InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FinCEN releases final rule on beneficial ownership reporting
On September 29, FinCEN issued a final rule establishing a beneficial ownership information reporting requirement, pursuant to the bipartisan Corporate Transparency Act. According to FinCEN, the final rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. FinCEN noted that the final rule is designed to protect national security and strengthen the integrity and transparency of the U.S. financial system. FinCEN also released a Fact Sheet clarifying the final rule. The final rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information, according to FinCEN. The same day, Treasury Secretary Janet L. Yellen released a statement, noting that the final rule is “a major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes.”
OFAC publishes Cuba FAQ
On September 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published frequently asked question (FAQ) 1090 related to Cuba sanctions. The FAQ clarifies that “U.S. persons send remittances to Cuba using digital payments,” and that OFAC’s general licenses are self-executing, meaning that if U.S. persons assess that their transactions fall within the scope of the authorizations, “they may execute such transactions without further assurance from OFAC. For transactions that do not fall within the scope of these authorizations, U.S. persons may apply for an OFAC specific license.” OFAC further noted that it “will prioritize specific license applications seeking authorization to enable remittances to flow more freely to the Cuban people via digital payments.”
DFPI cracks down on crypto-asset Ponzi schemes
On September 27, the California Department of Financial Protection and Innovation issued desist and refrain orders against 11 entities, including nine crypto asset trading platforms, one metaverse software development company, and one decentralized finance platform for violating California securities laws. While each of the 11 entities allegedly offered and sold unqualified securities through their platforms and promised various fixed rates of return to investors, DFPI claimed that the entities actually engaged in Ponzi-like schemes and used investor funds to distribute supposed profits and returns to other investors. Additionally, DFPI accused the entities of “luring” new investors through referral programs that operated like pyramid schemes in which investors would be paid commissions to recruit new investors. Referring to these as “high yield investment programs (HYIPs),” DFPI claimed the entities provided investors with few details about the people operating the HYIPs, how the HYIPs make money, or how the HYIPs facilitate deposits and withdrawals with crypto assets, among other things. DFPI also accused 10 of the 11 entities of making material representations and omissions to investors about the qualifications of their securities under California law as well as the purported risks. DFPI said in its announcement that it had been directed by an executive order issued by the governor in May (covered by InfoBytes here) to initiate enforcement actions to stop violations of consumer financial laws and to increase residents’ awareness of the benefits and risks associated with crypto asset-related financial products and services.
States accuse crypto platform of offering unregistered securities
On September 26, the New York attorney general sued a cryptocurrency platform for allegedly offering unregistered securities and defrauding investors. New York was joined by state regulators from California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont who also filed administrative actions against the platform. The states alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance. According to the New York AG’s complaint, the platform promoted and sold securities through an interest-bearing virtual currency account that promised high returns for participating investors. The NY AG said that a cease-and-desist letter was sent to the platform last year, and that while the platform stated it was “working diligently to terminate all services” in the state, it continued to handle more than 5,000 accounts as of July. The complaint charges the platform with violating New York’s Martin Act and New York Executive Law § 63(12), and seeks restitution, disgorgement of profits, and a permanent injunction.
California’s Department of Financial Protection and Innovation (DFPI) said in a press release announcing its own action that it will continue to take “aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts.” DFPI warned companies that crypto-interest accounts are securities and are therefore subject to investor protection under state law, including disclosure of associated risks.
Trade groups object to CFPB’s revised UDAAP exam manual
On September 28, seven banking industry groups sued the CFPB and Director Rohit Chopra claiming the agency exceeded its statutory authority when it released significant revisions to the UDAAP exam manual in March, which included making clear its view that any type of discrimination in connection with a consumer financial product or service could be an “unfair” practice. (Covered by a Buckley Special Alert.) At the time of issuance, the Bureau emphasized that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service.
Plaintiff trade groups argued in their complaint filed in the U.S. District Court for the Eastern District of Texas that the Bureau violated its authority outlined in the Dodd-Frank Act by claiming it can examine entities for alleged discriminatory conduct under its UDAAP authority. They contended that “the CFPB cannot regulate discrimination under its UDAAP authority at all because Congress declined to give the CFPB authority to enforce anti-discrimination principles except in specific circumstances,” and that, moreover, the Bureau’s “statutory authorities consistently treat ‘unfairness’ and ‘discrimination’ as distinct concepts.” While the trade groups said they “fully support the fair enforcement of nondiscrimination laws,” they emphasized that they “cannot stand by while a federal agency exceeds its statutory authority, creates regulatory uncertainty, and imposes costly burdens on the business community.”
The trade groups' suit also claimed that the Bureau violated the Administrative Procedure Act by failing to go through the proper notice-and-comment process when amending the Supervision and Examination Manual. Calling the manual updates “arbitrary” and “capricious,” the trade groups claimed the changes failed to consider the Bureau’s prior position on UDAAP authority and “did not grapple with Congress’s decision to narrowly define the FTC’s unfairness authority to screen out the same kind of power that the CFPB is now claiming for itself.” The complaint also called into question the Bureau’s funding structure, arguing that because the structure violates the Appropriations Clause it should be declared unconstitutional and the exam manual updates set aside.
