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New York proposes state-level increase in consumer finance oversight
On January 8, the New York governor released a proposal that would, among other things, expand the entities subject to NYDFS’ enforcement authority and harmonize state regulator authority to bring actions against entities engaging in unfair, deceptive, or abusive acts or practices with federal authority. Proposed within the 2020 State of the State agenda are several initiatives designed to increase the state’s oversight and enforcement of the financial services industry. Key measures include:
- Abusiveness claims. The proposal would make New York consumer protection law consistent with federal law by aligning the state’s UDAAP powers with those of the CFPB, thereby empowering state authorities to bring abusiveness claims under state law.
- Eliminate certain exemptions. The proposal would end exemptions from state oversight for certain, unspecified consumer financial products and services. “With the current federal administration reducing the number and breadth of enforcement actions brought by the CFPB, it is crucial that state consumer protection laws apply to all the same consumer products and services subject to Dodd-Frank,” the proposal states.
- Closing loopholes and creating a level playing field. Under the proposal, state-licensed cryptocurrency companies would be required to pay assessment fees similar to other financial services companies. Currently, only supervised entities licensed under the state’s insurance law or banking law are required to pay assessments to NYDFS to cover examination and oversight costs.
- Fines. In order to effectively deter illegal conduct, the proposal would amend the state’s insurance law to increase fines. Additionally, instead of the current Financial Services Law (FSL) penalty of $5,000 per violation, the governor proposes “capping penalties at the greater of $5,000, or two times the damages, or the economic gain attributed to the violation,” while also updating the FSL to provide “explicit authority for [NYDFS] to collect restitution and damages.”
- Debt collection. Debt collectors under the proposal would be required to be licensed by NYDFS, thus allowing the department to examine and investigate suspected abuses. Additionally, NYDFS’ new oversight authority would allow it to bring punitive administrative actions against debt collectors, which may result in significant fines or the loss of a license. The proposal would also codify the FTC’s rule prohibiting confessions of judgment in consumer loans.
As previously covered by InfoBytes, the proposal would also, among other things, expand access to safe and affordable financial services through a collaborative initiative between the state’s Community Development Financial Institutions, NYDFS, and other state agencies designed to improve outreach and financial literacy education to the unbanked and underserved communities.
California governor proposes strengthening state consumer protection authority and increasing financial innovation
On January 10, the California governor submitted his proposal for California’s 2020-2021 state budget, which would, among other things, include the creation and administration of the California Consumer Protection Law (Law). The governor’s budget summary indicates that “[t]he federal government’s rollback of the CFPB leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” The proposed Law is intended to provide “consumers with more protection against unfair and deceptive practices when accessing financial services and products.” To create and administer the Law, the proposed budget contemplates the expansion of the Department of Business of Oversight’s (DBO) authority to “protect consumers” and “foster the responsible development of new financial products.” In light of the expanded role, the governor also proposed renaming the DBO to the Department of Financial Protection and Innovation. The governor’s budget includes an allocation to the DBO of a $10.2 million Financial Protection Fund and 44 positions in 2020-2021, which would increase to $19.3 million and 90 positions in 2022-2023 for creating and implementing the Law.
According to the DBO’s website, the DBO currently “provides protection to consumers and services to businesses engaged in financial transactions” and “oversees the operations of state-licensed financial institutions, including banks, credit unions, money transmitters, issuers of payment instruments and travelers checks, and premium finance companies.” Under the governor’s budget proposal summary, in addition to the DBO’s current functions, the DBO will have greater authority to “pursue unlicensed financial service providers not currently subject to regulatory oversight such as debt collectors, credit reporting agencies, and financial technology (fintech) companies, among others.”
The budget proposal summary provides that the DBO’s new activities will include:
- Offering services to educate consumers (e.g., older Americans, students, military service members, and recent immigrants).
- Licensing and examining industries that are currently under-regulated.
- Analyzing market patterns and developments for evidence-based policies and enforcement.
- Enforcing against unfair, deceptive, and abusive practices.
- Establishing a new Financial Technology Innovation Office, which will be tasked with proactively promoting “responsible development of new consumer financial products.”
