InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
OFAC sanctions chemical suppliers tied to Mexican drug cartel
On April 14, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Order 14059, against two Chinese entities and five individuals based in China and Guatemala for their roles in supplying precursor chemicals to Mexican drug cartels for the production of illicit fentanyl intended for U.S. markets. OFAC coordinated with the DEA and the DOJ to take this action. “Treasury, as part of the whole-of-government effort to respond to [the fentanyl] crisis, will continue to vigorously apply our tools to prevent the transfer of precursor chemicals and machinery necessary to produce this drug,” Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement. The sanctions block all property and interests in property subject to U.S. jurisdiction belonging to the sanctioned persons and require such property, as well as “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons,” to be reported to OFAC. U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. OFAC warned that “persons that engage in certain transactions with the individuals and entities designated today may themselves be exposed to sanctions or subject to an enforcement action.”
3rd Circuit: Card renewal notices not subject to TILA itemization requirements
On April 11, the U.S. Court of Appeals for the Third Circuit upheld the dismissal of a putative class action suit claiming a national bank’s failure to itemize fees in its credit card renewal notices violated TILA and Regulation Z. Plaintiff alleged that his 2019 card renewal notice listed the annual membership fee as $525, but did not separate the fee into itemized amounts: $450 for the primary cardholder and $75 for an additional authorized user. Stating that the annual membership fee later appeared in his 2020 renewal notice as two separate fees, he claimed that he would have only paid the $450 fee for his own card if he had known it was an option in 2019. Plaintiff sued claiming the 2019 renewal notice violated TILA and Regulation Z, which require creditors to make disclosures before and during a creditor-borrower relationship, including the existence of any annual and periodic fees. The district court rejected the bank’s argument that the plaintiff lacked standing after finding that he suffered an economic injury by paying the full $525. However, the court granted the bank’s motion to dismiss after determining that the plaintiff failed to allege a TILA violation because neither the statute nor its implementing regulation expressly require banks to itemize fees in a renewal notice.
On appeal, the 3rd Circuit issued a precedential opinion finding that while the plaintiff had standing, he failed to plead an actual TILA violation. “While there is an itemization requirement in the statutes and regulations governing periodic disclosures,” the court clarified that “the same requirement is not included in the statutes and regulations applicable to renewal notices.” The 3rd Circuit stated that “[r]enewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship,” explaining that because “the creditor does not yet know whether the consumer will add an authorized user to the account” during the solicitation or application period, it “must disclose ‘optional’ additional card fees.” However, during the account renewal stage, TILA and Regulation Z only require creditors to “disclose terms ‘that would apply if the account were renewed.’”
Credit reporter must face FCRA suit on hard-inquiry reinvestigation
On April 10, the U.S. District Court for the Eastern District of Pennsylvania denied a credit reporting agency’s (CRA) motion for summary judgment in a certified class action suit accusing the CRA of willfully violating the reinvestigation provision in the FCRA. Plaintiff claimed that he disputed an alleged inaccurate hard inquiry on his credit report, and argued that not only did the CRA fail to remove the hard inquiry from his credit file, he was given a sales pitch for an identity theft product. The CRA conceded that it did not reinvestigate the dispute and argued, among other things, “that hard inquiries do not necessarily decrease a consumer’s credit score and, even if they did, such diminutions do not necessarily result in the denial of credit.” Experts for both parties debated the extent to which a hard inquiry affects a consumer’s credit score.
The court disagreed with the CRA’s position concerning the impact of hard inquiries on consumers’ credit scores, noting the conflict with federal regulators’ cautionary advice that “[t]hese inquiries will impact your credit score because most scoring models look at how recently and how frequently you apply for credit.” Moreover, the CRA’s own expert opined that hard inquiries usually do have a “minor impact” on consumers’ credit scores. Additionally, the court rejected the CRA’s argument that it did not willfully violate the FCRA because its process for handing hard-inquiry disputes was in line with industry-wide practices. The court cited Third Circuit precedent requiring CRAs to reinvestigate any information a consumer claims is inaccurate if the CRA does not deem the information frivolous or chooses not to delete it from the customer’s file. “When industry practices are contradicted by clear statutory language and case law giving force to that language, common practice does not save a defendant from a finding of willfulness,” the court wrote. With respect to the decertification request, the court said class members established that the time and resources spent trying to resolve disputes over inaccurate hard inquiries, and their lowered credit scores, amounted to concrete injury that can be fairly traceable to the CRA’s statutory violation.
