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OFAC sanctions Iranian officials for serious human rights abuses
On March 8, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions, pursuant to Executive Orders 13553 and 13846, against several Iranian regime officials and entities for serious human rights abuses against women and girls. Included among the sanctioned individuals are “the top commander of the Iranian army and a high-ranking leader in the Islamic Revolutionary Guard Corps (IRGC), as well as an Iranian official who was central to the regime’s efforts to block internet access.” OFAC also imposed sanctions against three Iranian companies and their leadership for their role in enabling the violent repression by the Iranian Law Enforcement Forces of peaceful protestors. The actions, taken in coordination with the EU, UK, and Australia, mark the continued effort to impose sanctions on persons who engage in serious human rights abuse or censorship with respect to Iran.
As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction 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.” OFAC further warned that “persons that engage in certain transactions with the persons designated today may themselves be exposed to sanctions or subject to an enforcement action,” and that “any foreign financial institution that knowingly facilitates a significant transaction or provides significant financial services for any of the persons designated today could be subject to U.S. sanctions.”
SEC files emergency action on $100 million crypto fraud
On March 6, the SEC announced it had filed an emergency action against a Miami-based investment adviser and one of its principals (collectively, “defendants”) in connection with a $100 million crypto asset fraud scheme. According to the SEC’s complaint, filed in the U.S. District Court for the Southern District of Florida, the defendants allegedly promised investors that their money would be primarily used to trade crypto assets and would generate returns through separately managed accounts and five private funds. The SEC alleged, however, that the defendants “disregarded the [funds’] structure, commingled investor assets, and used over $3.6 million to make Ponzi-like payments to fund investors.” Moreover, the SEC claimed that the defendants falsely represented that one of the funds received an audit opinion from a “top four auditor,” when in fact none of the funds ever received an audit opinion. The individual defendant also allegedly misappropriated investor money for personal use and provided altered documents with inflated bank account balances to a third-party administrator of some of the funds.
The SEC’s complaint alleges violations of the antifraud provisions of the federal securities laws and seeks permanent injunctions, disgorgement, prejudgment interest, and civil money penalties. The SEC is also seeking an officer and director bar and conduct-based injunction against the individual defendant. Additionally, the complaint includes a list of “relief defendants” and seeks disgorgement from each of the funds and from another entity that allegedly received approximately $12 million from the defendants and the funds. The announcement noted that the SEC successfully received an asset freeze, appointment of a receiver, and other emergency relief against the defendants.
DFPI issues more proposed changes to Student Loan Servicing Act
On March 6, the California Department of Financial Protection and Innovation (DFPI) issued a notice of second modifications to proposed regulations under the Student Loan Servicing Act (Act), which provides for the licensure, regulation, and oversight of student loan servicers by DFPI (covered by InfoBytes here). Last September, DFPI issued proposed rules to clarify, among other things, that income share agreements (ISAs) and installment contracts, which use terminology and documentation distinct from traditional loans, serve the same purpose as traditional loans (i.e., “help pay the cost of a student’s higher education”), and are therefore student loans subject to the Act. As such, servicers of these products must be licensed and comply with all applicable laws, DFPI said. (Covered by InfoBytes here.) In January, DFPI issued modified proposed regulations, outlining additional changes to definitions, time zone requirements, borrower protections, and examinations, books, and records requirements. (Covered by InfoBytes here.)
Following its consideration of public comments on the modified proposed regulations, DFPI is proposing the following additional changes:
- Amendments to definitions. Among other changes, the proposed changes amend “education financing products” to include private student loans which are not traditional loans. This change reverts the definition back to the word used in the original proposed rules. DFPI explained that this change “is necessary because the term ‘private student loan’ is defined later in the rules . . . but the term ‘private education loan’ is not separately defined.” The proposed changes also clarify “that the payment cap, which is the maximum amount payable under an income share agreement, may be expressed as an APR or an amount or a multiple of the amount advanced, covered, credited, deferred, or funded, excluding charges related to default.” Additionally, the changes revise the definition of “qualifying payment” to explain that “qualifying payments count toward maximum payments and the payment cap but not also the payment term.”
