstances that weigh in favor of a person being a lender subject to this section include, without limitation, whether the person:
    1. Indemnifies, insures, or protects an exempt entity from any costs or risks related to the loan;
    2. Predominantly designs, controls, or operates the loan program;
    3. Holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspects of the loan program; or
    4. Purports to act as an agent or a service provider or in another capacity for an exempt entity while acting directly as a lender in other states.

Florida SB 146 was filed in the Florida Senate on October 9, 2023, and referred to committees on October 17, 2023.

Given similar activity in other states in recent years, we are not surprised to see this latest initiative in Florida. On November 30, 2023, Ballard Spahr will host a webinar exploring these and other threats to the scope of federal preemption for national and state banks, and their non-bank partners.

John L. Culhane, Jr., Ronald K. Vaske & Mindy Harris

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FinCEN Expands CTA FAQs

On November 16, the Financial Crimes Enforcement Network (FinCEN) issued – again –expanded FAQs pertaining to beneficial ownership information (BOI) reportable under the Corporate Transparency Act (“CTA”). These expanded FAQs enlarge upon the previously expanded FAQs set forth by FinCEN in September.

The expanded FAQs of course cannot and do not expand upon the statutory and regulatory obligations already established by the CTA. In that sense, they do not add any additional insight, but rather repeat the rules already set by statute and regulation. With that in mind, we set forth below the new FAQs, some of which have particular relevance to attorneys and other so-called gatekeepers.

The CTA is scheduled to become effective on January 1, 2024. In the short time between now and then, FinCEN still must promulgate final regulations regarding access to the BOI database and propose regulations on the alignment between the CTA and the Customer Due Diligence (“CDD”) Rule applicable to banks. The time frame in which FinCEN must act is shrinking quickly.

B. 7. Is a reporting company required to use an attorney or a certified public accountant (CPA) to submit beneficial ownership information to FinCEN?

No. FinCEN expects that many, if not most, reporting companies will be able to submit their beneficial ownership information to FinCEN on their own using the guidance FinCEN has issued. Reporting companies that need help meeting their reporting obligations can consult with professional service providers such as lawyers or accountants.

C. 3. Are certain corporate entities, such as statutory trusts, business trusts, or foundations, reporting companies?

It depends. A domestic entity such as a statutory trust, business trust, or foundation is a reporting company only if it was created by the filing of a document with a secretary of state or similar office. Likewise, a foreign entity is a reporting company only if it filed a document with a secretary of state or a similar office to register to do business in the United States.

State laws vary on whether certain entity types, such as trusts, require the filing of a document with the secretary of state or similar office to be created or registered.

If a trust is created in a U.S. jurisdiction that requires such filing, then it is a reporting company, unless an exemption applies.

Similarly, not all states require foreign entities to register by filing a document with a secretary of state or a similar office to do business in the state.

However, if a foreign entity has to file a document with a secretary of state or a similar office to register to do business in a state, and does so, it is a reporting company, unless an exemption applies.

Entities should also consider if any exemptions to the reporting requirements apply to them. For example, a foundation may not be required to report beneficial ownership information to FinCEN if the foundation qualifies for the tax-exempt entity exemption.

C. 4. Is a trust considered a reporting company if it registers with a court of law for the purpose of establishing the court’s jurisdiction over any disputes involving the trust?

No. The registration of a trust with a court of law merely to establish the court’s jurisdiction over any disputes involving the trust does not make the trust a reporting company.

D. 6. Is my accountant or lawyer considered a beneficial owner?

Accountants and lawyers generally do not qualify as beneficial owners, but that may depend on the work being performed.

Accountants and lawyers who provide general accounting or legal services are not considered beneficial owners because ordinary, arms-length advisory or other third-party professional services to a reporting company are not considered to be “substantial control” (see Question D.2). In addition, a lawyer or accountant who is designated as an agent of the reporting company may qualify for the “nominee, intermediary, custodian, or agent” exception from the beneficial owner definition.

However, an individual who holds the position of general counsel in a reporting company is a “senior officer” of that company and is therefore a beneficial owner.

D. 10. Is a reporting company’s designated “partnership representative” or “tax matters partner” a beneficial owner?

It depends. A reporting company’s “partnership representative,” as defined in 26 U.S.C. 6223, or “tax matters partner,” as the term was previously defined in now-repealed 26 U.S.C. 6231(a)(7), is not automatically a beneficial owner of the reporting company. However, such an individual may qualify as a beneficial owner of the reporting company if the individual exercises substantial control over the reporting company, or owns or controls at least 25 percent of the company’s ownership interests.

