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California DFPI concludes MTA licensure not required for crypto exchange
On November 3, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to a cryptocurrency exchange’s transactions. The redacted opinion letter examines whether the inquiring company’s proposed business activities—which “will offer the purchase, sale, and trading of various cryptocurrencies using a platform provided by its affiliate and in conjunction with another affiliate that is a . . . registered broker-dealer”—are exempt from the MTA. Transactions on the company’s platform will involve the use of the company’s tokenized version of the U.S. dollar. Customers will deposit U.S. dollar funds into a company account where an equivalent amount of tokens will be created and used to facilitate a trade for cryptocurrency. The tokens can also be exchanged for U.S. dollars, or customers can hold the tokens in their wallet. According to the letter, the company says it “does not take custody of its client’s currencies or offer digital wallets,” but rather a “client’s digital wallet is directly linked to the platform and transacts on a peer-to-peer basis with other clients.” In addition to trading cryptocurrencies, the company also plans to allow customers to “trade in cryptographic representations of publicly listed securities,” thereby permitting customers to purchase, sell, or trade the securities tokens on the platform. The company will also be able to transfer customers’ shares of securities tokens from the platform to a customer’s traditional brokerage account. The company explained that these transactions of securities tokens will be covered by the company’s affiliate’s broker-dealer license.
DFPI concluded that because the Department has not yet “determined whether the issuance of tokenized versions of the U.S. Dollar or securities, or their use to trade cryptocurrencies, is money transmission,” it will not require the company to obtain an MTA license in order to perform the aforementioned services or to issue tokenized version of the U.S. dollar or securities. DFPI noted, however, that its conclusions are subject to change, and emphasized that its letter does not address whether the proposed activities are subject to licensure or registration under other laws, including the Corporate Securities Law of 1968.
CSBS provides tips on NMLS annual renewal
On October 20, the Conference of State Bank Supervisors (CSBS) announced that individuals and businesses in the mortgage, money transmission, debt collection, and consumer financial services industry are encouraged by state regulators to prepare for November 1, which is the beginning of the Nationwide Multistate Licensing System (NMLS) annual license renewal. The announcement noted the number of individual state licenses eligible for renewal is 13 percent higher than the same time last year, while the number of company licenses eligible for renewal is up 16 percent compared to this time last year. CSBS provided five tips for licensees to prepare for NMLS renewal, which include, among other things, resetting NMLS passwords to conform with new requirements that went into effect this past March and to review state-specific renewal requirements. CSBS also noted that the renewal period in most states runs from November 1 to December 31.
Arizona streamlines DBA licensing requirements
At the end of September, amended financial services licensing provisions under Arizona SB 1394 took effect. SB 1394 streamlines licensing requirements for companies that are currently required to obtain separate licenses for trade names or assumed names (often known as “doing business as” or DBAs). Specifically, SB 1394 will allow most companies that the Department of Insurance and Financial Institutions (DIFI) licenses to operate with additional trade names under a single license, provided the company notifies DIFI in writing prior to using the assumed name or trade name. Companies, however, may not use an assumed name or trade name that (i) is “so substantially similar” to another company’s name that it may cause public uncertainty or confusion; or (ii) may deceive or mislead the public as to the type of business conducted by the company. DIFI applauded the bill’s passage in an announcement released earlier this year, saying consumers will still be able to look up companies under a trade name and file complaints against a company’s trade name. “Licensees will save time and money by linking additional DBAs to a single license name without having to pay for and maintain multiple licenses,” DIFI said, noting that it still “maintains all regulatory authority including the ability to investigate, examine, and take action against the parent business.”
California amends certain debt collector licensing provisions
On September 27, the California governor signed AB 156, which, among other things, amends various provisions of the Debt Collection Licensing Act to allow any debt collector that submits an application to the commissioner of the Department of Financial Protection and Innovation before January 1, 2023, to operate pending the approval or denial of the application. The amendments also authorize the commissioner to issue a conditional license pending the receipt and review of fingerprints and related information. Additional provisions state that a conditional license will expire under certain conditions, including the issuance of an unconditional license. The amendments also grant the commissioner authorization to deem an application abandoned. The amendments take effect January 1, 2023.
