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Financial Services Law Insights and Observations

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  • DFPI says debt collection licenses “unavoidably delayed”

    On May 23, the California Department of Financial Protection and Innovation (DFPI) sent a notice to applicants and prospective applicants announcing unforeseen delays in the issuance of licenses under the Debt Collection Licensing Act. The FBI informed DFPI that new changes are needed to state agency protocols for requesting federal background checks. Prospective licensees are encouraged to continue submitting applications through the Nationwide Multistate Licensing System. DFPI stated that during this delay (which “is necessary to enable the Department to effectuate the licensing background check required under the Debt Collection Licensing Act”), “applicants may continue to engage in business, and the Department will not take action for unlicensed activity against applicants who filed their applications after December 31, 2021.” DFPI will reach out to applicants with instructions for submitting fingerprints for background checks when the process becomes available, and advised licensees that “[f]or purposes of including California debt collector license numbers when contacting or communicating with debtors as required under Civil Code section 1788.11, an applicant who has filed its application through NMLS may indicate “license number pending” or similar verbiage until a license is issued.” DFPI will notify applicants when it begins issuing licenses and encourages applicants to check the Department’s website for updates.

    Licensing State Issues California DFPI State Regulators NMLS Debt Collection Licensing Act Debt Collection

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  • NYDFS commits to mitigating virtual currency risks

    State Issues

    On May 20, NYDFS Superintendent Adrienne A. Harris emphasized the role regulation plays in protecting consumers from cybercriminals in the virtual currency marketplace. According to Harris, NYDFS is committed to mitigating risks in this space by guarding against sanctions evasion and illicit activity and making sure corporate infrastructure and consumer data are well protected from bad actors. Harris stressed that NYDFS “will continue to improve upon [its] regulation and supervision; engage with key stakeholders on important trends and issues; collaborate with state, federal and international regulators; and strive to be a forward-looking, innovative regulator, including through [its] VOLT initiative,” which supports the department’s efforts to increase transparency and enhance supervision related to virtual currency.

    State Issues Digital Assets Virtual Currency State Regulators NYDFS New York Consumer Protection Financial Crimes Fintech

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  • NYDFS issues industry letter on reverse mortgage lending

    State Issues

    On May 17, NYDFS announced an industry letter to establish its expectations for all institutions engaged in reverse mortgage lending in the State on cooperative apartment units (coop-reverse mortgages) once newly enacted Section 6-O*2 of the New York Banking Law takes effect May 30. The letter noted there is a comprehensive regulatory framework that addresses the marketing, origination, and servicing of reverse mortgages in New York and stated that most of the existing requirements apply equally to coop-reverse mortgages. This includes Title 3 of the New York Code of Rules and Regulations Part 79 (3 NYCRR 79), which establishes various requirements relating to the marketing, origination, servicing, and termination of reverse mortgage loans in New York, and Title 3 of the New York Code of Rules and Regulations Part 38 (3 NYCRR 38), which addresses issues involving, among other things, commitments and advertising for mortgage loans generally. Even so, the letter noted that NYDFS is considering amending its existing regulations to specifically address coop-reverse mortgages, or issuing a separate regulation governing this as a new product. Finally, the letter explained that “institutions that seek to originate, or service coop-reverse mortgages are directed to comply with the provisions of 3 NYCRR 79, and 3 NYCRR 38 in originating or servicing such mortgages” (subject to described clarifications, modifications, and exclusions). However, NYDFS stated that “in the event of any inconsistency between the provisions of Section 6-O*2 and provisions of either 3 NYCRR 79 or 3 NYCRR 38, the provisions of Section 6-O*2 will govern; and in the event of any inconsistency between the provisions of 3 NYCRR 79 and 3 NYCRR 38, provisions of 3 NYCRR 79 will govern.”

    State Issues NYDFS Mortgages New York Reverse Mortgages State Regulators

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  • DFPI amends requirements for Increased Access to Responsible Small Dollar Loans Program

    State Issues

    On May 10, the California Department of Financial Protection and Innovation (DFPI) issued a notice of approval of amendments to regulations under the California Financing Law (CFL) related to the agency’s pilot program for increased access to responsible small-dollar loans (RSDL program). The RSDL program, which became operative in 2014, allows finance lenders licensed under the CFL and approved by the DFPI commissioner to charge specified alternative interest rates and charges, including an administrative fee and delinquency fees, on loans subject to certain requirements.

    The approved amendments, among other things, increase the upper dollar loan limit from $2,500 to $7,500, require applicants to submit mandatory policies and procedures for addressing customer complaints and responding to questions from loan applicants and borrowers, require lenders report additional information about the finders they use, and allow lenders to use qualified finders to disburse loan proceeds, collect loan payments, and issue notices and disclosures to borrowers. (See also DFPI’s final statement of reasons, which outlines specific revisions and discusses the agency’s responses to public comments.) The amendments are effective July 1.