Note that a “partnership representative” or “tax matters partner” serving in the role of a designated agent of the reporting company may qualify for the “nominee, intermediary, custodian, or agent” exception from the beneficial owner definition.

E. 4. Can a company applicant be removed from a BOI report if the company applicant no longer has a relationship with the reporting company?

No. A company applicant may not be removed from a BOI report even if the company applicant no longer has a relationship with the reporting company. A reporting company created on or after January 1, 2024, is required to report company applicant information in its initial BOI report, but is not required to file an updated BOI report if information about a company applicant changes.

F. 6. Is there a requirement to annually report beneficial ownership information?

No. There is no annual reporting requirement. Reporting companies must file an initial BOI report and updated or corrected BOI reports as needed.

G. 3. How can I obtain a Taxpayer Identification Number (TIN) for a new company within 30 days so that I can file an initial beneficial ownership information report on time?

The Internal Revenue Service (IRS) offers a free online application for an Employer Identification Number (EIN), a type of TIN, which is provided immediately upon submission of the application. For more information on TINs, see “Taxpayer Identification Numbers (TIN)” on the website. For more information on Employer Identification Numbers and to access the EIN online application, see “Apply for an Employer Identification Number (EIN) Online” on the website.

A paper filing is required if a foreign person that does not have an Individual Taxpayer Identification Number (ITIN) applies for an EIN. According to the IRS, receiving an EIN through this process could take six to eight weeks. If you are a foreign person that may need to obtain an EIN for a reporting company, we recommend applying early for an ITIN. Foreign reporting companies that are not subject to U.S. corporate income tax may report a foreign tax identification number and the name of the relevant jurisdiction instead of an EIN or TIN.

G. 4. Should an initial BOI report include historical beneficial owners of a reporting company, or only beneficial owners as of the time of filing?

An initial BOI report should only include the beneficial owners as of the time of the filing. Reporting companies should notify FinCEN of changes to beneficial owners and related BOI through updated reports.

L. 4. If I own a group of related companies, can I consolidate employees across those companies to meet the criteria of a large operating company exemption from the reporting company definition?

No. The large operating company exemption requires that the entity itself employ more than 20 full-time employees in the United States and does not permit consolidation of this employee count across multiple entities.

L. 5. How does a company report to FinCEN that the company is exempt?

A company does not need to report to FinCEN that it is exempt from the BOI reporting requirements if it has always been exempt.

If a company filed a BOI report and later qualifies for an exemption, that company should file an updated BOI report to indicate that it is newly exempt from the reporting requirements. Updated BOI reports are filed electronically though the secure filing system. An updated BOI report for a newly exempt entity will only require that the entity: (1) identify itself; and (2) check a box noting its newly exempt status.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Scott Diamond & Peter D. Hardy

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Eleventh Circuit Rules Consumers Can Recover Statutory Damages for Willful FCRA Violations Without Proving Actual Damages

Joining every other circuit to address the same issue, the U.S. Court of Appeals for the Eleventh Circuit recently ruled that a consumer does not have to prove actual damages to recover statutory damages for willful violations of the Fair Credit Reporting Act.

In Omar Santos, et al. v. Experian Information Solutions, Inc., the named plaintiffs filed a class action lawsuit in which they sought to represent a class of individuals whose credit reports contained tradelines for debts reported to Experian by a collector of medical debts (“Healthcare Tradelines”). Due to a technical error by Experian, the status dates for the Healthcare Tradelines reported by Experian on the named plaintiffs’ credit reports were inaccurate. The named plaintiffs were among more than 2.1 million consumers whose Experian credit reports provided to third parties had inaccurate status dates for HealthCare Tradelines. In their complaint, the named plaintiffs alleged that Experian willfully violated its obligation under the FCRA to “follow reasonable procedures” to ensure that credit reports were prepared with “maximum possible accuracy.” They sought damages “of not less than $100 and not more than $1,000” for Experian’s willful FCRA violations.

Experian moved for summary judgment. While it did not dispute that the named plaintiffs’ credit reports contained inaccurate status dates for the Healthcare Tradelines, it argued that the FCRA’s provision for willful violations required the named plaintiffs to prove that they were denied credit, and incurred actual damages, as a result of the inaccurate dates.

