InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FinCEN highlights use of BSA reporting data
On April 25, FinCEN released its year-in-review for FY 2022. The annual summary provided insights into the agency’s efforts to support law enforcement and national security agencies, as well as statistics from Bank Secrecy Act (BSA) filings. FinCEN reported that BSA data was used to advance several law enforcement missions, including in 36.3 percent of active complex financial crimes investigations, 27.5 percent of active public corruption investigations, and 20.6 percent of active international terrorism investigations. Additionally, FinCEN noted that in FY 2022 there were over 7,600 Section 314(b)-registered financial institutions. Section 314(b) of the USA PATRIOT Act allows registered entities to share information about financial activity with one another to help entities of all sizes identify and report suspicious activity. FinCEN further reported that 92 percent of domestic law enforcement agencies that query BSA data “find the resulting financial intelligence valuable to the detection and deterrence of illicit activity.”
FDIC announces Oklahoma disaster relief
On April 28, the FDIC issued FIL-22-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Oklahoma affected by severe storms, straight-line winds, and tornados from April 19 to 20. The FDIC acknowledged the unusual circumstances faced by affected institutions and encouraged those institutions to work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements and instructed institutions to contact the Dallas Regional Office if they expect delays in making filings or are experiencing difficulties in complying with publishing or other requirements.
CFPB proposal would apply ATR requirements to PACE financing
On May 1, the CFPB announced a proposed rule which would prescribe ability-to-repay (ATR) rules to residential Property Assessed Clean Energy (PACE) financing and apply TILA’s civil liability provisions for violations. The proposal, required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, would amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE loans. PACE loans are designed to finance clean energy improvements on a borrower’s home and are secured by that residence. The Bureau explained that the loans are repaid through a borrower’s property tax payments, which increase over time and which remain with the property even if the borrower sells the property.
If finalized, the proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would (i) clarify an existing exclusion to Regulation Z’s definition of credit relating to tax liens and tax assessments to provide that this specific exclusion “applies only to involuntary tax liens and involuntary tax assessments”; (ii) make several adjustments to PACE financing loan estimate and closing disclosure requirements, including providing new model forms specifically designed for PACE transactions, and exempting PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans and from the requirement to provide periodic statements; (iii) prescribe ATR requirements for residential PACE financing that account for the unique nature of these transactions; (iv) provide that a PACE transaction is not a qualified mortgage; (v) extend TILA Section 130’s ATR requirements and liability provisions to any “PACE company” with substantial involvement in making credit decisions for a PACE transaction; and (vi) clarify how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.
The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement. Comments on the proposed rule are due July 26 or 30 days after publication in the Federal Register, whichever is later.
To accompany the proposed rule, the Bureau released several fast facts breaking down and clarifying proposed coverage and the suggested changes. The Bureau also released a data point report documenting research findings on PACE financing in California and Florida from July 2014 through June 2020. Among other things, the report found that PACE loans create an increase in negative credit outcomes for borrowers, particularly with respect to mortgage delinquency. Additionally, PACE borrowers were more likely to have higher interest rates and increased credit card balances and were more likely to live in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states. The report noted that “PACE outcomes improved significantly in California after that State began requiring PACE companies to consider ability to pay before making a loan.”
Republicans say regulators are coordinating on de-banking digital assets
On April 26, House Financial Services Committee Chairman Patrick McHenry (R-NC), Digital Assets, Financial Technology and Inclusion Subcommittee Chairman French Hill (R-AR), and Oversight and Investigations Subcommittee Chairman Bill Huizenga (R-MI) sent separate letters to the Federal Reserve Board Chair Jerome Powell, FDIC Chair Martin J. Gruenberg, and acting Comptroller of the Currency Michael J. Hsu seeking information to help the lawmakers determine whether there exists a “coordinated strategy to de-bank the digital asset ecosystem in the United States” and “suppress innovation.”
The text common to each letter pointed to actions taken by the federal prudential regulators as discouraging banks from offering services to digital asset firms. The lawmakers cited OCC guidance issued in 2021 (Interpretive Letter 1179, covered by InfoBytes here), which stated that banks can engage in certain cryptocurrency activities as long as they are able to “demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner” and the banks receive a regulator’s written non-objection. Also discussed were FDIC instructions released in April 2022, which directed banks to promptly notify the agency if they intend to engage in, or are currently engaged in, any digital-asset-related activities, as well as a joint statement issued by the regulators in January that highlighted key risks banks should consider when choosing to engage in cryptocurrency activities. (Covered by InfoBytes here and here.)
Referring to certain recent bank collapses, the lawmakers argued that they do not believe that the underlying problems were caused by digital asset-related customers. The lawmakers requested information related to non-public records and communications between agency employees and supervised banks relating to the aforementioned guidance by May 9.