A statement released by the U.S. Chamber of Commerce, one of the trade group plaintiffs bringing the law suit, says the Bureau “is operating beyond its statutory authority and in the process creating legal uncertainty that will result in fewer financial products available to consumers.” U.S. Chamber Executive Vice President and Chief Policy Officer Neil Bradley added that the “CFPB is pursuing an ideological agenda that goes well beyond what is authorized by law and the Chamber will not hesitate to hold them accountable.”
Agencies announce hurricanes Fiona and Ian disaster relief guidance
On September 29, the FDIC, Federal Reserve Board, NCUA, OCC, and the Conference of State Bank Supervisors issued a joint interagency statement covering supervisory practices for financial institutions affected by Hurricanes Fiona and Ian. Among other things, the agencies informed institutions facing operational challenges that the regulators will expedite requests for temporary facilities, noting that in most cases, “a telephone notice to the primary federal and/or state regulator will suffice initially to start the approval process, with necessary written notification being submitted shortly thereafter.” The agencies also called on financial institutions to “work constructively” with affected borrowers, noting that “prudent efforts” to adjust or alter loan terms in affected areas “should not be subject to examiner criticism.” Institutions facing difficulties in complying with any publishing and reporting requirements should contact their primary federal and/or state regulator. Additionally, the agencies noted that institutions may receive Community Reinvestment Act consideration for community development loans, investments, or services that revitalize or stabilize federally designated disaster areas. Institutions are also encouraged to monitor municipal securities and loans impacted by Hurricanes Fiona and Ian.
HUD also announced disaster assistance for areas in Puerto Rico affected by Hurricane Fiona. The disaster assistance follows President Biden’s major disaster declaration on September 21. According to the announcement, effective immediately, HUD is issuing 29 regulatory and administrative waivers intended to provide flexibility and relief to impacted communities. The waivers cover the following HUD programs: The Community Development Block Grant Program, HOME Investment Partnerships Program, Housing Opportunities for Persons with AIDS Program, Continuum of Care Program, and Emergency Solutions Grant Program. HUD is also providing an automatic 90-day moratorium on foreclosures of FHA-insured home mortgages for covered properties effective September 21, as well as for mortgages to Native American borrowers guaranteed under Section 184 Indian Home Loan Guarantee program and home equity conversion mortgages. HUD is also making various FHA insurance options available to victims whose homes require repairs or were destroyed or severely damaged. HUD’s Section 203(h) program allows borrowers from participating FHA-approved lenders to obtain 100 percent financing, including closing costs, for homes in which “reconstruction or replacement is necessary.” Additionally, HUD’s Section 203(k) loan program will allow individuals to finance the purchase of a house, or refinance an existing house and the costs of repair, through a single mortgage. The program also allows homeowners with damaged property to finance the repair of their existing single-family homes. HUD will also share information on housing providers and HUD programs with FEMA and the state, and will provide flexibility to public housing agencies. Similar disaster assistance measures were also announced (see here and here) for areas of Alaska affected by severe storms, flooding, and landslides from September 15-20, and areas in Florida impacted by Hurricane Ian.
The FDIC also issued FIL-42-2022 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Puerto Rico affected by Hurricane Fiona from September 17 and later. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, 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.
Additionally, the OCC issued a proclamation permitting OCC-regulated institutions, at their discretion, to close offices affected by Hurricane Ian in Florida “for as long as deemed necessary for bank operation or public safety.” The proclamation directed institutions to OCC Bulletin 2012-28 for further guidance on actions they should take in response to natural disasters and other emergency conditions. According to the 2012 Bulletin, only bank offices directly affected by potentially unsafe conditions should close, and institutions should make every effort to reopen as quickly as possible to address customers’ banking needs.
NYDFS also issued an industry letter advising state-regulated financial institutions to take reasonable and prudent measures to assist consumers and businesses affected by Hurricane Fiona in Puerto Rico. The guidance recommends that financial institutions (i) waive ATM and overdraft fees; (ii) increase ATM withdrawal limits; (iii) ease restrictions on cashing out-of-state and non-customer checks; (iv) ease credit terms for new loans; (v) increase credit card limits for creditworthy customers; (vi) waive late fees on credit card and other loan balances; (vii) work with customers to defer payments or extend payment due dates on loans to help prevent delinquencies and negative credit reporting caused by disaster-related disruptions; and (viii) work with money transmitters and money services businesses to facilitate and expedite the transmission of funds. The actions are intended to help ease financial burdens for New Yorkers seeking to support individuals located in Puerto Rico, as well as consumers in Puerto Rico who hold New York bank accounts.