The district court agreed that proof of actual damages was required but denied Experian’s summary judgment motion because there was some evidence that the named plaintiffs suffered actual damages. After the close of discovery, the named plaintiffs moved to certify a class, and as to the predominance requirement of Federal Rule of Civil Procedure 23, they argued that because they did not have to prove actual damages resulting from Experian’s willful violation, any individual issues concerning class members’ actual damages were irrelevant. In response, Experian argued that because the putative class members were required to prove they were actually injured by a willful violation, each class member’s individual proof of damages would predominate over common questions.

The magistrate judge agreed with Experian that the named plaintiffs had not met the predominance requirement in Rule 23 based on the district court’s prior ruling on Experian’s summary judgment. The magistrate judge recommended denying the named plaintiffs’ class certification motion and the district court adopted the magistrate judge’s recommendation and denied class certification. The Eleventh Circuit then granted permission to the named plaintiffs to appeal the district court’s class certification order.

Relying on the U.S. Supreme Court’s 2021 decision in TransUnion LLC v. Ramirez, the Eleventh Circuit first found that the named plaintiffs had Article III standing to bring the action. Specifically, the Eleventh Circuit referenced the Supreme Court’s acknowledgment in Ramirez that intangible harms can be concrete if they bear “a close relationship to harms traditionally recognized as providing a basis for lawsuits in American courts.” According to the Eleventh Circuit, because violations of the FCRA “have a close relationship to the harm caused by the publication of defamatory information,” a consumer does not have to prove that the false reporting caused an injury because the false reporting itself is the injury. The Eleventh Circuit found that the named plaintiffs had standing because the record contained evidence that the status dates reported by Experian on their credit reports were inaccurate.

The FCRA, in 15 U.S.C. Sec. 1681n(a)(1)(A), allows a consumer to recover “[1] any actual damages sustained by the consumer as a result of the [violation] or [2] damages of not less than $100 and not more than $1,000.” (emphasis added). Experian argued that Congress made recovery under both options contingent on a showing actual damages, and that “damages” under the second option are reserved for consumers who incur actual damages but either cannot prove the precise amount of damages or suffered less than $100 in actual damages.

In rejecting Experian’s argument, one of the key rationales offered by the Eleventh Circuit was the plain language of Section 1681n(a)(1)(A) with regard to the first option, which states that actual damages must be sustained by the consumer as a result of the violation before the consumer can recover. In contrast, the second option contains none of these requirements. In addition, emphasizing that the two options in Section 1681n(a)(1)(A) are separated by “or,” the Eleventh Circuit observed that Congress’s use of “or” to separate two provisions in a statute signals that there are two alternatives and that reading the second option to allow for statutory damages without proof of actual damages gives the options separate meanings.

The Eleventh Circuit observed that its reading of the FCRA was consistent with its FCRA case law and with how other circuits have read Section 1681n(a)(a)(A). The Eleventh Circuit cited to decisions of the Eighth, Seventh, Ninth, and Tenth Circuit which held that the second option of Section 1681n(a)(1)(A) does not require proof of actual damages. Accordingly, the Eleventh Circuit found that the district court’s denial of the named plaintiffs’ motion for class certification was an abuse of discretion because the district court’ analysis of the Rule 23 predominance requirement was based on its interpretation of the second option in Section 1681n(a)(1)(A). The Eleventh Circuit vacated the district court’s decision and remanded the case to allow the district court to address Experian’s argument that the named plaintiffs did not meet all of the other Rule 23 class certification requirements.

Daniel JT McKenna & John L. Culhane, Jr.

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The NLRB Delays Effective Date of New Joint Employer Test After Challenge By Business Groups

On November 9, 2023, a coalition of business advocacy groups led by the US Chamber of Commerce filed a lawsuit in the US District Court for the Eastern District of Texas challenging the National Labor Relations Board (“NLRB”) new final rule for determining joint employer status under the National Labor Relations Act (“NLRA”). Almost immediately, on November 13, 2023, the Chamber filed for summary judgment.

In response, the NLRB has pushed back the effective date for the new rule to February 26, 2024. The rule was previously set to take effect on December 29, 2023.

