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On September 15, the Conference of State Bank Supervisors (CSBS) issued its Model Regulatory Framework for State Regulation of Certain Virtual Currency Activities (Model Framework). The CSBS Emerging Payments Task Force developed the Model Framework to assist states in licensing and regulating virtual currency activities. The Model Framework includes key components to a regulatory scheme that the CSBS hopes will protect consumers and the larger marketplace while facilitating innovation. It also defines virtual currency and describes specifically covered virtual currency activities, such as those involving third-party controls of virtual currency. Additionally, the Model Framework provides flexibility in denominating permissible investments, tailoring cybersecurity audits to a company’s business model, and includes an addition to the BSA/AML Compliance section that recommends that states require verification of an entity’s service users and account holders. The Model Framework also includes a supervision component that requires the establishment of policies and procedures that protect customer access to funds in the event of an institutional failure.
The Model Regulatory Framework for State Regulation of Certain Virtual Activities can be seen here.
CSBS Announcement: Arizona Department of Financial Institutions Becomes Latest State Agency to Adopt National SAFE MLO Test
On July 29, the Conference of State Bank Supervisors (CSBS) announced that the Arizona Department of Financial Institutions began using the National SAFE Mortgage Loan Originator (MLO) Test, making it the 47th state banking agency to adopt the SAFE MLO Test containing Uniform State Content. Combining both the national and state testing requirements of the SAFE Act and the CSBS/AARMR model state law, the test with Uniform State Content was first made available to state banking agencies on April 1, 2013 to help streamline the application process for MLOs seeking to obtain licensure in more than one state. Since April 1, 2013, according to the CSBS, over 58,000 MLOs have taken the National SAFE MLO Test with Uniform State Content. Notably, applicants who take the test on or after October 3, 2015, will be expected to understand requirements of the TRID Rule as promulgated by the CFPB.
On April 27, the Conference of State Bank Supervisors (CSBS) announced that three working groups of state regulators – the State Coordinating Committee (SCC), the Multi-State Mortgage Committee (MMC), and the Multi-State MSB Examination Task Force (MMET) – issued annual reports to state regulators regarding their 2014 operations and progress. Responsible for information sharing and examination work with the CFPB, the SSC report outlines the two agencies’ 9 joint examinations. The MMC – established as the “oversight body for multi-state mortgage supervision” in 2008 – is responsible for coordinated, multi-state mortgage exams, and its report covers the 6 joint mortgage examinations conducted with the CFPB in 2014. Finally, the MMET supervises the money services businesses; its report highlights 57 examinations conducted jointly with the CFPB in 2014.
CSBS Announces $5.2 Million Multi-State Enforcement Action Against Maryland-Based Mortgage Lender To Resolve Allegations Of Misconduct Relating To Continuing Education And Testing Of Mortgage Loan Originators
On April 13, the Conference of State Bank Supervisors (“CSBS”) announced a settlement agreement and consent order following a coordinated enforcement action launched by 43 states against a non-bank mortgage lender after finding that the lender’s mortgage professionals shared test information from mandatory compliance examinations and the lender’s compliance staff routinely completed continuing education and examination requirements for other employees. The case developed after state financial regulators in New Hampshire and Maryland discovered the misconduct and reported it to the Multi-State Mortgage Committee (“MMC”)—a group composed of state regulators charged with supervising mortgage lenders that operate in multiple states—which opened an investigation. Joined by 41 other states, the settlement agreement also found that many of the lender’s employees dishonestly completed continuing education requirements for other employees, including the mortgage lender’s chief executive officer and chief operating officer. The settlement agreement and consent order issued by the MMC for the breach of these duties included the imposition of a $5.2 million fine and commanded the removal and replacement of the lender’s chief operating officer. The agreement also ordered the lender to (i) prepare a comprehensive plan of improved corporate governance policies approved by the lender’s parent’s board of directors within 270 days, with a follow-up reported to the MMC on implementation of the plan required 270 days later, and (ii) hire an independent auditor to evaluate the lender’s training and education program. The same mortgage lender was also subject to a different and unrelated enforcement action in February 2015. The CFPB recently imposed a $2 million penalty against the lender for deceptive marketing practices and paying kickbacks to customer referrals.
On March 25, the Conference of State Bank Supervisors (“CSBS”) and the American Association of Residential Mortgage Regulators (“AARMR”) issued a proposal seeking public comment on its Proposed Regulatory Prudential Standards for Non-bank Mortgage Servicers. According to the CSBS, the proposal is in response to an increasing number of non-bank servicers that continue to acquire mortgage servicing rights, and subsequently, require enhanced state regulation to (i) provide better safeguards for borrowers, investors, and other stakeholders, (ii) increase regulatory oversight and market discipline over non-bank mortgage servicers, and (iii) enhance transparency, accountability, risk management and corporate governance standards. Comments on the proposal must be received by June 25, 2015.
On February 10, officials from federal and state banking authorities – the Fed, FDIC, NCUA, OCC, and the CSBS – testified at a U.S. Senate Banking Committee on ways the agencies can provide “regulatory relief” to community banks and credit unions, which disproportionately incur burdens to implement the rules and provisions of the Dodd-Frank Act. Specifically, officials from each of the federal banking agencies detailed current initiatives and proposals that would provide less burdensome compliance costs.
CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
As previously reported in our January 8 Digital Commerce & Payments alert and in InfoBytes, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency on December 16, 2014. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
Special Alert: CSBS Issues Policy, Draft Model Regulatory Framework, and Request for Comment Regarding State Regulation of Virtual Currency
On December 16, 2014, the Conference of State Bank Supervisors (“CSBS”) issued a Policy on State Regulation of Virtual Currency (the “Policy”), Draft Model Regulatory Framework, and a request for public comment regarding the regulation of virtual currency. The Policy and Draft Model Regulatory Framework were issued through the work of the CSBS Emerging Payments Task Force (the “Task Force”). The Task Force was established to explore the nexus between state supervision and the development of payment systems and is seeking to identify where there are consistent regulatory approaches among states.
As a result of its work to date, the Policy recommends that “activities involving third party control of virtual currency, including for the purposes of transmitting, exchanging, holding, or otherwise controlling virtual currency, should be subject to state licensure and supervision.” The Policy states that state regulators have determined certain activities involving virtual currency raise concerns in three areas: consumer protection, marketplace stability, and law enforcement.
The Task Force’s intentional technology-neutral approach targets “licensable activities” – activities performed by one party, in a position of trust, acting on behalf of another. It recommends that such licensable activities be regulated by amending current laws, or when necessary, enacting new legislation to cover the transmission, exchanging, and holding of value of currencies. The Policy recommends that those who service these transactions through mobile wallets, vaults, payment processors, and others should be appropriately licensed.
The Policy targets certain activities:
- Exchange (e.g., sovereign to virtual, virtual to sovereign, or virtual to virtual)
- Services that facilitate third-party exchange, storage, and/or transmission of virtual currency through any medium (e.g., wallets, vaults, kiosks, merchant-acquirers, and payment processors).
The Task Force notes that the Policy explicitly does not cover either merchants or consumers whose use of virtual currencies is solely to purchase goods or services; or for activities that utilize similar technologies, such as cryptography-based ledger systems, but are not financial in nature nor used for financial recordkeeping.
The Draft Model Regulatory Framework
The Draft Model Regulatory Framework proposes a system for state licensing and supervision of certain virtual currency activities. The Draft Model Regulatory Framework addresses the following areas of concern regarding businesses engaged in virtual currency activities: licensing requirements and systems, financial strength and stability, consumer protection issues, cybersecurity, compliance with Bank Secrecy Act and Anti-Money Laundering, recordkeeping, and regulatory supervision.
Request For Public Comment
The CSBS is looking for public comment on the Draft Model Regulatory Framework in two main areas:
- The Licensing Regime for the Virtual Currency Business. What should such a regime look like? How can states best streamline the process? How should laws that apply to regular money transmitters, such as escheatment or funds availability, be applied to the virtual currency business?
- Risk Management. What is an appropriate level of identification for customers? How should BSA/AML regulations change to address virtual currencies? What role should cyber risk insurance play? What sorts of consumer protections will be necessary?
The specific questions posed by the CSBS are found here. The creation of a new licensing regime, in addition to laws that will govern future litigation structure, will influence the direction states take in regulating virtual currencies.
Members of the industry have until February 16, 2015 to respond to the RFC.
On December 16, the Conference of State Bank Supervisors (CSBS) announced its draft regulatory framework and requested public comment on specific questions intended to aid state regulators on the regulation of virtual currencies. The regulation of virtual currency activities currently varies from state to state. The draft framework is intended to create uniform state regulation. Comments are due by February 16, 2015.
On July 1, the OCC, the Federal Reserve Board, the FDIC, the NCUA, and the Conference of State Bank Supervisors issued interagency guidance on home equity lines of credit (HELOCs) nearing their end-of-draw periods. The guidance states that as HELOCs transition from their draw periods to full repayment, some borrowers may have difficulty meeting higher payments resulting from principal amortization or interest rate reset, or renewing existing loans due to changes in their financial circumstances or declines in property values. As such, the guidance describes the following “core operating principles” that the regulators believe should govern oversight of HELOCs nearing their end-of-draw periods: (i) prudent underwriting for renewals, extensions, and rewrites; (ii) compliance with existing guidance, including but not limited to the Credit Risk Management Guidance for Home Equity Lending and the Interagency Guidelines for Real Estate Lending Policies; (iii) use of well-structured and sustainable modification terms; (iv) appropriate accounting, reporting, and disclosure of troubled debt restructurings; and (v) appropriate segmentation and analysis of end-of-draw exposure in allowance for loan and lease losses estimation processes. The guidance also outlines numerous risk management expectations, and states that institutions with a significant volume of HELOCs, portfolio acquisitions, or exposures with higher-risk characteristics should have comprehensive systems and procedures to monitor and assess their portfolios, while less-sophisticated processes may be sufficient for community banks and credit unions with small portfolios, few acquisitions, or exposures with lower-risk characteristics.