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Financial Services Law Insights and Observations


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  • Fintech fined over interest charges billed as tips and donations


    A California-based fintech company recently entered separate consent orders with California, Connecticut, and the District of Columbia to resolve allegations claiming it disguised interest charges as tips and donations connected to loans offered through its platform. The company agreed to (i) pay a $100,000 fine in Connecticut and reimburse Connecticut borrowers for all loan-related tips, donations, and fees paid; (ii) pay a $30,000 fine in the District of Columbia, including restitution; and (iii) pay a $50,000 fine in California, plus refunds of all donations received from borrowers in the state. The company did not admit to any violations of law or wrongdoing.

    The Connecticut banking commissioner’s consent order found that the company engaged in deceptive practices, acted as a consumer collection agency, and offered, solicited, and brokered small loans for prospective borrowers without the required licensing. The company agreed that it would cease operations in the state until it changed its business model and practices and was properly licensed. Going forward, the company agreed to allow consumers to pay tips only after fully repaying their loans. The consent order follows a temporary cease and desist order issued in 2022.

    A consent judgment and order reached with the D.C. attorney general claimed the company engaged in deceptive practices by misrepresenting the cost of its loans and by not clearly disclosing the true nature of the tips and donations. The AG maintained that the average APR of these loans violated D.C.’s usury cap. The company agreed to ensure that lenders accessing the platform are unable to see whether a consumer is offering a tip (or the amount of tip) and must take measures to make sure that withholding a tip or donation will not affect loan approval or loan terms. Among other actions, the company is also required to disclose how much lenders can expect to earn through the platform.

    In the California consent order, the Department of Financial Protection and Innovation (DFPI) claimed that the majority of consumers paid both a tip and a donation. A pop-up message encouraged borrowers to offer the maximum tip in order to have their loan funded, DFPI said, alleging the pop-up feature could not be disabled without using an unadvertised, buried setting. These tips and/or donations were not included in the formal loan agreement generated in the platform, nor were borrowers able to view the loan agreement before consummation. According to DFPI, this amounted to brokering extensions of credit without a license. Additionally, the interest being charged (after including the tips and donations) exceeded the maximum interest rate permissible under the California Financing Law, DFPI said, adding that by disclosing that the loans had a 0 percent APR with no finance charge, they failed to comply with TILA.

    Fintech State Issues Licensing Enforcement Washington California Connecticut Interest TILA DFPI State Regulators State Attorney General

  • DFPI examines whether some payment services are exempt from MTA

    The California Department of Financial Protection and Innovation (DFPI) recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) relating to whether certain payment services are exempt or subject to licensure. The redacted opinion letter examines three payment services provided by the inquiring company. DFPI first analyzed and determined that payments received by a law firm collection agent from a different entity’s collection attorneys and remitted to said entity are exempt pursuant to MTA Financial Code section 2011. DFPI next considered whether the MTA’s agent of payee exemption applies to certain tax payment transactions wherein a customer’s payment obligation to the company is extinguished once the customer has submitted a payment through a particular contractor. According to DFPI, transactions conducted pursuant to a contract between the company and the contractor (appointed as a limited agent for the sole purpose of receiving payments on the company’s behalf from taxpayers) are exempt from the MTA under the agent of payee exemption. Finally, DFPI considered whether the agent of payee exemption applies to certain payments to government entities. DFPI explained, among other things, that the language contained within the contracts with each government entity “establishes that the government entity has appointed [the company] to act as its agent and that payment to [the company] extinguishes the payor’s payment obligation to the government entity.” As such, DFPI determined that “transactions conducted pursuant to contracts containing such language are exempt from the MTA under the agent of payee exemption.”