As we previously reported, the new rule creates a more liberal legal test for joint employment and allows for a joint employer finding based on indirect or unexercised control alone. Although joint employment is rarely litigated at the NLRB, it has been one of the most bitterly contested issues in labor law over the past decade. The NLRB applies the joint employer test when workers directly employed through employers such as franchisors and staffing firms seek union elections or file NLRB charges claiming their labor rights were violated. If workers for a staffing firm claim the company to which they are subcontracted is actually in charge, the Board decides whether that user company is jointly liable with the direct employer. In other words, the new rule could widen the number of companies that must participate in labor negotiations – or be liable for unfair labor practices — alongside their franchisees or independent contractors.

In their lawsuit, the groups challenge the new rule on three grounds. First, the groups contend that the rule is overbroad and directly contradicts the long-established common-law definition that limits joint employment to relationships of actual and substantial control. For decades, the Board drew from the common law straightforward framework and held that firms were joint employers only if they exercised “direct,” “immediate,” and “substantial” control over the same employees’ essential terms of employment. The new approach allows an entity to be a joint employer of another employer’s employees if they share or codetermine – or could share or codetermine– the employees’ essential terms and conditions of employment whether or not the alleged joint employer wields that power itself or through another entity, or has used that power or merely retains it.

Second, the new rule abandons an important principle of meaningful collective bargaining. The groups argue that the structure and purpose of the NLRA require that an employer possess enough control over essential terms and conditions of employment such that collective bargaining between a union and that employer is “meaningful.” The plaintiffs in the lawsuit argue that the new rule requires firms with no meaningful interest and no real leverage to be at the bargaining table.

Finally, the new rule replaces a clear standard that businesses have relied upon to tailor their business arrangements with uncertainty that threatens chaos and indeterminacy across major industry sectors. Specifically, the new rule will have a major impact on franchise business models. If the rule goes into effect, joint-employer status may be established merely by the indirect or reserved control over a broad range of matters, “including wages, benefits, and other compensation; hours of work and scheduling; the assignment of duties to be performed; supervision of performance of duties…” This will substantially affect and harm franchisees, as franchisors scale back on the support and services they supply to their franchisees for fear of being found to be joint employers.

In addition to the three challenges above, the groups also challenge the Board’s justification for the change.

Further complicating the fate of the rule is a November 6, 2023, petition filed by the Service Staffing International Union, requesting the District of Columbia Court of Appeals to review the joint-employer rule. Debates regarding which level of federal court, district or circuit, has priority in reviewing the NLRB’s rule could slow down both challenges.

Franchisors will need to work with closely with Human Resources to address or extend services to franchisees and teach franchisees how to lead their employees. Franchisors will have to monitor franchisees and managers more closely to ensure compliance with regulations and be prepared to get more involved in the employee management side if the rule does survive its legal challenges. Other businesses who use staffing agencies or other subcontracted workers should also evaluate their business models.

Ballard Spahr regularly works with employers on federal and state employment law compliance issues including updating policies and procedures, training management staff and working collaboratively with human resources departments and in-house counsel on management matters.

Nalee Xiong & Brian D. Pedrow

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Fifth Circuit Stays Further Proceedings in CFPB Appeal of Summary Judgment in Lawsuit Challenging UDAAP Exam Manual Changes Pending SCOTUS Decision in CFSA v. CFPB

Earlier this month, the CFPB filed a notice with the Texas federal district court that it is appealing to the Fifth Circuit the district court’s order granting summary judgment to a group of trade associations in their lawsuit against the CFPB challenging the changes made to its UDAAP Exam Manual in March 2022. Last week, the Fifth Circuit entered an order granting the CFPB’s unopposed motion to stay further proceedings in the Fifth Circuit pending the U.S. Supreme Court’s decision in Community Financial Services Association of America Ltd. v. CFPB.

It is not surprising that the CFPB sought a stay since the Fifth Circuit was likely to affirm the district court order based on the Fifth Circuit’s CFSA v. CFPB decision unless the Supreme Court had reversed that decision by the time the Fifth Circuit decided the case. In its motion seeking the stay, the CFPB stated that briefing should be held in abeyance pending the Supreme Court’s resolution of CFSA because “[a]s the district court recognized, the resolution of the funding issue in this case is currently controlled by this Court’s decision in CFSA.”