CFPB’s Supervisory Highlights targets student loan servicers
On September 29, the CFPB released a special edition of its Supervisory Highlights focusing on recent examination findings related to practices by student loan servicers and schools that directly lend to students. Highlights of the supervisory findings include:
- Transcript withholding. The Bureau found several instances where in-house lenders (i.e., where the schools themselves are the lender) are withholding transcripts as a debt collection practice. According to the Bureau, many post-secondary institutions choose to withhold official transcripts from borrowers as an attempt to collect education-related debts. The Supervisory Highlights states the position that the blanket withholding of transcripts to coerce borrowers into making payments is an “abusive” practice under the Consumer Financial Protection Act.
- Supervision of federal student loan transfers. The Bureau identified certain consumer risks linked to the transfer of nine million borrower account records to different servicers after two student loan servicers ended their contracts with the Department of Education (DOE). The review, which was handled in partnership with the DOE and other state regulators, identified several concerns, such as (i) the information received during the transfer was insufficient to accurately service the loan; (ii) transferee and transferor servicers reported different numbers of total payments that count toward income-driven repayment forgiveness for some borrowers; (iii) information inaccurately stated the borrower’s next due date; (iv) certain accounts were placed into transfer-related forbearances following the transfer, instead of in more advantageous CARES Act forbearances; and (v) multiple servicers experienced significant operational challenges.
- Payment relief programs. The Bureau found occurrences where federal student loan servicers allegedly engaged in unfair acts or practices when they improperly denied a borrower’s application for loan cancellation through Teacher Loan Forgiveness or Public Service Loan Forgiveness. The Bureau claimed that many servicers “illegally misrepresented borrowers’ eligibility dates and the number of payments the borrower needed to make to qualify for relief,” and “provided misinformation about borrowers’ entitlement to progress toward loan forgiveness during the pandemic payment suspension.” The Bureau said it will continue to monitor servicers’ practices to ensure borrowers receive the relief for which they are entitled, and directed servicers to address consumer harm caused by these actions.
The Bureau issued a reminder that it will continue to supervise student loan servicers and lenders within its supervisory jurisdiction regardless of institution type. Student loan servicers, originators, and loan holders are advised to review the supervisory findings and take any necessary measures to ensure their operations address these risks.
DOJ amends SCRA settlement with auto loan provider
On September 28, the DOJ announced an amended settlement with an auto loan provider resolving allegations that it failed to fully provide qualified servicemembers with interest rate benefits afforded to them under the Servicemembers Civil Relief Act (SCRA). According to the DOJ, while monitoring the auto lender’s compliance with the original DOJ settlement, the DOJ found that the auto loan provider was failing to apply interest rate benefits back to the date orders were issued calling the servicemember to active duty, and that it had improperly delayed the approval of interest rate benefits to some servicemembers. Under this amended settlement agreement, the auto loan provider agreed to pay an additional $185,460 to 250 servicemembers who did not receive proper interest rate benefits. The DOJ also noted that each servicemember who did not receive interest rate benefits back to the date their orders were issued will receive a refund of any excess interest they paid, as well as an additional payment of three times the overpayment or $100, whichever is higher. The auto loan provider is required to pay an additional $40,000 civil penalty to the U.S. and must revise its SCRA policies and training regarding interest rate benefits for servicemembers.
CFPB sues online lender to servicemembers
On September 29, the CFPB filed a complaint against a New York-based online lender and 38 of its subsidiaries for allegedly violating the Military Lending Act (MLA) and the Consumer Financial Protection Act by imposing excessive charges on loans to servicemembers and their dependents. The Bureau alleges that the defendants required consumers to join its membership program and pay monthly membership fees ranging from $19.99 to $29 to access certain “low-APR” installment loans. The complaint says that when the membership fees are combined with loan-interest-rate charges, the total fees exceed the MLA’s allowable rate cap, contending that the MLA serves to protect active duty servicemembers and their dependents by limiting the APR applicable to extensions of credit to 36 percent. The Bureau further claims that the defendants deceived consumers by representing that they owed loan payments and fees that were actually void under the MLA. In addition, the Bureau claims that the defendants refused to allow customers to cancel their memberships and stop paying monthly fees until their loans were paid, despite leading many consumers to believe they could cancel their memberships for any reason at any time, thereby “avoid[ing] such automatic renewals and associated membership fees.” In certain cases, the defendants refused to cancel memberships if a consumer had unpaid membership fees even if the loan was paid off, the Bureau says. The Bureau is seeking permanent injunctive relief, damages, restitution, disgorgement, civil money penalties, and other relief.
Fed takes action against bank for flood insurance violations
On September 27, the Federal Reserve Board announced a civil money penalty against a Pennsylvania-based bank. In the order, the Fed alleged that the bank violated the National Flood Insurance Act (NFIA) and Regulation H. The order assesses a $41,500 penalty against the bank for an alleged pattern or practice of violations of Regulation H, but does not specify the number or the precise nature of the alleged violations. The maximum civil money penalty under the NFIA for a pattern or practice of violations is $2,392 per violation.