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Financial Services Law Insights and Observations

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  • FTC and Utah add TSR charges to real estate seminar complaint

    Federal Issues

    On May 20, the FTC announced that it and the Utah Division of Consumer Protection amended their complaint against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to attend real estate events costing thousands of dollars. The amended complaint adds additional defendants and new charges asserting the defendants violated the Telemarketing Sales Rule (TSR). As previously covered by InfoBytes, the U.S. District Court for the District of Utah issued a temporary restraining order against the defendants after the FTC and the Utah Division of Consumer Protection accused the defendants of violating the FTC Act, the Consumer Review Fairness Act (CRFA), and Utah state law, by marketing real estate events with false claims and celebrity endorsements. Among other things, the defendants allegedly told consumers they would (i) earn thousands of dollars in profits from real estate investment “flips” by using the defendants’ products; (ii) receive 100 percent funding for their real estate investments, regardless of credit history; and (iii) receive a full refund if they do not make “‘a minimum of three times’” the price of the workshop within six months. The amended complaint alleges that, in addition to the claims made at the real estate events, the defendants reiterated the false or misleading statements in the course of their telemarketing activities in violation of the TSR.

    Federal Issues Courts FTC Enforcement FTC Act UDAP TSR Deceptive Marketing State Issues

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  • FHFA tries again on GSE capital framework

    Federal Issues

    On May 20, the FHFA announced the re-proposal of a notice of proposed rulemaking that would establish a new regulatory capital framework for Fannie Mae and Freddie Mac (GSEs). In June 2018, the FHFA issued a proposed rulemaking that would implement a regulatory capital framework for the GSEs including (i) a new framework for risk-based capital requirements; and (ii) two alternative approaches to setting minimum leverage capital requirements. (Covered by InfoBytes here.) The FHFA states that while the 2018 proposal remains the foundation of the re-proposal, including the mortgage risk-sensitive framework, the re-proposal “increas[es] the quantity and quality of the [GSEs]’ regulatory capital and reduc[es] the pro-cyclicality of the aggregate capital requirements.”

    According to a factsheet released in conjunction with the re-proposal, the purpose is to ensure that the GSEs operate in a safe and sound manner and are positioned, particularly during times of financial stress, to “fulfill [their] statutory mission to provide stability and ongoing assistance to the secondary mortgage market across the economic cycle.” Specifically, the re-proposal changes include, among other things (i) supplemental capital requirements; (ii) quality of capital changes, such as a risk weight floor and capital buffers; (iii) measures to address pro-cyclicality; and (iv) requirements for the GSEs to assess their own credit, market, and operational risk. Comments on the proposal must be submitted within 60 days of publication in the Federal Register.

    Federal Issues Fannie Mae Freddie Mac GSE Capital Requirements FHFA Agency Rule-Making & Guidance

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  • FINRA provides guidance on whether member firms must disclose reliance on agency relief during Covid-19

    Federal Issues

    On May 21, FINRA updated its frequently asked questions (previously discussed herehereherehere, here, and here) to provide additional detail on how and when to document that it has relied on temporary relief from FINRA rules during the Covid-19 pandemic.  Among other things, the updated FAQs also address Form U4 filings and temporary extensions of time to pass qualification examinations for operations professionals.

    Federal Issues Covid-19 FINRA Examination

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  • SBA gives guidance on collecting PPP processing fees

    Federal Issues

    On May 21, the Small Business Administration (SBA) released a procedural notice detailing the Form 1502 reporting process through which lenders will be able to collect the processing fees on eligible Paycheck Protection Program (PPP) loans. The SBA will pay lenders’ processing fees for PPP loans, based on the balance of the loan at the time of full disbursement, in the following amounts: (i) five percent for loans of not more than $350,000; (ii) three percent for loans of more than $350,000 and less than $2 million; and (iii) one percent for loans of at least $2 million. Lenders are required to report to the SBA on Form 1502 loans have been fully disbursed or canceled. Form 1502 should be submitted electronically to the SBA by the later of (i) May 29, or (ii) 10 calendar days after disbursement or cancellation of the PPP loan. (This is an updated deadline that was recently reflected in the SBA’s FAQs and was first announced in an interim final rule regarding disbursements under the PPP, covered by InfoBytes here.)