Oregon issues remote work guidance to licensed loan originators
On September 21, the Oregon Department of Consumer and Business Services filed permanent administrative order FSR 3-2022 with the Secretary of State to allow licensed loan originators and employees to work from home. Under the order, Oregon licensed mortgage loan originators “may originate loans from a location other than from a licensed branch office if the location is the licensed mortgage loan originator’s home; the licensed mortgage loan originator is an employee of a mortgage banker or mortgage broker; and the mortgage banker or the mortgage broker complies with OAR 441-860- 0040, as applicable.” Mortgage bankers or brokers must have in place appropriate policies and procedures to supervise licensees working from home, including data security measures to protect consumers’ personal data. Additionally, licensees working from home “are prohibited from engaging in person with consumers for loan origination purposes at the home of the loan originator or employee, unless the home is licensed as a branch.” Licensees may, however, “engage with consumers for loan origination purposes at the home of the loan originator or employee by means of conference telephone or similar communications equipment that allows all persons participating in the visitation to hear each other, provided that participation is controlled and limited to those entitled to attend, and the identity of participants is determinable and reasonably verifiable.” Licensees who work from home are also prohibited from keeping any physical business records at any location other than a licensed location, and must also ensure that all origination records are available at a licensed location.
California updates mortgage licensing requirements
On September 23, the California governor signed SB 1495. The bill, among other things (i) updates requirements that the assurances required as a condition of license renewal would be that the licensee had, during the preceding 2-year period, informed themselves of those developments; (ii) expands the scope of the crime of perjury, thereby imposing a state-mandated local program; (iii) refers to the Nationwide Mortgage Licensing System and Registry in the provisions of the Real Estate Law as the “Nationwide Multistate Licensing System and Registry”’; and (iv) for real estate broker license applicants, moves the component on state and federal fair housing laws to the real estate practice course instead of the legal aspects of real estate course, and delays the revision to the real estate practice course until 2024. The bill also updates definitions of “SAFE Act,” and “mortgage loan originator.” The bill is effective January 1, 2023.
3rd Circuit: Debt buyer not required to be licensed under Pennsylvania law
On September 19, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in an FDCPA suit, finding that a defendant debt buyer was not required to be licensed under Pennsylvania law when it attempted to collect interest that had accrued at a rate of more than 6 percent under the original credit card agreement. According to the opinion, the plaintiff opened a credit card with a bank, which had an interest rate of 22.9 percent. The plaintiff defaulted on a debt he accrued on the card, and the debt was subsequently charged-off and sold by the bank to the defendant. The plaintiff argued that the defendant violated the FDCPA since the interest rate was limited by the Pennsylvania Consumer Discount Company Act (CDCA), which states that an unlicensed firm “in the business of negotiating or making loans or advances of money on credit [less than $25,000]” may not collect interest at an annual interest rate over 6 percent. The district court granted the defendant’s motion to dismiss, ruling that the defendant was entitled to collect interest above 6 percent because it held a license under a different state law.
On the appeal, the 3rd Circuit found that the CDCA applies to companies that arrange for or negotiate loans with certain parameters, and that there is nothing in the plaintiff’s amended complaint to suggest that the defendant is in the business of negotiating loans. The appellate court noted that the plaintiff’s allegations “indicate that [the defendant] purchases debt, such as [plaintiff’s] credit card account that [the bank had] charged off. But even with that allegation as a starting point, it is not reasonable to infer that an entity that purchases charged-off debt would also be in the business of negotiating or bargaining for the initial terms of loans or advances.” The appellate court further noted that “the amended complaint cuts against such an inference: it alleges that [the bank], not [the defendant], set the annual interest rate for [plaintiff’s] use of the credit card for loans and advances at 22.90%. Thus, with the understanding that negotiate means ‘to bargain’ and not ‘to transfer,’ [the plaintiff’s] allegations do not support an inference that [defendant] is in the business of negotiating loans or advances.”
DFPI proposal would consider ISAs as student loans
On September 9, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking to adopt new regulations and amend current regulations implementing the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (formerly the Department of Business Oversight) (previously covered by InfoBytes here). The proposed rulemaking also outlines new clarifications to the Student Loans: Borrower Rights Law, which was enacted in 2020 (effective January 1, 2021) to provide new requirements for student loan servicers (previously covered by InfoBytes here).