In vacating the changes to the Exam Manual, the district court concluded that the changes were invalid because: first, based on the Fifth Circuit’s opinion in CFSA v. CFPB, the CFPB’s funding is unconstitutional under the Appropriations Clause, and, second, relying on the Supreme Court’s “major questions doctrine,” the changes exceeded the CFPB’s UDAAP authority. Thus, if the Supreme Court reverses in CFSA, the Fifth Circuit will need to decide whether the district court’s ruling based on the “major questions doctrine” was correct.

Even if the Supreme Court affirms in CFSA, it is still possible that the Fifth Circuit may need to reach the issue of whether the “major questions doctrine” applies to the Exam Manual changes. If the Supreme Court rules that the constitutional violation does not impact any prior CFPB actions other than the payday loan rule at issue in CFSA or if Congress ratifies all prior CFPB actions, the Fifth Circuit could need to consider the merits of the plaintiffs’ alternative, non-constitutional arguments for invalidating the Exam Manual changes.

John L. Culhane, Jr., Richard J. Andreano, Jr., Michael Gordon & Alan S. Kaplinsky

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CFPB Issues Annual FDCPA Report; FTC Issues Annual Letter on Debt Collection to CFPB

The CFPB has issued its annual Fair Debt Collection Practices Act report covering the CFPB’s debt collection activities in 2022. The report incorporates information from the FTC’s most recent annual letter to the CFPB describing its 2022 activities in the debt collection market.

CFPB Report. The CFPB report includes a “spotlight” section on the collection of medical bills. In this section, the CFPB identifies issues commonly raised in consumer complaints including that: the medical bill being collected had already been paid or was being collected long after services were provided; the medical bill was placed on the consumer’s credit report without the consumer first being contacted about the bill; and the amount being collected was inaccurate.

The CFPB cautions that medical debt collectors may violate the Fair Debt Collection Practices Act or the Consumer Financial Protection Act’s UDAAP prohibition when they attempt to collect bills that are not actually owed or are the wrong amount. This includes instances in which a collector is collecting charges for services the patients never received, collecting for more expensive versions of services than what were actually provided (often called “upcoding”), collecting amounts based on rates that are inconsistent with applicable state law, collecting amounts that are not owed due to prohibitions in federal laws such as the No Surprises Act or the Nursing Home Reform Act, or collecting amounts that are not recoverable under applicable state law.

The section on medical collections also covers state law developments. The CFPB discusses recent state efforts to enact laws dealing with the collection and reporting of medical bills. According to the CFPB, because FCRA and FDCPA preemption is narrow, it would generally not apply to state restrictions on the collection, furnishing, and reporting of medical bills. The CFPB also discusses First Amendment challenges to state laws dealing with the collection and reporting of medical bills. According to the CFPB, its research casts doubt on claims of industry participants that state restrictions on the collection, furnishing, and reporting of medical bills will reduce the reliability of the credit reporting system. In September 2023, the CFPB launched a rulemaking process under the FCRA to eliminate medical bills from credit reports.

The CFPB report also includes sections on debt collections complaints, results of examinations of debt collectors publicly reported in Supervisory Highlights, and enforcement actions involving alleged debt collection activity in violation of the FDCPA and CFPA (which we blogged about here and here.)

FTC Letter. The FTC’s letter discusses 2022 activity in previously-filed FTC enforcement activity related to debt collection directed at small businesses (which we blogged about here) and the distribution of redress to consumers in 2022 based on prior settlements. It also discusses the settlement of the enforcement action brought by the FTC and 18 state attorneys general in 2022 against Harris Jewelry, a national jewelry retailer that markets and sells military-themed gifts, alleging that Harris Jewelry violated the FTC Act and TILA by engaging in unlawful sales and credit practices targeting servicemembers and failing to make required disclosures. The FTC notes that the settlement requires the company to stop collection of millions of dollars of debt. The FTC also discusses its efforts to “combat[] unauthorized charges,” particularly where consumers are tricked into incurring unwanted charges through the use of “dark patterns,” including two enforcement actions involving dark patterns (which we blogged about here.)

John L. Culhane, Jr., Reid F. Herlihy, Kristen E. Larson & Michael Gordon

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FCC and FTC Announce New AI Calling and Voice Initiatives

On November 16, the Federal Communications Commission (FCC) and Federal Trade Commission (FTC) announced new independent initiatives regarding the use and implications of AI technologies on consumers in the context of telephone and voice communications. These initiatives align with the recent Executive Order on Artificial Intelligence and show federal regulators’ expanding focus on existing and anticipated AI issues.