- Borrower protections. The first round of changes revised the time zone in which a payment must be received to be considered on-time to Pacific Time, in order to protect California borrowers. However, in further modifying the timing requirement, DFPI explained in its notice that “[r]equiring cut off times different than those posted on the servicer’s website just for California borrowers would deviate from standard current practices, would require system changes and enhancements that would be very expensive to implement and could cause confusion and operational risk to both servicers and borrowers. Limiting the exception to only those situations where the servicer has not posted the cut off time aligns with servicers’ operational capabilities and national banking standards.”
- Qualified written requests. The proposed changes clarify requirements for sending acknowledgments of receipt and responses to qualified written requests.
The second modifications also clarify provisions related to education financing servicing report requirements, and provide that upon notice, a student loan servicer must make available for inspection its books, records, and accounts at a licensed location designated by the DFPI or electronically.
Comments on the second modifications are due March 23.
6th Circuit: Each alleged FDCPA violation carries its own statute of limitations
On March 1, the U.S. Court of Appeals for the Sixth Circuit reversed the dismissal of a debt collection action, holding that every alleged violation of the FDCPA has its own statute of limitations. According to the opinion, the plaintiff financed a furniture purchase through a retail installment contract. While making payments on the contract, the company purportedly sold the debt to a third party. After the plaintiff defaulted on the debt, the third party—through the defendant attorney—sued the plaintiff in state court to recover the unpaid debt and attorney’s fees. After the third party eventually voluntarily dismissed the suit due to questions of whether the debt transfer was valid, the plaintiff sued the attorney for violating the FDCPA, alleging the defendant doctored the retail installment contract (RIC) to make it appear as if the debt assignment was legal. The defendant moved to dismiss the complaint as time-barred by the FDCPA’s one-year statute of limitations. The district court dismissed the case citing the complaint was filed more than a year after the third party filed the state court complaint and later denied both the plaintiff’s motion for reconsideration and the defendant’s motion for attorney’s fees. Both parties appealed.
On appeal, the 6th Circuit agreed that the plaintiff made a timely claim. Plaintiff argued that at least one of her claims fell within the one-year statute of limitations—the attorney’s filing of the updated RIC that allegedly showed the “contrived transfer” of debt—and maintained that she filed within one year of that alleged violation. The defendant countered, among other things, that the plaintiff’s claim was time-barred because it was a continuing effect of the third party’s initial filing of the state court complaint. The 6th Circuit reviewed caselaw on the “continuing-violation doctrine” and determined that the doctrine was not relevant to the case, stating that the plaintiff never invoked it because she was not “trying to sweep in acts that would otherwise be outside of the filing period,” but rather sought “redress for a single claim that is not time-barred.” The 6th Circuit emphasized that the plaintiff’s “single claim is independent of [the third party’s] initial filing of the lawsuit—not a continuing effect of it—because it is a standalone FDCPA violation.” The opinion further stated that the only date considered for the statute of limitations is the date a lawsuit is filed when subsequent FDCPA violations within that lawsuit occurred, and wrote that “[i]f we were to only consider the date [the third party] filed suit . . . we would create a rule that disregards the fact that §1629k(d) creates an independent statute of limitations for each violation of the FDCPA . . . . And if we adopted [the defendant’s] approach, we’d be saying that ‘so long as a debtor does not initiate suit within one year of the first violation, a debt collector [is] permitted to violate the FDCPA with regard to that debt indefinitely and with impunity.’”
CFPB report looks at junk fees; official says they remain agency focus
On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:
- Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
- Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
- Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
- Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
- Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.
CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.