    State Issues California State Regulators DFPI California Financing Law Pilot Program Small Dollar Lending

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  • Connecticut issues CDO against unlicensed small-dollar marketplace lender

    State Issues

    On May 4, the Connecticut Banking Commissioner issued a temporary cease and desist order against an unlicensed California-based marketplace lender after determining it had reason to believe the respondent allegedly violated several provision of the Connecticut General Statutes, as well as Section 1036 of the CFPA. The respondent operates a mobile application to help consumers take out small-dollar loans and solicits lenders via its website through advertisements claiming it “takes the work out of lending by vetting and organizing a marketplace of loan requests” where “[b]orrowers set their own terms and provide appreciation tips to lenders who agree to fund a loan, allowing for mutually beneficial financial outcomes.” Consumers initiate loans on the respondent’s platform for a certain amount, which includes optional monetary tips for both the lender and the respondent of up to 12 and 9 percent of the loan amount respectively. The Commissioner’s investigation noted that while the respondent touted the tips as being optional and not required for submitting a loan request or receiving funding, 100 percent of the loans originated to Connecticut consumers from June 2018 to August 2021 included a tip. When the tips were factored into the finance charge, the APRs of the Connecticut consumers’ loans ranged from 43 percent to over 4,280 percent. During the identified time period, loan disclosures identified the amount of the tips for each loan; however, starting in April 2021, the revised disclosures and promissory notes removed any itemization of the tips, and promissory notes allegedly “failed to indicate any obligation of the borrower to pay tips on their loans.” According to the Commissioner, the corresponding disclosures “stated that only one payment, for the principal loan amount, was due at the end of the loan,” however on the loan’s due date, the total loan amount including tips was withdrawn from the consumer’s account. Additionally, disclosures allegedly informed consumers that the APR on the loans was zero percent even though all the loans carried much higher APRs.

    The Commissioner further concluded that the respondent prohibited direct communication between consumers and lenders and charged several fees on delinquent loans, including late fees and recovery fees for its collection efforts. Moreover, at least one of the contracted collection agencies was not licensed in the state, nor was the respondent licensed as a small loan company in Connecticut, and nor did it qualify for a licensure exemption.

    In issuing its order to cease and desist, order to make restitution, and notice of intent to impose a civil penalty and other equitable relief, the Commissioner stated that the respondent’s “offering, soliciting, brokering, directly or indirectly arranging, placing or finding a small loan for a prospective Connecticut borrower, without the required license” constitutes at least 1,600 violations of the Connecticut General Statutes. The Commissioner cited additional violations, which included engaging in unlicensed activities such as lead generation and debt collection, and cited the respondent for providing false and misleading information related to the terms and costs of the loan transactions in violation of both state law and the CFPA’s prohibition against deceptive acts or practices. In addition to ordering the respondent to immediately cease and desist from engaging in the alleged violations, the Commissioner ordered the respondent to repay any amounts received from Connecticut consumers in connection with their loan, plus interest.

    State Issues Licensing Connecticut State Regulators CFPA UDAAP Deceptive Consumer Finance Small Dollar Lending Interest Rate Disclosures

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  • Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ

    Courts

    A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.

    The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.

    OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”

    The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.

    The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.

    In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.

    In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.

    The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand. 

    During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.


    If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.

    Courts State Issues Maryland State Regulators Licensing Fintech Debt Collection Consumer Lending Usury Special Alerts

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  • NYDFS encourages virtual currency licensees to use blockchain analytics tools for sanctions and AML compliance

    State Issues

    On April 28, NYDFS announced new guidance on virtual currency entities that are establishing the use of blockchain analytics tools. NYDFS explained that virtual currency activities can involve, among other things, different sources, destinations, and types of funds flows than are found in more traditional, fiat-currency contexts. Such characteristics of virtual currencies can create compliance challenges, but also can present new possibilities for new technology-driven control measures. In the guidance, NYDFS outlined expectations for New York State-regulated virtual currency companies, including: (i) establishing control measures that may leverage blockchain analytics; (ii) augmenting due diligence controls; (iii) conducting transaction monitoring of on-chain activity; and (iv) conducting sanctions screening of on-chain activity. NYDFS also emphasized "the importance of risk-based policies, processes, and procedures to identify transaction activity involving virtual currency addresses or other identifying information associated with sanctioned individuals and entities listed on the SDN List, or located in sanctioned jurisdictions."