The court denied summary judgment for two reasons. First, the court did not find that the CRA’s actions were “objectively reasonable” based on the CRA’s reliance on a “contorted and inconsistent” reading of the FCRA and its interpretation of § 1681i (which “requires a reasonable reinvestigation when consumers raise a dispute of inaccuracy”). The court also denied summary judgment “[b]ecause a jury could find that [the CRA’s] blanket policy of refusing to reinvestigate disputes of hard inquiries is not reasonable under the law.”
California joins multistate settlement with securities brokerage
On April 6, the California Department of Financial Protection and Innovation (DFPI) joined a multi-state settlement with a securities brokerage company stemming from an investigation spearheaded by state securities regulators from Alabama, Colorado, California, Delaware, New Jersey, South Dakota, and Texas relating to certain alleged operational and technical failures. According to DFPI, the investigation was triggered by a March 2020 incident in which the brokerage company experienced several platform outages during a period in which hundreds of thousands of investors relied on the company’s app to make trades, thus preventing some users from being able to process trades. The settlement order sets out multiple alleged violations by the brokerage company, including negligently disseminating inaccurate information to customers, failing to have a “reasonably designed customer identification program,” inadequately supervising critical technology, having a deficient system for dealing with customer inquiries, failing to exercise due diligence before approving certain option accounts, and failing to report all customer complaints to FINRA and state securities regulators.
While the company neither admitted nor denied the findings, it agreed to pay up to $10.2 million in penalties and will continue to implement recommendations to address the alleged misconduct. DFPI noted in its announcement that it “found no evidence of willful or fraudulent conduct” by the company, and said the company fully cooperated with the investigation.
OFAC sanctions target Russian financial facilitators
On April 12, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), in coordination with the United Kingdom, announced sanctions targeting Russian financial facilitators to curb the country’s access to the international financial system. The sanctions, issued pursuant to Executive Order 14024, target 25 individuals and 29 entities with touchpoints in 20 jurisdictions, and include the facilitation network of one of Russia’s wealthiest billionaires who is subject to sanctions in multiple jurisdictions, OFAC said. The designations also serve to reinforce existing measures and further disrupt Russia’s ability to import critical technologies for use in its war against Ukraine. Concurrently, the State Department designated several entities operating in Russia’s defense sector, as well as entities supporting Russia’s war efforts against Ukraine and entities associated with the country’s energy exports. (See also State Department’s fact sheet here.) The Commerce Department also added 28 entities to its entity list. “Today’s action underscores our dedication to implementing the G7 commitment to impose severe costs on third-country actors who support Russia’s war,” Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson said in the announcement.
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons that are in the U.S. or in the possession or control of U.S. persons are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, unless authorized by a general or specific OFAC license, or otherwise exempt.
In conjunction with the sanctions, OFAC issued several Russia-related general licenses (see GLs 62, 63, 64, and 65), revoked GL 15, and published new FAQ 1122.
Multinational tech company to pay $3.3 million for OFAC and BIS violations
On April 6, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), in consultation with the Department of Commerce’s Bureau of Industry and Security (BIS), announced a $3.3 million settlement with a multinational technology company to resolve potential civil liabilities stemming from the exportation of services or software from the United States to sanctioned jurisdictions and to Specially Designated Nationals (SDNs) or blocked persons. The settlement comprised an agreement with OFAC to pay a civil penalty of $2,980,264.86 and an administrative penalty of $624,013 with BIS. In light of the related OFAC action, the company was given a $276,382 credit by BIS contingent upon the company fulfilling its requirements under the OFAC settlement agreement, resulting in a combined overall penalty amount of $3,327,896.86.
According to OFAC’s web notice, the conduct underlying the administrative penalty imposed by BIS stemmed from certain conduct involving the company’s Russian subsidiary. The conduct underlying the settlement with OFAC took place between July 2012 and April 2019, when the company and certain subsidiaries allegedly “sold software licenses, activated software licenses, and/or provided related services from servers and systems located in the United States and Ireland to SDNs, blocked persons, and other end users located in Cuba, Iran, Syria, Russia, and the Crimea region of Ukraine.” The total value of the 1,339 apparent violations was more than $12 million. OFAC alleged that the causes of these apparent violations stemmed from a lack of complete or accurate information on end customers for the company’s products, and that during the relevant time period, there were shortcomings in the company’s restricted-party screening controls. Among other things, OFAC alleged that the company’s screening architecture did not aggregate identifying information across its various databases to identify SDNs or blocked persons, failed to screen and evaluate pre-existing customers in a timely fashion, and missed common variations of restricted party names.