The FCC Notice of Inquiry

The FCC’s Notice of Inquiry (NOI) focuses on the use of AI technologies in the context of unwanted and illegal telephone calls and text messages under the Telephone Consumer Protection Act (“TCPA”). Importantly, through the NOI the FCC seeks to understand not only the potential risks associated with AI, but the potential benefits of AI in the telecommunications sector.

A key focus of the NOI is collecting information to define the term ‘Artificial Intelligence’ for purposes of the TCPA. Reaching a clear definition will be a critical step in focusing any discussion regarding the use of AI in this context. The NOI outlines a number of relevant statutory definitions for AI and related terms and seeks to identify any additional information the FCC should consider in defining the term for purposes of the TCPA. The FCC is specifically interested in the interaction between AI and the TCPA’s existing prohibition on “artificial” voice messages. The FCC specifically questions “the potential ability of AI technologies to function as the equivalent to a live agent when interacting with consumers”.

Relatedly, the FCC’s NOI seeks to identify the potential benefits of AI technologies for protecting consumers from unwanted and illegal robocalls and robotexts. The FCC’s questions in this context consider both potential tools to identify and screen calls, as well as new tools that callers could use to better target their calls to specific demographics.

Finally, the FCC is seeking input regarding potential liability for AI developers who design calling systems in a manner that permits or promotes violations of the TCPA. Controlling liability regarding the implementation and use of AI systems is likely to be a critical TCPA compliance issue moving forward.

The full NOI and list of questions posed by the FCC can be found here. Comments are due by December 18, 2023.

The FTC’s Voice Cloning Challenge

On the same day, the FTC announced its Voice Cloning Challenge to address the present and emerging harms of AI or AI-enabled voice cloning technologies. The Voice Cloning Challenge is broader in scope when compared to the FCC’s NOI, focusing on the potential risks and benefits of AI voice cloning technologies in the context of the FTC Act, the Telemarketing Sales Rule, and the proposed Impersonation Rule (proposed by the FTC to combat government and business impersonation scams, permitting monetary recovery and civil penalties against scammers). The Voice Cloning Challenge is designed to encourage the development of multidisciplinary approaches aimed at preventing, monitoring, and evaluating malicious voice cloning.

The full rules of the Challenge are available here. Submissions must address at least one of three “intervention points:” (1) Prevention or Authentication; (2) Real Time Detection or Monitoring; and (3) Post-use Evaluation. The FTC has outlined guidelines and timelines for submissions, which are available here. The top prize winner will receive $25,000, with additional prizes for the runner-up and three honorable mentions. Final submissions must be submitted between January 2, 2024 and January 12, 2024.

Timothy Dickens

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FTC Authorizes Use of Compulsory Process in Artificial Intelligence Investigations

On November 21, the Federal Trade Commission (FTC) approved in a 3-0 vote a resolution authorizing the use of compulsory process in nonpublic investigations involving products and services that involve or claim to involve artificial intelligence (AI).

Compulsory process is akin to a subpoena, and it allows the FTC to request the production of information, documents, or testimony relevant to an investigation. The FTC reports that the omnibus resolution will streamline FTC staff’s ability to issue civil investigative demands (CID), while retaining the Commission’s authority to determine when demands are issued. The resolution will be in effect for 10 years.

While the resolution will have a clear impact on companies that develop AI, it will also have an impact on all companies that offer products or services that involve or claim to involve AI. Indeed, given the FTC’s prior warnings relating to misleading advertising about AI practices, it should be expected that the FTC will use compulsory process to investigate it.

In any event, the resolution should also be seen as a general indication that the FTC plans to focus on regulating AI, and it will seek the investigative tools it deems necessary. Companies should therefore ensure that they have the proper AI governance plans in place to assess and defend their practices.

Timothy Dickens & Gregory P. Szewczyk

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CFPB Approves Trial Disclosure Program Waiver Template Application for Construction-to-Permanent Loans

The CFPB recently approved an application (Application) from the Independent Community Bankers Association (ICBA) for alternative disclosures under the Truth in Lending Act (TILA)/Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure (TRID) rule for construction-to-permanent loans. The Application is for a Trial Disclosure Program Waiver Template (TDP Waiver Template). The TDP Waiver Template is not actually operative, and is not binding on the CFPB. Rather, individual institutions must submit their own application for a Trial Disclosure Program Waiver (TDP Waiver) based on the TDP Waiver Template in accordance with the CFPB’s Policy to Encourage Trial Disclosure Programs (Policy). We previously reported on the Policy. We also previously reported on the CFPB’s request for comments on the Application.