CFPB examines removal of medical collections from credit reports
On April 26, the CFPB released a data point report estimating that nearly 23 million American consumers will have at least one medical collection removed from their credit reports when all medical collection tradelines under $500 are deleted. Additionally, the Bureau found that the removal will result in approximately 15.6 million people having all medical collections removed. The reporting change occurred as part of an undertaking by the three nationwide consumer reporting companies announced earlier in April. Examining credit reports that occurred between 2012 and 2020, the Bureau studied the impact of this change and noted that on average consumers experienced a 25-point increase in their credit scores in the first quarter following the removal of their last medical collection. The average increase, the report found, was 21 points for consumers with medical collections under $500 compared to 32 points for those with medical collections over $500. The report further discussed the association between the removal of medical collection tradelines and the amount of available credit for revolving and installment accounts, as well as increases in first-lien mortgage inquiries (attributable, the Bureau believes, to consumers working to remove these tradelines as part of applying for mortgage credit).
Treasury announces strategy to address financial institution de-risking
The U.S. Treasury Department recently released its “first of its kind” strategy to address financial institution de-risking. Mandated by the Anti-Money Laundering Act of 2020, the 2023 De-Risking Strategy examines customer categories most often impacted by de-risking and provides findings and policy recommendations to address ongoing problems. Treasury defines de-risking as financial institutions restricting or terminating business relationships indiscriminately with broad classes of customers rather than analyzing and managing specific risks in a targeted manner. The report found that customers most frequently subject to de-risking are small-to-medium-sized money service businesses (MSB) that are often used by immigrant communities to send remittances abroad. Other commonly impacted customer categories include non-profit organizations operating overseas in high-risk jurisdictions and foreign financial institutions with low correspondent banking transaction volumes. De-risking is particularly acute for entities operating in financial environments characterized by significant money laundering/terrorism financing risks, the report notes. Identifying “profitability as the primary factor in financial institutions’ de-risking decisions,” the report found that profitability is influenced by several factors, including the cost to implement anti-money laundering/countering the finance of terrorism (AML/CFT) compliance measures and systems commensurate with customer risk.
The report presents several recommendations for policymakers, such as promoting consistent supervisory expectations and training federal examiners to consider the effects of de-risking, as well as suggesting that financial institutions analyze account termination notices and notice periods for non-profits and MSBs to identify ways to support longer notice periods where possible. Treasury also encourages heightened international cooperation to strengthen foreign jurisdictions’ AML/CFT regimes, and encourages policymakers to continue assessing the risks and opportunities of innovative and emerging technologies for AML/CFT compliance solutions. Treasury may also consider requiring financial institutions to have “reasonably designed and risk-based AML/CFT programs supervised on a risk basis, possibly taking into consideration the effects of financial inclusion.”
OFAC reaches $7.6 million settlement with online digital-asset trading platform
On May 1, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $7.6 million settlement with a Massachusetts-based online trading and settlement platform to resolve potential civil liability stemming from allegations that the platform allowed customers in sanctioned jurisdictions to engage in digital asset-related transactions. According to OFAC’s web notice, between January 2014 and November 2019, the platform allegedly permitted customers to make more than $15.3 million in trades, deposits, and withdrawals, despite having reason to know that the customers’ locations—based on both Know Your Customer (KYC) information and internet protocol address data—were in jurisdictions subject to comprehensive OFAC sanctions. OFAC noted that although the platform implemented a sanctions compliance program to screen new customers, it did not retroactively screen existing customers, thus allowing these customers to continue to conduct trading activity. While the platform made efforts to identify and restrict accounts with a nexus to certain sanctioned jurisdictions, compliance deficiencies resulted in the platform processing 65,942 online digital asset-related transactions for 232 customers apparently located predominantly in Crimea, but also in Cuba, Iran, Sudan, and Syria.
In arriving at the settlement amount, OFAC considered, among other things, that the platform failed to exercise due caution or care for its sanctions compliance obligations and had reason to know that certain customers were located in sanctioned jurisdictions. Additionally, the settlement amount reflects that the platform did not voluntarily disclose the apparent violations. OFAC also considered several mitigating factors, including that: (i) the platform was a small start-up when most of the apparent violations occurred; (ii) the platform has not received a penalty notice from OFAC in the preceding five years; (iii) the platform cooperated with OFAC during the investigation and undertook numerous remedial measures; and (iv) the volume of apparent violations represented a very small percentage of the total volume of transactions conducted on the platform annually.
Providing context for the settlement, OFAC said the “action highlights that online digital asset companies—like all financial service providers— are responsible for ensuring that they do not engage in transactions prohibited by OFAC sanctions, such as providing services to persons in comprehensively sanctioned jurisdictions. To mitigate such risks, online digital asset companies should develop a tailored, risk-based sanctions compliance program.”
