InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Agencies file lawsuit in scheme targeting the elderly
On February 1, the California Department of Financial Protection and Innovation (DFPI), along with the CFTC and 26 other state regulators, announced a complaint against a precious metals dealer and its owner (collectively, “defendants”) for allegedly perpetrating a $68 million fraudulent scheme against more than 450 individuals nationwide, specifically against the elderly. According to the complaint, the defendants allegedly utilized false statements on its website regarding the risk and safety of their traditional retirement accounts and used fear tactics to convince senior citizens to purchase the precious metals. The complaint alleged that the company violated the federal Commodity Exchange Act by targeting the elderly and advising them to dissolve their savings and traditional retirement accounts in order to purchase their highly inflated and overpriced products, and that defendants had misrepresented their credentials and advised customers that the products were “a safe and conservative investment.” The complaint seeks disgorgement, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act, state regulatory laws, and CFTC regulations.
The same day, the SEC filed a complaint against the defendants in the U.S. District Court for the Central District of California for allegedly violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctions, disgorgement, plus interest, and civil penalties.
DFPI addresses several MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the purchase and sale of digital assets and agent of payee rules. Highlights from the redacted letters include:
- Purchase and Sale of Digital Assets; Payment Processing Services. The redacted opinion letter examines whether the inquiring company’s client is required to be licensed under the MTA. The letter describes two types of transactions proposed to be conducted on the client’s online trading platform: (i) transactions in which customers purchase and sell digital assets from the company in exchange for fiat currency (Direct Purchase Transactions); and (ii) transactions in which merchants use the platform as a payment processor to accept digital assets from customers in exchange for non-fungible tokens (Payment Processing Transactions). DFPI concluded that the Direct Purchase Transactions do not require an MTA license because they do not “involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI similarly concluded that the Payment Processing Transactions do not require licensure at this time because DFPI has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission[.]” Notwithstanding, DFPI added that it has been “studying the cryptocurrency industry closely” and that “[a]t any time, the Department may determine these activities are subject to regulatory supervision. The Department may also adopt regulations or issue interpretive opinions that significantly restrict [the contemplated] business operations.”
- Agent of Payee. The redacted opinion letter addresses whether the inquiring company’s proposed payment processing activities are exempt from the MTA’s licensing requirements. The letter explains that the company proposes to process payments related to purchases of apps through a virtual marketplace that operates on the company’s point of sale terminals. Through the virtual marketplace, customers (generally small businesses or merchants) may purchase apps that are developed and licensed to customers by third-party developers. Pursuant to a developer agreement, the company is appointed by such third-party developers to act as an “agent” of the developers “to collect and hold all Gross Revenue on [the developers’] behalf and to remit the Remittance Amount to [the developers’] Payment Account.” DFPI concluded that receiving funds from a customer for the purposes of transmitting payments to the developer “constitutes ‘receiving money for transmission.’” However, DFPI noted that these activities also satisfy the “agent of payee” exemption requirements because, pursuant to the developer agreement, the company acts as an agent of the developer, and the company’s receipt of payment satisfies “the customer’s (payor’s) obligation to the Developer for goods or services.” Accordingly, DFPI concluded that while the activities described constitute “money transmission” the company is exempt from the MTA’s licensure requirement.
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions.
Harris confirmed as NYDFS superintendent
On January 25, the New York State Senate confirmed Adrienne A. Harris as Superintendent of NYDFS. “I am honored to serve as the Superintendent of the Department of Financial Services. As the first African American woman to lead DFS, I am personally committed to working with all stakeholders to build a robust, fair and sustainable financial system, creating a better economic future for all New Yorkers,” Harris said in a press release announcing her confirmation. NYDFS highlighted many of Harris' actions to advance economic opportunities and financial services for consumers in the state during her first 100 days.
DFPI reminds licensees about submitting annual reports
On January 5, the California Department of Financial Protection and Innovation (DFPI) announced that, pursuant to Financial Code section 22159(a), all DFPI California Financing Law licensees are required to submit their annual reports by March 15, even if the licensee had no business activity during the 2021 calendar year. According to DFPI, pursuant to Financial Code section 22715(b), failing to submit the annual report by March 15 will result in penalties. Among other things, DFPI also noted that the form and instructions for submitting the Annual Report are available on DFPI’s website, and that the annual report must be submitted electronically through the DFPI portal.
Collection agency must pay $100,000
On January 10, the Connecticut Department of Banking (Department) issued an order against a California-based collection agency (respondent) for failing to request a hearing within the prescribed time period after a notice regarding submission of certain information was sent by the Department. According to the order, the Department sent the respondent an information request and after requesting additional time to supply the information, the respondent notified the Department that it was voluntarily surrendering its license to collect in Connecticut. However, the respondent still failed to submit the requested information, which the state said is mandatory before it would consider the surrender of the respondent’s license. The Department ordered the respondent to cease and desist from violating Section 36a-17(e) of the Connecticut General Statutes and to pay a $100,000 civil money penalty. The Department also revoked the respondent’s license to act as a consumer collection agency in Connecticut.
Texas adopts home equity lending amendments
On December 31, the Texas Department of Banking, Department of Savings and Mortgage Lending, Office of Consumer Credit Commissioner, and Credit Union Department issued amendments related to home equity lending to specify requirements for electronic disclosures. With respect to oral and electronic loan applications, one of the provisions “provides that a home equity loan closing must occur at least 12 days after the owner ‘submits a loan application to the lender,’” and “explains that a loan application may be submitted electronically in accordance with state and federal law governing electronic disclosures, with references to the UETA and the E-Sign Act.” Additionally, among other things, the provisions describe Texas Constitution, Article XVI, Section 50’s applicability to out-of-state financial institutions. The amendments are effective January 6.