CFPB and NLRB to share info on employer-driven debt practices and illegal surveillance
On March 7, the CFPB and the National Labor Relations Board (NLRB) entered into an information sharing agreement to create a formal partnership for addressing unlawful practices involving employer surveillance and employer driven debt. The agencies stressed in the joint announcement that their Memorandum of Understanding will help identify and end employer practices that cause workers to incur debt by forcing them to pay for employer-mandated training or equipment that they might not need, or that surveil workers and sell their personal data to financial institutions, insurers, and other employers. These actions, the agencies said, may violate the FCRA and other consumer financial protection laws. As previously covered by InfoBytes, last June the Bureau launched an inquiry into employer-driven debt practices. The request for information focused on debt obligations incurred by consumers in the context of an employment or independent contractor arrangement, and sought information on “prevalence, pricing and other terms of the obligations, disclosures, dispute resolution, and the servicing and collection of these debts.”
“Many workers discover that getting a job can mean piling up debt instead of making a living,” CFPB Director Rohit Chopra said in the announcement. “Information sharing with the [NLRB] will support our efforts to end debt traps that stop workers from leaving one job for another.” NLRB General Counsel Jennifer Abruzzo agreed, adding that as the “economy, industries and workplaces continue to change, we are excited to work with CFPB to strengthen our whole-of-government approach and ensure that employers obey the law and workers are able to fully and freely exercise their rights without interference or adverse consequences.”
SEC fines gaming company $4 million as successor to a company charged with FCPA violations
On March 6, the SEC announced that an Ireland-based global gaming and sports betting company, as successor-in-interest to a company it acquired in 2020 (the “acquired company”), agreed to pay a $4 million civil money penalty to settle claims that the acquired company violated the books and records and internal accounting controls provisions of the FCPA by using third-party consultants in Russia. According to the SEC’s order, the acquired company operated several gaming brands, including an online poker website. The SEC said that between May 26, 2015 and May 15, 2020, while the acquired company’s shares were registered with the SEC, it paid roughly $8.9 million to consultants in Russia in an effort to legalize poker in the country. During this time period, the SEC explained, the acquired company lacked sufficient internal accounting controls over its Russian operations with respect to third-party consultants, and failed to “consistently make and keep accurate books and records regarding its consultant payments in Russia.” Many of these third-party consultants, the SEC said, were “retained without adequate due diligence or written contracts, and paid without adequate proof of services.” The order indicated that certain payments were inaccurately recorded as lobbying fees, and that some payments went towards reimbursements for gifts given to individuals, including Russian government officials, and to a Russian state agency responsible for administering internet censorship filters. The SEC charged the Ireland company, as successor-in-interest to the acquired company, with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934. The resolution requires the Ireland company, which neither admitted nor denied the allegations, to pay a $4 million civil money penalty. The SEC recognized the Ireland company’s cooperation and remedial efforts.
District Court says EFTA applies to cryptocurrency
On February 22, the U.S. District Court for the Southern District of New York partially granted a cryptocurrency exchange’s motion to dismiss allegations that its inadequate security practices allowed unauthorized users to drain customers’ cryptocurrency savings. Plaintiffs claimed the exchange and its former CEO (collectively, “defendants”) failed to correctly implement a two-factor authentication system for their accounts and misrepresented the scope of the exchange’s security protocols and responsiveness. Plaintiffs filed a putative class action alleging violations of the EFTA and New York General Business Law, along with claims of negligence, negligent misrepresentation, breach of contract, breach of warranty, and unjust enrichment. The defendants moved to dismiss, in part, by arguing that the EFTA claim failed because cryptocurrency does not constitute “funds” under the statute. The court denied the motion as to the plaintiffs’ EFTA claim, stating that the EFTA does not define the term “funds.” According to the court, the ordinary meaning of “cryptocurrency” is “a digital form of liquid, monetary assets” that can be used to pay for things or “used as a medium of exchange that is subsequently converted to currency to pay for things.” In allowing the claim to proceed, the court referred to a final rule issued by the CFPB in 2016, in which the agency, according to the court’s opinion, “expressly stated that it was taking no position with respect to the application of existing statutes, like the EFTA, to virtual currencies and services.” In the final rule, the Bureau stated that it “continues to analyze the nature of products or services tied to virtual currencies.” The court dismissed all of the remaining claims, citing various pleading deficiencies, and finding, among other things, that the “deceptive acts or practices” claim under New York law failed because plaintiffs did not identify specific deceptive statements the defendants made or deceptive omissions for which the defendants were responsible.