    As previously covered by InfoBytes, NYDFS issued a framework outlining industry best practices for state-regulated property/casualty insurers writing cyber insurance, which provided guidance for effectively managing cyber insurance risk. The framework is the first guidance released by a U.S. regulator on cyberinsurance. NYDFS noted it has “engaged with external stakeholders to inform this new guidance and continues to conduct significant outreach to state, federal and international regulators; industry; and other experts in the field to ensure New York maintains a robust regulatory regime and remains a destination for virtual currency companies to operate.”

    State Issues Digital Assets Agency Rule-Making & Guidance NYDFS Privacy/Cyber Risk & Data Security State Regulators Bank Regulatory Fintech OFAC Sanctions Financial Crimes

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  • Illinois adopts rules implementing Predatory Loan Prevention Act

    State Issues

    On April 22, the Illinois Department of Financial and Professional Regulation (IDFPR) published in the Illinois Register a notice of adopted rules to implement the Predatory Loan Prevention Act (PLPA or the Act). As previously covered by InfoBytes, the Act was signed into law in March 2021 to prohibit lenders from charging more than 36 percent APR on all non-commercial consumer loans under $40,000, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. Violations of the Act constitute a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act and carry a potential fine up to $10,000. Additionally, any loan with an APR exceeding 36 percent will be considered null and void.

    In general, the adopted rules require lenders to provide a disclosure to consumers about the 36 percent APR rate cap established by the PLPA, incorporate the APR calculation method required by the PLPA, and amend the rules for reporting of payday loans to the state database. The rules specify that words in the definitions are not defined to have the same meaning as in Regulation Z, including any interpretation by the CFPB. For purposes of calculating the PLPA ARP, the rules specify that the calculation excludes only certain specified bona fide fees, but includes finance charges, loan application fees, and fees imposed for participation in any plan or arrangement for a loan, “even if that charge would be excluded from the finance charge under Regulation Z.”

    The IDFPR made several amendments related to rate cap disclosure notices. These specify that all loan applications must include a separate rate cap disclosure signed by the consumer (disclosures must be provided in English and in the language in which the loan was negotiated) that clearly and conspicuously states: “A lender shall not contract for or receive charges exceeding a 36% annual percentage rate on the unpaid balance of the amount financed for a loan, as calculated under the Illinois Predatory Loan Prevention Act (PLPA APR). Any loan with a PLPA APR over 36% is null and void, such that no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan. The annual percentage rate disclosed in any loan contract may be lower than the PLPA APR.”

    The rules take effect August 1.

    State Issues State Regulators Illinois Predatory Lending Consumer Finance Interest Rate APR

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  • DFPI concludes MTA licensure not required for direct purchase and sale of cryptocurrency

    Recently, the California Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the California Money Transmission Act (MTA) related to the purchase and sale of virtual currency. The redacted opinion letter examines whether a Company that offers customers the opportunities to deposit fiat currency to a Company account and then draw down that balance to purchase virtual currency from the company requires MTA licensure. The Company explained that virtual currency is purchased from a third party and is transferred to the customer’s Company-issued virtual currency wallet where it can then be stored, transferred to an external wallet, or sold for fiat currency. When a customer later wants to sell the purchased virtual currency for fiat currency, the transaction occurs in a similar fashion. The Company stated that “virtual currency sales to customers are from the Company’s own inventory,” and that for purposes of the opinion, DFPI “assumes these sales occur independently of the Company’s own transactions with third parties.”

    DFPI concluded that because the Company’s activities are limited to directly purchasing and selling cryptocurrency to customers, it does not require an MTA license because it does “not involve the sale or issuance of stored value or receiving money for transmission.” Specifically, DFPI stated that because the “customer’s fiat currency balance in the Company account does not meet the definition of stored value” and because “funds in that account can only be used for virtual currency purchases from the Company or transferred out to the customer’s external bank account,” the closed loop stored value “does not constitute issuance of stored value that is regulated under the MTA.” DFPI reminded the Company that its determination is limited to the presented facts and that any change could lead to different conclusions.

    Licensing Digital Assets State Issues State Regulators DFPI California Money Transmission Act California Cryptocurrency Fintech

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  • Illinois adopts amendments to Consumer Installment Loan Act

    On April 22, the Office of the Illinois Secretary of State published in the Illinois Register a notice by the Department of Financial and Professional Regulation of adopted amendments to certain parts of its Consumer Installment Loan Act (CILA). Under the amendments, a licensee may obtain a license under the CILA for the exclusive purpose and use of making title secured loans. The amendments also require consumer installment lenders to provide a disclosure to consumers regarding the 36 percent annual percentage rate (APR) rate cap established by the Predatory Loan Prevention Act Annual Percentage Rate. These amendments eliminate small consumer loans and implement rules for reporting, to the state database, consumer installment loans. Additionally, the amendments include the implementation of a new definition and new rules for title-secured loans. The amendments are effective August 1.

    Licensing State Issues Illinois State Regulators Consumer Finance Installment Loans

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