    Licensing State Issues State Regulators DFPI California Money Transmission Act

  • NYDFS proposes vetting guidance for licensed or chartered entities

    State Issues

    On May 9, NYDFS Superintendent Adrienne A. Harris released proposed guidance for banking organizations and non-depository financial institutions chartered or licensed under the New York Banking Law concerning the Department’s character and fitness assessment expectations. The proposed guidance sets forth several criteria, including that covered institutions (i) update and modernize policies and procedures to ensure designated persons, including senior officers and governing board members, undergo a robust initial vetting process to make sure no new circumstances or conflicts of interests arise that may compromise the organization; (ii) take a risk-based and proportionate approach to ensure their vetting frameworks are tailored to meet their specific business needs, operations, and risks; (iii) promptly inform NYDFS if, through a character and fitness review, a determination is made that a previously vetted designated person is no longer fit to perform the current function, or if a designated person has been transferred to another position or group (or modifications are made to a designated person’s current functions); and (iv) vet each designated person at the time they become a designated person, regardless of whether the person currently is or previously was a designated person at a different covered institution, including in instances involving a merger or acquisition. The announcement noted that a covered institution’s compliance with the guidance will be reviewed as part of its regular examination framework. Comments on the proposed guidance are due June 30.

    State Issues State Regulators NYDFS New York Bank Regulatory

  • Crypto platform reaches $1.2 million settlement on alleged compliance failures

    State Issues

    On May 1, NYDFS issued a consent order against a cryptocurrency trading platform for engaging in alleged violations of the state’s cybersecurity regulation (23 NYCRR Part 500). According to the consent order, during examinations conducted in 2018 and 2020, NYDFS identified multiple alleged deficiencies in the respondent’s cybersecurity program, as required by both the cybersecurity regulation and the state’s virtual currency regulation (23 NYCRR Part 200). Following the examinations, NYDFS initiated an investigation into the respondent’s cybersecurity program. The Department concluded that the respondent failed to conduct periodic cybersecurity risk assessments “sufficient to inform the design of the cybersecurity program,” and failed to establish and maintain an effective cybersecurity program and implement a reviewed and board-approved written cybersecurity policy. Moreover, NYDFS claimed the respondent’s policies and procedures were not customized to meet the company’s needs and risks. Under the terms of the consent order, the respondent must pay a $1.2 million civil monetary penalty and submit quarterly progress reports to NYDFS detailing its remediation efforts. 

    State Issues Digital Assets Privacy, Cyber Risk & Data Security State Regulators NYDFS New York Enforcement Cryptocurrency 23 NYCRR Part 200 23 NYCRR Part 500 Virtual Currency

  • Fed and Illinois regulator take action against bank on capital and management

    On May 4, the Federal Reserve Board announced an enforcement action against an Illinois state-chartered community bank and its holding company related to alleged deficiencies identified in recent examinations. While the written agreement (entered into by the parties at the end of April) does not outline the specific deficiencies, it notes that the bank and the holding company have started taken corrective action to address the issues identified by the Federal Reserve Bank of St. Louis (FRB) and the Illinois Department of Financial and Professional Regulation (IDFPR). Among other things, the holding company’s board of directors must take appropriate steps to fully use its financial and managerial resources to ensure the bank complies with the written agreement and any other supervisory action taken by the bank’s federal or state regulator. The board is also required to submit a written plan to the FRB and the IDFPR describing actions and measures it intends to take to strengthen board oversight of the management and operations of the bank. The bank is required to submit a written plan outlining its current and future capital requirements and must notify the FRB and the IDFPR within 30 days after the end of any calendar quarter in which its capital ratios fall below the minimum ratios specified within the approved capital plan. Additionally, the bank is prohibited from taking on debt, redeeming its own stock, or paying out dividends or distributions without the prior approval of state and federal regulators.

    Bank Regulatory Federal Issues Federal Reserve Enforcement State Regulators Illinois FRB State Issues

  • House subcommittee holds hearing on stablecoin regulation

    Federal Issues

    The House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion recently held a hearing to examine stablecoins’ role in the payment system and to discuss proposed legislation for creating a federal framework for issuing stablecoins. A subcommittee memorandum identified different types of stablecoins (the most popular being pegged to the U.S. dollar to diminish volatility) and presented an overview of the market, which currently consists of more than 200 different types of stablecoins, collectively worth more than $132 billion. The subcommittee referred to a 2021 report issued by the President’s Working Group on Financial Markets, along with the FDIC and OCC (covered by InfoBytes here), in which it was recommended that Congress pass legislation requiring stablecoins to be issued only by insured depository institutions to ensure that payment stablecoins are subject to a federal prudential regulatory framework. The subcommittee discussed draft legislation that would define a payment stablecoin issuer and establish a regulatory framework for payment stablecoin issuers, including enforcement requirements and interoperability standards. 