States reach $1.2 million settlement with MLOs over fraudulent SAFE Act education certifications
On January 18, the Conference of State Bank Supervisors (CSBS) announced that 441 mortgage loan originators (MLOs) have agreed to pay approximately $1.2 million to settle allegations that they falsely claimed to have completed annual mortgage education programs required under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The enforcement action, which included the participation of 44 state agencies from 42 states, targeted a mortgage education scheme offered by a California-based company and its owner that provided false certificates claiming that MLOs took mandatory eight-hour continuing education courses as required for licensure under state and federal law. (See additional background information on the enforcement action here.) The states’ investigation—led by the California Department of Financial Protection and Innovation—revealed that the owner allegedly, in some instances, completed online education courses on behalf of the MLOs, and in other instances “granted course credit to [MLOs] who had enrolled in his approved course but who neither attended the course nor completed the required coursework necessary to receive course credit.” Administrative enforcement actions have been taken against the company, the owner, and members of the owner’s family. The settling MLOs have agreed to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license. CSBS noted that MLOs implicated in the investigation that did not sign a consent order will face further enforcement actions with their appropriate state financial regulator for additional disciplinary action against their MLO licenses.
DFPI enters into a settlement with a rent-to-own furniture provider
On January 10, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Los Angeles-based rent-to-own furniture provider for allegedly failing to comply with the Karnette Rental-Purchase Act (Karnette Act) in connection with its subscription agreements. This settlement constitutes the first action against a rent-to-own firm for violating the California Consumer Financial Protection Law (CCFPL). According to the settlement, in addition to charging excessive late fees, the company failed to: (i) disclose whether the property subject to the rental-purchase agreement is new or used; (ii) clearly and conspicuously provide the Karnette Act’s mandated contractual disclosures; and (iii) adhere to the Karnette Act’s prescribed formula for calculating the maximum cash price, among other things. As part of the settlement, the company must desist and refrain from violating the CCFPL, refund customers late fee overcharges, offer its rent-to-own products and services in compliance with the Karnette Act and applicable consumer laws, and report on its activities semi-annually to the DFPI. According to DFPI Commissioner Clothilde V. Hewlett, the consent order “reminds California businesses and consumers that the DFPI will be exercising its expanded authority under the new law.”
NYDFS concerned with CFPB’s small business loan data collection proposal
On January 6, NYDFS issued a comment letter responding to the CFPB’s Notice of Proposed Rulemaking (NPRM), “Small Business Lending Data Collection under the Equal Credit Opportunity Act (Regulation B).” The NPRM—mandated under Section 1071 of the Dodd-Frank Act—would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. This information would be reported annually to the Bureau, and eventually published by the Bureau on its website, with some potential modifications. According to the Bureau, the statute’s stated intent is to “facilitate enforcement of fair lending laws and enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.” (Covered by a Buckley Special Alert.)
In its comment letter, NYDFS discussed its responsibilities for examining state-chartered banking institutions’ compliance with the New York Community Reinvestment Act (NYCRA), New York Banking Law § 28-b, which NYDFS noted largely mirrors the current federal Community Reinvestment Act (CRA). Additionally, NYDFS stated that it examines regulated institutions for compliance with state fair lending requirements and agreed with the Bureau that “collecting critical information about minority- and women-owned businesses (MWOBs) to address fair lending concerns and allow financial institutions to identify gaps in the market” is an important goal. To that end, NYDFS is in the process of implementing its own MWOB data collection regulation under the NYCRA, which would require New York state-chartered banking institutions to start collecting MWOB-related data. (Covered by InfoBytes here.) Due to similarities between the proposed regulation and the Bureau’s NPRM, and to avoid imposing an undue burden on institutions covered by both regulations, NYDFS’s proposed regulation includes language that would “permit, but not obligate, NYDFS to treat compliance with the CFPB’s rule implementing Section 1071 as compliance with the NYCRA’s MWOB-related data collection regulation.”
Two specific issues were raised in response to the Bureau’s NPRM. First, NYDFS expressed concerns about the NPRM’s silence as to whether the Bureau intends to share more detailed data with state regulators to help states identify fair lending violations and enforce anti-discrimination laws, even if this information is not made available to the public. NYDFS urged the Bureau to include specific language stating it “may share all data submitted by financial institutions with state regulators in accordance with information sharing agreements between the CFPB and the state regulators.” Second, NYDFS asked the Bureau to reconsider its proposal to require data collection only for MWOBs with a threshold of $5 million or less in gross annual revenue. In particular, NYDFS warned of the risk of “dissimilarity in data collected by lenders for submission to the CFPB and the NYDFS” as NYDFS’s proposed regulation “requires evaluation of MWOB lending without respect to size.” NYDFS stressed that this dissimilarity “may prevent the NYDFS from deeming compliance with the CFPB regulation sufficient to comply with the NYDFS regulation.”
DFPI adopts debt collector license application and requirements
On December 22, the California Department of Financial Protection and Innovation (DFPI) adopted regulations, beginning at section 1850, title 10 of the California Code of Regulations, under the Debt Collection Licensing Act. As previously covered by InfoBytes, in July, DFPI issued a notice of proposed rulemaking to incorporate changes to its debt collection licensing requirements and application. Among other things, the regulations set forth the: (i) application form and procedures for filing a license application through the Nationwide Multistate Licensing System & Registry (NMLS); (ii) requirements for a licensee to maintain information filed through the NMLS current; and (iii) procedures for surrendering a license as a debt collector.