- Providing legal support for the administration of the Law.
- Expanding administrative and IT staff to support the DBO’s increased authority.
The details of the Governor’s budget proposal have not yet been published.
NYDFS encourages regulated entities to prepare for cyber attacks
On January 4, NYDFS issued an Industry Letter warning regulated entities about the “heightened risk” of cyberattacks by hackers affiliated with the Iranian government following the killing of Iranian official Qasem Soleimani, and strongly encouraging entities to undertake preparations to ensure quick responses to any suspected cyber incidents. Specifically, NYDFS recommends that regulated entities (i) patch/remediate all vulnerabilities (especially publicly disclosed vulnerabilities); (ii) ensure employees are adequately able to handle phishing attacks; (iii) “fully implement multi-factor authentication”; (iv) “review and update disaster recovery plans”; (v) and quickly respond to further alerts from the government or other reliable sources, even outside regular business hours. The letter notes that NYDFS’ cyber regulation 23 NYCRR 500.17 (previously covered by InfoBytes here), requires regulated entities to notify NYDFS “‘as promptly as possible but in no event later than 72 hours’ after a material cybersecurity event.”
California DBO denies point-of-sale lending license application; issues related guidance
On December 30, the California Department of Business Oversight (DBO) announced the denial of a Minnesota-based point-of-sale company’s application to make loans under the California Financing Law (CFL) after determining the company had already been making unregulated loans to California consumers in violation of the CFL. According to the DBO’s Statement of Issues, the fintech company offers a product that allows consumers to enter into small installment loans in order to make online purchases at participating merchants. The company contended that it purchases credit sale contracts from merchants selling goods to consumers, and argued that these types of purchases do not qualify as loans subject to the CFL. However, following a review of the company’s application and products, the DBO concluded that the company structured its merchant partners’ purported credit sales to evade otherwise applicable consumer protections. Moreover, the DBO stated in its press release that the company’s “extensive role in its merchants’ transactions and pre-existing relationship with some consumers who were parties to the purported credit sales showed that [the company] was making loans under California law.” According to the decision, “[e]xtensive third-party involvement in the underlying credit sale may cause transactions to be deemed loans, regardless of form . . . even if the underlying credit sale is bona fide” (italics in original).
The DBO also issued a separate legal opinion advising a different, unidentified lender that its deferred payment products meet the Civil Code and case law definition of “loans” and therefore require a CFL license to be offered in the state. Among other things, the DBO argued that it is unclear as to why the lender’s products—which the lender claims “are not loans but similar to a forbearance”—would be exempt from the CFL, reiterating that loans and forbearances are both subject to usury provisions. The DOB noted that point-of-sale financing transactions may meet the definition of a loan when: (i) the transactions are treated like loans by the consumer, merchant, and third-party financer, “despite contradictory language in the applicable contracts”; (ii) there is an extensive relationship between the merchant and third-party financer; (iii) disclosures are not clearly made to the consumer about the role of the third-party financer and all financing terms; and (iv) “the financing transaction is not otherwise regulated.”
NYDFS directs financial institutions to submit LIBOR transition risk management plans
On December 23, NYDFS issued an Industry Letter (Letter) directing its regulated depository and non-depository institutions, insurers, and pension funds to outline their plans for managing the risks associated with the potential impact of LIBOR’s likely cessation at the end of 2021. NYDFS seeks assurance that regulated institutions’ board of directors and senior management fully understand the associated risks, have developed appropriate plans, and have initiated actions to facilitate transition to an alternative reference rate. The Letter does not mandate use of any particular alternative rate, but notes that “the Alternative Reference Rates Committee . . ., convened by the FRB and the [Federal Reserve Bank of New York (FRBNY)], has chosen [the Secured Overnight Financing Rate published by the FRBNY] as its recommended alternative to U.S. dollar LIBOR.” The Letter requires NYDFS-regulated institutions to describe: (i) programs that will assess financial and non-financial transition risks; (ii) “processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties”; (iii) processes to communicate with customers and counterparties; (iv) plans and processes for “operational readiness, including related accounting, tax and reporting aspects of [the] transition” from LIBOR; and (v) their governance framework, including oversight by an institution’s board of directors or its equivalent governing authority. Institutions are required to submit their transition-risk management plans to NYDFS by February 7.