    Subcommittee Chairman, French Hill (R-AR), delivered opening remarks, in which he commented that the proposed legislation would require stablecoin issuers to comply with redemption requirements, monthly attestation and disclosures, and risk management standards. Recognizing the significant amount of work yet to be done in this space, Hill said he believes that “innovation is fostered through choice and competition,” and that “one way to do that is through multiple pathways to become a stablecoin issuer, though with appropriate protections [to] prevent regulatory arbitrage and a race to the bottom.” He cited reports that digital asset developers are leaving the U.S. for countries that currently provide a more established regulatory framework for digital assets, and warned that this will stymie innovation, jobs, and consumer/investor protection. He also criticized ”the ongoing turf war between the SEC and CFTC” with respect to digital assets, and warned that “[w]hen you have two agencies contradicting each other in court about whether one of the most utilized stablecoins in the market is a security or a commodity, what you end up with is uncertainty.”

    Witness NYDFS Superintendent Adrienne A. Harris discussed the framework that is currently in place in New York and highlighted requirements for payment stablecoin issuers operating in the state. In a prepared statement, Harris said many domestic and foreign regulators call the Department’s regulatory and supervisory oversight of virtual currency the “gold standard,” in which virtual currency entities are “subject to custody and capital requirements designed to industry-specific risks necessary for sound, prudential regulation.” Harris explained that NYDFS established “additional regulations, guidance, and company-specific supervisory agreements to tailor [its] oversight” over financial products, including stablecoins, and said the Department is the first agency to provide regulatory clarity for these types of products. She highlighted guidance released last June, which established criteria for regulated entities seeking to issue USD-backed stablecoins in the state (covered by InfoBytes here), and encouraged a collaborative framework that mirrors the regulatory system for more traditional financial institutions and takes advantage of the comparative strengths offered by federal and state regulators. Federal regulators will be able to comprehensively address “macroprudential considerations” and implement foundational consumer and market protections, while states can “leverage their more immediate understanding of consumer needs” and more quickly modernize regulations in response to industry developments and innovation, Harris said.

    Federal Issues Digital Assets Stablecoins Payments State Issues House Financial Services Committee State Regulators NYDFS Federal Legislation Fintech

  • DFPI cracks down on crypto platforms’ AI claims

    State Issues

    On April 19, the California Department of Financial Protection and Innovation (DFPI) announced enforcement actions against five separate entities and an individual for allegedly offering and selling unqualified securities and making material misrepresentations and omissions to investors in violation of California securities laws. According to DFPI, the desist and refrain orders allege that the subjects (which touted themselves as cryptocurrency trading platforms) engaged in a variety of unlawful and deceptive practices, including promising investors high yield returns through the use of artificial intelligence to trade crypto assets, falsely representing that an insurance fund would prevent investor losses, and using investor funds to pay purported profits to other investors. The subjects also allegedly took measures to make the scams appear to be legitimate businesses through the creation of professional websites and social media accounts where influencers and investors shared testimonials about the money they were supposedly making. The orders require the subjects to stop offering, selling, buying, or offering to buy securities in the state, and demonstrate DFPI’s continued crackdown on high yield investment programs.

    State Issues Securities Enforcement California State Regulators Digital Assets DFPI Artificial Intelligence Cryptocurrency

  • DFPI says escrow trust accounts are not stored value under MTA

    The California Department of Financial Protection and Innovation recently released a new opinion letter covering aspects of the California Money Transmission Act (MTA) and the Escrow Act related to persons engaging in business as an escrow agency within the state. The redacted opinion letter examines a request from the inquiring company for confirmation that it does not require either an internet escrow agent license or a money transmitter license in the state of California in connection with its proposed business model (details on the model have been omitted). DFPI responded that under the Escrow Law, “it is unlawful for any person to engage in business as an escrow agent within this state except by means of a corporation duly organized for that purpose licensed by the commissioner as an escrow agent.” The definition of an “internet escrow agent,” DFPI explained, was added to Financial Code section 17003, subdivision (b) to mean “any person engaged in the business of receiving escrows for deposit or delivery over the Internet.” DFPI concluded that based on the facts asserted within the request, the inquiring company has not demonstrated that its proposed model is exempt from the Escrow Law.