In arriving at the $2,980,265.86 settlement amount, OFAC considered various mitigating factors, including that (i) evidence did not show that persons located in U.S. offices or management were aware of the alleged activity at the time (the apparent violations were revealed during a self-initiated look back); (ii) upon identifying the apparent violations, the company self-disclosed the matter to OFAC, conducted a retrospective review of thousands of past transactions, cooperated with OFAC throughout the investigation, terminated the accounts of the SDNs or blocked persons, and updated internal procedures to disable access to products or services upon discovery of a sanctioned party; and (iii) the company “undertook significant remedial measures and enhanced its sanctions compliance program through substantial investment and structural changes.” OFAC outlined several compliance considerations for companies conducting business through foreign-based subsidiaries, distributors, and resellers, and reminded businesses that OFAC’s SDN List is dynamic, and that when changes to the list are made, “companies should evaluate their pre-existing trade relationships to avoid dealings with prohibited parties.”
Tennessee enacts Money Transmission Modernization Act
On April 4, the Tennessee governor signed HB 316 / SB 268 to enact the Money Transmission Modernization Act, the money transmitter model law created by industry and state experts. Provisions under the Act amend Tennessee Code Annotated, Title 45, and are intended to (i) reduce regulatory burden by promoting coordination among the states in areas of regulation, licensing, and supervision; (ii) protect the public from financial crime; (iii) standardize activities that are subject to, or otherwise exempt from, licensure; and (iv) modernize safety and soundness requirements to protect customer funds while supporting innovative and competitive business practices. Under the Act, persons may not engage in the business of money transmission, or advertise, solicit, or hold themselves out as providing money transmission without being licensed. In addition to exempting federal and state agencies and financial institutions organized under the laws of any state or the United States, the Act now exempts “authorized delegates”—persons designated by a licensee to engage in money transmission on behalf of the licensee, and persons that fall within an outlined exemption, including persons appointed as an agent of the payee.
The Act also provides the commissioner of financial institutions with the authority to exercise various powers, including the use of the Nationwide Multistate Licensing System and Registry, and the ability to participate in multistate supervisory processes coordinated through the Conference of State Bank Supervisors, Money Transmitter Regulator Association, and others for all licensees that hold licenses in Tennessee and other states. While retaining the ability to conduct examinations of licensees, the commissioner may now examine or investigate an authorized delegate. The Act also updates licensee liability requirements related to net worth assets and surety bonds and make various other changes related to audit reports and disclosure permissions. The Act further provides that “[a] person shall not engage in the business of money transmission on behalf of a person not licensed under this chapter or not exempt pursuant to § 45-7-104,” and stipulates that “[a] person that engages in such activity provides money transmission to the same extent as if the person were a licensee, and is jointly and severally liable with the unlicensed or nonexempt person.” The Act takes effect January 1, 2024.
Collection agency to pay $10k for operating without a license
On March 21, the Connecticut Department of Banking fined a collection agency $10,000 and ordered it to cease and desist from collection agency activity for operating without a valid license. According to the order, the company applied for a consumer collection agency license in Connecticut in October 2022. However, during its review of the company’s application, the Department of Banking discovered that the company had been operating as a consumer collection agency without a license in the state since at least 2019. Under the terms of the consent order, the company must pay a civil penalty fine of $10,000, and pay $800 to cover back licensing fees. The company consented to the entry of the sanctions without admitting or denying any wrongdoing “solely for the purpose of obviating the need for further formal administrative proceedings,” the order said.
West Virginia amends real estate licensing provisions
On March 28, the West Virginia governor signed HB 3203 to amend certain provisions relating to the West Virginia Real Estate License Act, which requires persons engaging, directly or indirectly, in the capacity of a real estate broker, associate broker, or salesperson in the state to be licensed. A license is required “even if the person or entity is licensed in another state and is affiliated or otherwise associated with a licensed real estate broker in [West Virginia].” The changes, among other things, (i) eliminate requirements for certain information to be included on license applications; (ii) modify qualifications for licensure; (iii) clarify and amend requirements for prelicense and continuing education requirements; (iv) modify licensing requirements based on licensure in another jurisdiction or for license certifications issued by the Real Estate Commission (Commission); (v) eliminate certain requirements for persons holding a broker’s license; (vi) clarify language relating to when the Commission “may refuse a license or revoke, suspend, or impose any other sanction against a licensee”; (vii) require a licensee “to disclose in writing whether the licensee represents the seller, the buyer, the seller and the buyer, the landlord, the tenant, or the landlord and the tenant”; and (viii) modify certain provisions relating to complaint procedures, the judicial review of final decisions/orders issued by the Commission, criminal penalties, and suits for the collection of compensation. The amendments take effect 90 days from passage.
Divided 4th Circuit: Including GAP coverage does not eliminate auto loan exemption from MLA
On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.
On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”
The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.
Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.