    The SBA will begin accepting 1502 reports on fully disbursed or cancelled PPP loans on May 22. Lenders will not receive a processing fee payment if the loan is canceled before disbursement or if a disbursed loan is canceled or voluntarily terminated but repaid before May 18 (the borrower certification safe harbor date). As detailed in the procedural notice, lenders will be required to create an account in the Fiscal Transfer Agent Lender portal to access and submit Form 1502. The procedural notice includes, among other things, specifics on account creation and reporting. Additionally, the procedural notice contains useful questions and answers, including how the processing fees will be disbursed and when processing fees may be subject to clawbacks from the SBA.

    Federal Issues SBA Department of Treasury Small Business Lending Covid-19

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  • FTC announces $40 million settlement with payment processor in credit card laundering case

    Federal Issues

    On May 19, the FTC filed a complaint against a large payment processing company and its former executive for allegedly participating in deceptive or unfair acts or practices in violation of the FTC Act and the Telemarketing Sales Rule (TSR) by processing payments and laundering, or assisting in the laundering of, credit card transactions targeting hundreds of thousands of consumers. The FTC’s complaint alleges, among other things, that the payment processing company received and ignored repeated “warnings and direct evidence” dating back to 2012 showing that the former executive was using his company to open hundreds of fake merchant accounts and shell companies, and allowed him to continue to open merchant accounts until 2014. According to the FTC, the “schemes included, but were not limited to, a debt relief scam that used deceptive telemarketing, business opportunity scams that used deceptive websites, and a criminal enterprise that used stolen credit card data to bill consumers without their consent” in which the both defendants received fees for processing the scheme’s payments. The FTC also claims that the payment processing company violated its own anti-fraud policies by failing to adequately underwrite, monitor, or review its sales agents and their risk management processes, and failed to timely terminate the merchant accounts involved in the scheme.

    The payment processing company’s proposed settlement imposes a $40 million monetary judgment and prohibits the company from assisting or facilitating TSR and FTC Act violations related to payment processing. Additionally, the company will be required to (i) screen and monitor prospective restricted clients; (ii) establish and implement a written oversight program to monitor its wholesale independent sales organizations (ISO); and (iii) hire an independent assessor to monitor the company’s compliance with the settlement’s ISO oversight program.

    The former executive’s proposed settlement imposes a $270,373.70 monetary judgment, and bans him from payment processing or acting as an ISO for certain categories of high-risk merchants. He is also prohibited from credit card laundering activities, making or assisting others in making false or misleading statements, and assisting or facilitating violations of the FTC Act or TSR.

    Neither defendant admitted or denied the allegations, except as specifically stated within the proposed settlements.

    Federal Issues FTC Enforcement Credit Cards Anti-Money Laundering Payment Processors

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  • SBA clarifies PPP eligibility for foreign affiliates

    Federal Issues

    On May 21, the SBA recently published an interim final rule (IFR), which addresses the eligibility requirements related to employees of a Paycheck Protection Program (PPP) borrower’s foreign affiliates. The SBA reiterated in the IFR that a small business must include foreign affiliate employees when calculating how many people it employs for purposes of determining if the business meets the PPP eligibility requirement of 500 or fewer employees. The SBA acknowledged, however, that previous guidance (covered by InfoBytes here) may have created “reasonable borrower confusion,” so in “an exercise of enforcement discretion,” the agency reiterated that the “SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-US employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States.” The SBA further determined that these borrowers will “not be deemed to have made an inaccurate certification of eligibility solely on that basis.”

    The IFR takes effect upon publication in the Federal Register and is applicable to PPP applications submitted through June 30, 2020, or when program funding is exhausted. Comments are due within 30 days.