Hsu presses for global supervision of crypto
On March 6, acting Comptroller of the Currency Michael J. Hsu commented that the collapse of a major cryptocurrency exchange has underscored a need for consolidated supervision of global cryptocurrency firms. Speaking before the Institute for International Banker’s Annual Washington Conference, Hsu offered thoughts on how to build and maintain trust in global banking. “To be trustworthy, global crypto firms need a lead regulator who has authority and responsibility over the enterprise as a whole,” Hsu said. “Until that is done, crypto firms with subsidiaries and operations in multiple jurisdictions will be able to arbitrage local regulations and potentially play shell games using inter-affiliate transactions to obfuscate and mask their true risk profile.” Hsu pointed out that in order to conduct business in the U.S. foreign banks must be supervised by a home country via “a lead regulator with visibility and authority over the entirety of the bank’s global activities.” In contrast, not a single crypto firm is currently subject to consolidated supervision, Hsu said.
Hsu drew comparisons between a now-defunct international bank that led to significant changes in how global banks are supervised and the collapsed crypto exchange, arguing that there are “striking similarities” between the two, including that both (i) “faced fragmented supervision by a combination of state, federal, and foreign authorities”; (ii) “lacked a lead or ‘home’ regulator with authority and responsibility for developing a consolidated and holistic view of the firms”; (iii) “operated across jurisdictions where there was no established framework for regulators to share information on the firms’ operations and risk controls”; and (iv) “used multiple auditors to ensure that no one could have a holistic view of their firms.” To close the gap in the crypto sector, Hsu said action “will have to take place outside of bank regulatory channels,” but noted that the Financial Stability Board and other international bodies have already “recognized the need for a comprehensive global supervisory and regulatory framework for crypto participants.”
CFPB publishes HMDA review
On March 3, the CFPB published findings from a voluntary review of the 2015 HMDA Final Rule issued in October 2015, as well as subsequent related amendments that eased certain reporting requirements and permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit (covered by InfoBytes here). Under Section 1022(d) of Dodd-Frank, the Bureau is required to conduct an assessment of each significant rule or order adopted by the agency under federal consumer financial law. The Bureau noted that it previously determined that the 2015 HMDA Final Rule “is not a significant rule for purposes of section 1022(d)” and said the decision to conduct the review was voluntary.
The Report on the Home Mortgage Disclosure Act Rule Voluntary Review found, among other things, that (i) “[c]onsistent with the 2015 HMDA Final Rule’s increase in the closed-end reporting threshold for depository institutions, HMDA coverage of first lien, closed-end mortgages decreased between Q1 of 2017 and Q1 of 2018, from 97.0 percent to 93.8 percent”; (ii) for all financial institutions originating closed-end mortgages, “the share of those institutions reporting HMDA data decreased between 2015 and 2020, with the largest decreases observed in 2017 and 2020” after the reporting threshold rose from 25 loan originations to 100 loan originations; (iii) revising data points to include the age of applicant and co-applicant race, ethnicity, gender, and income, increased the amount of compiled data; and (iv) analyzing data assists in detecting fair lending risk and discrimination in mortgage lending. “HMDA’s expanded transactional coverage improved the risk screening used to identify institutions at higher risk of fair lending violation by improving the accuracy of analysis and thus reducing the false positive rate at which lenders were mistakenly identified as high risk,” the report said.
The report also noted that interest rate data “provides an important observation that enables data users, including government agencies, researchers, and consumer groups to analyze mortgage pricing in order to better serve HMDA’s purposes. In particular, interest rate information brings a greater transparency to the market and facilitates enforcement of fair lending laws.” The Bureau further noted that HMDA data is “crucial” to federal regulators when conducting supervisory examinations and enforcement investigations. The Bureau commented that the “requirement to report new HMDA data points greatly increased the accuracy of supervisory data since the additional data points are now used to assess fair lending risks and are subject to supervisory exams for accurate filing to HMDA,” adding that the data is “also used to estimate appropriate remuneration amounts for harmed consumers.”