    DFPI further considered whether the inquiring company’s proposed model meets the definition of stored value under the MTA, and whether it qualifies for several exemptions under the statute. DFPI explained that the transactions under consideration are not considered “stored value under the definition in Financial Code section 2003, subdivision (x), because they do not represent a claim against the issuer; rather, the money comes under [the inquiring company’s] possession and control and therefore must be placed in an escrow trust account. “An escrow trust account is not the same as stored value,” DFPI said, adding that since the transaction is not stored value, it is unnecessary to address the remaining arguments regarding the MTA.

    Licensing State Issues California State Regulators DFPI California Money Transmission Act Escrow

  • DFPI proposes new CCFPL modifications on complaints and inquiries

    State Issues

    On April 14, the California Department of Financial Protection and Innovation (DFPI) released a third round of modifications to proposed regulations for implementing and interpreting certain sections of the California Consumer Financial Protection Law (CCFPL) related to consumer complaints and inquiries. DFPI modified the proposed text in December and March (covered by InfoBytes here and here) in response to comments received on the initially proposed text issued last year to implement Section 90008 subdivisions (a) (b), and (d)(2)(D) of the CCFPL (covered by InfoBytes here). Subdivisions (a) and (b) authorize the DFPI to promulgate rules establishing reasonable procedures for covered persons to provide timely responses to consumers and the DFPI concerning consumer complaints and inquiries, whereas subdivision (d)(2)(D) permits covered persons to withhold certain non-public or confidential information when responding to consumer inquiries.

    DFPI considered comments on the most recent proposed modifications and is now proposing further additional changes:

    • Amended definitions. The proposed modifications change “officer” to “complaint officer” and expand the definition to mean “an individual designated by the covered person with primary authority and responsibility for the effective operation and governance of the complaint process, including the authority and responsibility to monitor the complaint process and resolve complaints.” References to “officer” have been changed to “complaint officer” throughout.
    • Complaint processes and procedures. The proposed modifications make clarifying edits to the requirements for annual notices issued to consumers (disclosures must be provided “in a clear and conspicuous manner”), and specify that complaints pertaining solely to entities not involved in the offering or providing of the financial product or service being reported on should not be included in the number of complaints received.
    • Inquiry processes and procedures. The proposed modifications clarify that should an inquirer indicate any dissatisfaction “regarding a specific issue or problem” concerning a financial product or service or allege wrongdoing by the covered person or third party, the inquiry should be handled as a complaint.

    Comments are due April 29.

    State Issues Agency Rule-Making & Guidance State Regulators DFPI CCFPL Consumer Complaints

  • NYDFS to impose supervision fees on virtual currency licensees

    State Issues

    On April 17, NYDFS announced the adoption of a final regulation establishing how certain licensed virtual currency businesses will be assessed for supervision and examination costs. Under 23 NYCRR Part 102, licensed virtual currency companies holding a Bitlicense will be assessed for their supervisory costs, similar to other licensees regulated by the Department. Last year, NYDFS first proposed a provision in the state budget authorizing the Department to collect supervisory costs from virtual currency businesses licensed pursuant to the Financial Services Law in order to add talent to its virtual currency regulatory team. (Covered by InfoBytes here.) NYDFS explained that the regulation will only apply to licensed virtual currency businesses and that the fees will only cover the costs and expenses associated with the Department’s oversight of a licensee’s virtual currency business activities. A licensee’s total annual assessment fee will be the sum of its supervisory component and its regulatory component, as defined in the regulation, and will be billed five times per fiscal year, once per quarter and a final true-up at the end of the fiscal year. The background to the final regulation notes that to the extent that a person holds multiple licenses to engage in virtual currency business activities, or concurrently acts as a money transmitter, such person will be billed separately for each license, adding that “[p]ersons who engage in virtual currency business activities as a limited purpose trust company or a banking organization will continue to be assessed under 23 NYCRR Part 101.” The final regulation takes effect upon publication of the Notice of Adoption in the New York State Register.

    State Issues State Regulators NYDFS Digital Assets Supervision Examination 23 NYCRR Part 102 Money Service / Money Transmitters