The ICBA asserts that the purpose of the Application is to increase the availability of affordable single-close construction-to-permanent loans through the modification of the Loan Estimate and Closing Disclosure under the TRID rule to better align with such transactions. The ICBA claims that such disclosures are primarily designed for standard home purchase or refinance mortgage loans, and as currently configured do not sufficiently disclose all components of consumer construction-to-permanent loans. As a result, the ICBA asserts that while community banks are main suppliers of construction loan financing in many small towns and rural markets, many community banks are reluctant to offer such loans based on concerns about complying with the TRID rule requirements for the Loan Estimate and Closing Disclosure in connection with construction-to-permanent loans.

Among the modifications provided for in the TDP Waiver Template are the following:

  • The Loan Terms section of the Loan Estimate and Closing Disclosure more clearly disclose interest rate and monthly payment information for the construction phase and the permanent phase.
  • The Projected Payments section of the disclosures separately set forth the construction phase payments and the permanent phase payments.
  • The Closing Costs Details section of the disclosures is divided into two pages, one for the construction phase and one for the permanent phase. (The TDP Waiver Template provides that the costs are disclosed separately for the construction phase and permanent phase “to demonstrate to the consumer the added costs associated with a construction loan.” However, this is not the case for various fees as the construction phase costs include costs paid at consummation that apply to the loan in general and are not specific to a construction loan, such as credit report fees, flood zone determination fees, and title related charges.)
  • The Calculating Cash to Close section of the disclosures include a specific entry for the construction costs.
  • The Annual Percentage Rate section of the disclosures include separate rates for the construction phase and the permanent phase.
  • A Conversion Notice disclosure is added that is a combination of an adjustable rate mortgage interest rate change notice and an initial escrow account disclosure statement, although the escrow account disclosure would be optional. The Notice would be provided to the borrower 60 to 120 days before the conversion to the permanent phase to advise the borrower of the monthly payment that will be required. An Initial Escrow Account Disclosure Statement currently is required under RESPA. (The ICBA application provided for a Pre-Conversion Loan Modification disclosure that would address changes between the originally anticipated permanent phase loan terms and the modified permanent phase terms. That disclosure is not part of the TDP Waiver Template.)

While the ICBA application provided for a construction costs table to be added to the disclosures to provide detail regarding the construction costs, lot value or purchase price, down payment and loan amount, the table is not included in the TDP Waiver Template. However, the TDP Waiver Template provides for the inclusion of some of the information in the Borrower’s portion of the Summaries of Transactions section of the Closing Disclosure.

The CFPB advises that it will accept applications from lenders for a TDP Waiver based on the TDP Waiver Template under Section E.1.b of the Policy. The CFPB states that it “is interested in receiving applications from a number of lenders, rather than a single market participant.” The CFPB advises that, consistent with the Policy, applications for a TDP Waiver should:

  • Include the information specified in section A of the Policy, but with appropriate adjustments given that the application will be based on the TDP Waiver Template.
  • Include a statement that the application is based on the TDP Waiver Template, and that the applicant wishes to conduct in-market testing of the trial versions of the Loan Estimate and Closing Disclosure described in the Addendum to the TDP Waiver Template.
  • Identify the specific portions of Regulation Z sections 1026.37 and 1026.38, which set forth the requirements for the Loan Estimate and Closing Disclosure, respectively, that will require a waiver. (The CFPB states that the “ICBA broadly identifies [the sections], as they govern the [Loan Estimate and the Closing Disclosure], respectively. However, the disclosures proposed by ICBA do not require a waiver of every single component of these two provisions.”)
  • Include information relating to the in-market testing design to be used, including:
    • The size, location, and nature of the consumer population to be involved in the testing program, an explanation of how the population was chosen, and a description of any plans to scale or modify the population over the duration of the testing program.
    • A description of test result data that the applicant expects to share with the CFPB.
    • Metrics for evaluating whether the trial disclosures tested actually improve on existing disclosures.