FTC, Pennsylvania ban debt collection operation
On April 26, the FTC and the Commonwealth of Pennsylvania announced that the U.S. District Court for the Eastern District of Pennsylvania recently entered an order permanently banning a debt collection firm and two associated individuals from the industry. The FTC and Pennsylvania sued the defendants in 2020 for their involvement in a telemarketing operation that allegedly misrepresented “no obligation” trial offers to organizations and then enrolled recipients in subscriptions for several hundred dollars without their consent (covered by InfoBytes here). The complaint charged the defendants with violating the FTC Act by, among other things, illegally threatening the organizations if they did not pay for the unordered subscriptions and claimed the debt collection firm handled collections nationwide despite not having a valid corporate registration in any state and only being licensed to collect debt in Washington State. In addition to permanently enjoining the defendants from participating in the debt collection industry (whether directly or through an intermediary), the court order requires the defendants’ continued cooperation as the case proceeds against the other defendants.
CFPB warns debt collectors on “zombie mortgages”
On April 26, the CFPB issued an advisory opinion affirming that the FDCPA and implementing Regulation F prohibit covered debt collectors from suing or threatening to sue to collect time-barred debt. As such, a debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate federal law, the Bureau said. The agency stated that numerous consumers have filed complaints relating to “zombie second mortgages,” where homeowners, operating under the assumption that a mortgage debt was forgiven or was satisfied long ago by loan modifications or bankruptcy proceedings, are contacted years later by a debt collector threatening foreclosure and demanding payment of the outstanding balance along with interest and fees.
The Bureau explained that, leading up to the 2008 financial crisis, many lenders originated mortgages without considering consumers’ ability to repay the loans. Focusing on “piggyback” mortgages (otherwise known as 80/20 loans, in which consumers took out a first lien loan for 80 percent of the value of the home and a second lien loan for the remaining 20 percent of the home’s valuation), the Bureau stated that most lenders did not pursue payment on the second mortgage but instead sold them off to debt collectors. Years later, some of these debt collectors are demanding repayment of the second mortgage and threatening foreclosure, the Bureau said, adding that for many of the mortgages, the debts have become time barred. The Bureau commented that, in most states, consumers can raise this as an affirmative defense to prevent a debt collector from recovering on the debt using judicial processes such as foreclosure. Additionally, because “Regulation F’s prohibition on suits and threats of suit on time-barred debt is subject to a strict liability standard,” a debt collector that sues or threatens to sue “violates the prohibition ‘even if the debt collector neither knew nor should have known that a debt was time-barred,’” the Bureau said. The advisory opinion clarified that these restrictions apply to covered debt collectors, including individuals and entities seeking to collect defaulted mortgage loans and many of the attorneys that bring foreclosure actions on their behalf.
CFPB Director Rohit Chopra delivered remarks during a field hearing in Brooklyn, New York, in which he emphasized that the Bureau will work with state enforcement agencies to take action against covered debt collectors who break the law. He reminded consumers that they can also sue debt collectors themselves under the FDCPA.
Agencies release statement on LIBOR sunset; CFPB amends Reg Z to reflect transition
On April 26, the CFPB joined the Federal Reserve Board, FDIC, NCUA, and OCC in issuing a joint statement on the completion of the LIBOR transition. (See also FDIC FIL-20-2023 and OCC Bulletin 2023-13.) According to the statement, the use of USD LIBOR panels will end on June 30. The agencies reiterated their expectations that financial institutions with USD LIBOR exposure must “complete their transition of remaining LIBOR contracts as soon as practicable.” Failure to adequately prepare for LIBOR’s discontinuance may undermine financial stability and institutions’ safety and soundness and could create litigation, operational, and consumer protection risks, the agencies stressed, emphasizing that institutions are expected to take all necessary steps to ensure an orderly transition. Examiners will monitor banks’ efforts throughout 2023 to ensure contracts have been transitioned away from LIBOR in a manner that complies with applicable legal requirements. The agencies also reminded institutions that safe-and-sound practices include conducting appropriate due diligence to ensure that replacement alternative rate selections are appropriate for an institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities. Institutions should also “understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it,” the agencies advised. Both banks and nonbanks should continue efforts to adequately prepare for LIBOR’s sunset, the Bureau said in its announcement, noting that the agency will continue to help institutions transition affected consumers in an orderly manner.
The Bureau also issued an interim final rule on April 28 amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. The interim final rule updates the Bureau’s 2021 LIBOR Transition Rule (covered by InfoBytes here) to reflect the enactment of the Adjustable Interest Rate Act of 2021 and its implementing regulation promulgated by the Federal Reserve Board (covered by InfoBytes here). Among other things, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. The interim final rule also (i) makes conforming changes to terminology used to identify LIBOR replacement indices; and (ii) provides an example of a 12-month LIBOR tenor replacement index that meets certain standards within Regulation Z. The Bureau also released a Fast Facts summary of the interim final rule and updated the LIBOR Transition FAQs.
The interim final rule is effective May 15. Comments are due 30 days after publication in the Federal Register.