    Federal Issues Department of Treasury SBA Small Business Lending CARES Act Covid-19 Of Interest to Non-US Persons

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  • Federal Reserve Bank of New York announces first subscription date of loan facility program

    Federal Issues

    On May 20, the Federal Reserve Bank of New York announced the first loan subscription date for the Term Asset-Based Securities Loan Facility (TALF) and released an expanded set of Frequently Asked Questions and other documents relating to the facility’s operations. The first subscription date will be June 17, 2020, and the first closing date will be June 25, 2020. The FAQs contain information on why the TALF was established, how the TALF will work, borrower eligibility, eligible collateral, eligible underlying assets, master trust requirements, credit ratings, collateral review, interest rates, and loan subscription and closing, among other things.

    Federal Issues Covid-19 Federal Reserve Bank of New York Securities

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  • Prudential regulators outline principles on small-dollar lending

    Federal Issues

    On May 20, the FDIC, Federal Reserve Board, OCC, and NCUA issued joint principles for offering responsible small-dollar loans. The agencies note the “important role” that small-dollar lending can play during times of economic stress, such as the Covid-19 pandemic, and issued the guidance to encourage supervised banks, savings associations, and credit unions to offer responsible small-dollar loans to consumers and small businesses. The principles cover various loan structures, including open-end lines of credit with minimum payments, closed-end loans with short single payment terms, and longer-term installment payments. The guidance indicates that reasonable loan policies and risk management practices would generally address the following:

    • Loan structures. Loan amounts and repayment terms should align with eligibility and underwriting criteria that support successful repayment of the loan, including interest and fees, rather than re-borrowing, rollovers, or immediate collectability in the event of default.
    • Loan pricing. Pricing, including for loans offered through managed third-party relationships, should reflect “overall returns reasonably related to the financial institution’s product risks and costs” and comply with applicable state and federal laws.
    • Loan underwriting. Underwriting should use internal and/or external data sources to assess a customer’s creditworthiness. Underwriting may use new technologies and automation to lower the cost of providing the small-dollar loans.
    • Loan marketing and disclosures. Disclosures should comply with applicable consumer protection laws and regulations and provide information in “a clear, conspicuous, accurate, and customer-friendly manner.”
    • Loan servicing and safeguards. Timely and reasonable workout strategies, such as payment term restructuring, should be provided for customers who experience financial distress.

    As previously covered by InfoBytes, the federal financial regulators issued a joint statement in March, encouraging institutions to offer reasonable, small-dollar loans to consumers and small businesses to help mitigate the effects of the Covid-19 pandemic.

    Federal Issues Agency Rule-Making & Guidance FDIC Federal Reserve OCC NCUA Small Dollar Lending Installment Loans Small Business Lending Covid-19

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  • FTC, FCC warn VoIP service providers about Covid-19 robocalls

    Federal Issues

    On May 20, the FTC and the FCC sent letters to three more Voice over Internet Protocol (VoIP) service providers, warning the companies to stop routing and transmitting robocall campaigns promoting Covid-19 related scams. According to the FTC, two of the companies are routing coronavirus-related fraud robocalls originating overseas. In April, the agencies sent an initial round of letters to three VoIP service providers for similar issues (covered by InfoBytes here). As in April, the letters warn the companies that they have been identified as “routing and transmitting illegal robocalls, including Coronavirus-related scam calls” and must cease the behavior or they will be subject to enforcement action. Additionally, the agencies sent a separate letter to a telecommunications trade association thanking the group for its assistance in identifying the campaigns and relaying a warning that the FCC will authorize U.S. providers to begin blocking calls from the three companies if they do not comply with the agencies’ request within 48 hours after the release of the letter.

    Federal Issues FTC FCC Robocalls Enforcement Covid-19

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  • FINRA updates Covid-19 supervisory FAQs to extend regulatory deadlines

    Federal Issues

    On May 19, FINRA updated its Covid-19 FAQs (previously discussed here, here, here, here, and here) to extend certain reporting, certification, and testing requirements until June 30, 2020. First, FINRA extended the deadline for registered persons temporarily functioning as principals under FINRA Rule 1210.04 to pass qualification examinations. Second, FINRA extended the deadline for reports related to a member’s supervisory control system that are required under FINRA Rule 3120. Finally, FINRA extended the deadline for members to execute certifications required under FINRA Rule 3130.

    Federal Issues Covid-19 FINRA Supervision

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