The CFPB states that it “will carefully evaluate the plan to test the effectiveness of these disclosures” and that “[w]hile the CFPB is unable to provide staff support to develop an individualized plan for an applicant, the CFPB plans to provide technical feedback on any application to allow for any modifications by the applicant prior to making a decision to approve or deny an application.” The CFPB states that if it grants an application from a lender for a TDP Waiver based on the TDP Waiver Template, it intends to provide the lender with the terms and conditions of the waiver in a document entitled “TDP Waiver Terms and Conditions,” and to publish a TDP Waiver Order on the CFPB’s website and in the Federal Register.

Richard J. Andreano, Jr.

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FHFA Announces 2024 Conforming Mortgage Loan Limits

The Federal Housing Finance Agency (FHFA) recently announced the conforming loan limits for residential mortgage loans acquired by Fannie Mae and Freddie Mac in 2024. Fannie Mae addresses the limits in Lender Letter 2023-09.

As was expected based on the continuing increase in housing prices, the limits increased significantly. The standard loan limit for a one-unit home increased from $726,200 in 2023 to $766,550 for 2024. For high-cost areas, and also for Alaska, Guam, Hawaii and the U.S. Virgin Islands, the loan limit for a one-unit home increased from $1,089,300 for 2023 to $1,149,825 for 2024.

The FHFA announcement that is linked above includes links to:

  • A list of conforming loan limits for all counties and county-equivalent areas in the U.S.
  • A map showing the conforming loan limits across the U.S.
  • A detailed addendum of the methodology used to determine the conforming loan limits.
  • A list of FAQs that covers broader topics that may be related to conforming loan limits.

Fannie Mae advises that the loan limits apply to the original loan balance, and not the loan balance at the time of delivery.

Richard J. Andreano, Jr.

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HUD Recently Announced the 2024 Loan Limits for FHA Forward Mortgages and HECMs

The U.S. Department of Housing and Urban Development (HUD) recently announced the 2024 loan limits for FHA insured forward mortgage loans and FHA insured Home Equity Conversion Mortgages (HECMs). The announcements were made in Mortgagee Letter 2023-21 and Mortgagee Letter 2023-22, respectively.

For forward mortgage loans in non-high cost areas, the amount for a single unit home increased from $472,030 in 2023 to $498,257 in 2024. In high cost areas, the amount for a single unit home increased from $1,089,300 in 2023 to $1,149,825 in 2024. In Alaska, Guam, Hawaii and the U.S. Virgin Islands, the amount for a single unit home increased from $1,633,950 in 2023 to $1,724,725 for 2024. For HECMS, the maximum claim amount for all areas increased from $1,089,300 in 2023 to $1,149,825 in 2024.

Each Mortgagee Letter includes a link to a HUD website that can be used to find the applicable limit for specific areas nationwide.

We recently reported on the residential mortgage loan limits for loans purchased by Fannie Mae and Freddie Mac in 2024.

Richard J. Andreano, Jr.

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Did You Know?

On November 1, 2023, the Vermont Commissioner of Taxes established, pursuant to 32 V.S.A. § 3108, the interest rate for the calculation of the interest on the underpayment and overpayment of tax liabilities for the upcoming calendar year. Effective January 1, 2024, that rate will be 8.0%. The 2024 Interest Rate Memo is available here. (“Declared Rate”). The Declared Rate is the basis for determining whether a loan is a high-rate loan under Vermont law.

Disclosures are required for first-lien, residential loans in Vermont where the borrower is expected to be charged in excess of four points or interest in excess of three percent over the Declared Rate, or both (“Disclosure Threshold”). 9 V.S.A. § 104.

Notably, disclosures for high-rate mortgage loans were have been temporarily suspended by Orders of the Vermont Department of Financial Regulation since May 5, 2022 -- most recently in an Order Extending Suspension for the period from July 1, 2023 until December 31, 2023. As set forth therein:

  • Based on the prevailing mortgage rates, it is highly probable that during the next six months the interest rates on Market Rate Mortgage Loans may exceed the 2023 Disclosure Threshold.
  • The Disclosure is not intended for prospective borrowers of Market Rate Mortgage Loans.
  • Providing prospective borrowers of Market Rate Mortgage Loans with the Disclosure, notifying them that they may be eligible for a loan with a lower interest rate from another lender, may confuse and mislead such borrowers.

Nothing in the foregoing modified or suspended disclosure requirements for High Point Mortgage Loans.

Stacey L. Valerio

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Looking Ahead

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