In its initial statement of reasons for the new regulations, DFPI noted that since the Act took effect five years ago, additional private student loan financing products have emerged, such as income share agreements and installment contracts, which use terminology and documentation distinct from traditional loans. DFPI commented that while lenders and servicers of these products have asserted that their products do not fall within the definition of a student loan and are not subject to the statute’s requirements, these education financing products serve the same purpose as traditional loans—“help pay the cost of a student’s higher education"—and are therefore student loans subject to the Act, and servicers of these products must be licensed and comply with all applicable laws. The proposed rulemaking, among other things, (i) defines the term “education financing products,” which now fall under the purview of the Act, along with other related terms; (ii) amends various license application requirements, including amended financial requirements for startup applicants; (iii) outlines provisions related to non-licensee (e.g., servicers that do not require a license but that are subject to the Student Loans: Borrower Rights Law) filing requirements; and (iv) specifies that servicers of all education financing products must submit annual aggregate student loan servicing reports to DFPI. The proposed rulemaking also removes certain unnecessary requirements based on DFPI’s experience in administering the Act to reduce the regulatory burden.
Comments on the notice of proposed rulemaking are due October 28.
D.C. Department of Insurance, Securities and Banking says certain Bitcoin activity subject to money transmission laws
Recently, the District of Columbia’s Department of Insurance, Securities and Banking (DISB) issued a bulletin informing industry participants engaging in or planning to engage in money transmission involving Bitcoin or other virtual currency “used as a medium of exchange, method of payment or store of value in the District” that such transactions require a money transmitter license. Specifically, the bulletin noted that DISB considers Bitcoin to be money for money transmission purposes. Relying on United States v. Larry Dean Harmon, DISB stated that while “money transmission is vaguely defined in DC Code,” the court’s decision “relied on the common use of the term “money” to mean a “medium of exchange, method of payment or store of value,” and that therefore Bitcoin functions like money. The bulletin also noted that the court found that while the D.C. Money Transmitters Act of 2000 specifically defined certain banking and financial terms, it did not define “money,” thereby reasoning “that the goal of the MTA is to regulate all kinds of transfers of funds, whether fiat currency, virtual currency or cryptocurrencies.”
Additionally, DISB noted that “engaging in the business of ‘money transmission’” includes “transactions where entities receive for transmission, store, and/or take custody, of Bitcoin and other virtual currencies from consumers via kiosks (aka BTMs), mobile applications and/or online transactions.” However, transactions where entities propose to sell and buy Bitcoin and other virtual currencies from consumers in exchange for cash payments via kiosks and/or online transactions are not considered to be money transmission. Entities that plan to engage in covered activities are subject to money transmission licensing requirements, DISB stated, explaining that whether an entity is required to obtain a money transmitter license depends on the individual facts and circumstances of each applicant, which include but are not limited to an applicant’s proposed business plan and flow of funds, as well as an applicant’s business model.
Connecticut fines collection agency $100,000 and revokes license
On August 18, the Connecticut Banking Commissioner revoked a consumer collection agency’s license after finding that it failed to provide requested information during an examination. Following an examination in May, the commissioner issued a “Notice of Automatic Suspension, Notice of Intent to Revoke Consumer Collection Agency License, Notice of Intent to Issue Order to Cease and Desist, Notice of Intent to Impose Civil Penalty and Notice of Right to Hearing” to the collection agency warning that if it failed to request a hearing within 14 days “the allegations would be deemed admitted.” According to the order, due to the collection agency’s failure to respond to the notices, the commissioner was “unable to determine that the financial responsibility, character, reputation, integrity and general fitness of Respondent are such to warrant belief that the business will be operated soundly and efficiently.” The collection agency also allegedly failed to maintain a surety bond that ran in accordance with its consumer collection agency license. The commissioner revoked the collection agency’s license to operate in the state, ordered it to cease and desist from violating Section 36a-17(e) of the 2022 Supplement to the General Statutes which requires it to make its records available, and imposed a $100,000 civil penalty.