Kraninger discusses coordinated state supervision and enforcement efforts
On December 10, in a speech before the National Association of Attorneys General Capital Forum, CFPB Director Kathy Kraninger discussed partnership with the states, as well as recent efforts between the Bureau and states in the areas of supervision and enforcement, including innovation policies. Kraninger also discussed the Bureau’s small dollar and debt collection rules. Noting that the Bureau will “effectively enforce the law to fulfill our consumer protection mission … after thoroughly reviewing the facts,” Kraninger recapped FY 2019 enforcement actions and settlements, which have resulted in more than $777 million in total consumer relief, which included over $600 million in consumer redress and more than $174 million in other relief. These actions, Kraninger stated, have resulted in more than $185 million in civil money penalties, not taking into account suspended amounts. Kraninger also highlighted several joint efforts with states and other agencies over the past year, including (i) a multi-agency action resolving a 2017 data breach (InfoBytes coverage here); (ii) a joint action with the New York Attorney General against a network of New York-based debt collectors that allegedly engaged in improper debt collection tactics (InfoBytes coverage here); (iii) a coordinated action with the Minnesota Attorney General’s Office, the North Carolina Department of Justice, and the Los Angeles City Attorney concerning a student loan debt relief operation (InfoBytes coverage here); and (iv) an action with the South Carolina Department of Consumer Affairs against an operation that offered high-interest loans to veterans and other consumers in exchange for the assignment of some of the consumers’ monthly pension or disability payments (InfoBytes coverage here).
Kraninger also discussed the Bureau’s recently-announced American Consumer Financial Innovation Network (ACFIN), which is designed to enhance coordination among federal and state regulators to facilitate financial innovation. (InfoBytes coverage here). ACFIN currently includes nine state attorneys general and four state financial regulators. Kraninger noted that the Bureau is presently reviewing approximately 190,000 comments concerning proposed changes related to certain payday lending requirements and mandatory underwriting provisions (InfoBytes coverage here), as well as over 14,000 comments submitted in response to its Notice of Proposed Rulemaking issued in May concerning amendments to the debt collection rule (InfoBytes coverage here). Kraninger stressed that the Bureau plans to release a Supplemental Notice of Proposed Rulemaking “very early” in 2020, and will be “interested in practical and pragmatic ideas of how to make time-barred debt disclosures work.”
Georgia proposes temporary authority for MLOs
On November 18, the Georgia Department of Banking and Finance issued a notice of proposed rulemaking, which would require several state specific requirements for mortgage loan originators (MLO) seeking to utilize temporary authority (Temporary Authority) in the state of Georgia pursuant to Section 106 of the Economic Growth, Regulatory Relief, and Consumer Protection Act—which is set to take effect November 24. Specifically, the proposed rule outlines the following additional requirements:
- Disclosure requirements. Mortgage companies are required to provide additional written disclosures to consumers showing that the MLO is not licensed and may ultimately not be granted a license. This written disclosure shall be “made no later than the date the consumer signs an application or any disclosure, whichever event occurs first,” and must be maintained by the company. Additionally, the disclosure must state that the Department “may take administrative action against the [MLO] that may prevent such individual from acting as a [MLO]” before a loan is closed. The language in the rule must appear on the loan documentation in 10-point bold-face type.
- Education requirements. Any MLO who qualifies to utilize Temporary Authority must submit proof to the Department that they have enrolled in a class to satisfy education requirements and have registered to take the national MLO test. Both notifications must be submitted within 30 days of the MLO’s application submission.
- Advertising requirements. All advertisements must “clearly and conspicuously” indicate that MLOs operating under Temporary Authority are currently unlicensed and have pending applications with the Department. Moreover, the advertisement must state that the “Department may grant or deny the license application.”
- Transaction journal requirements. Mortgage companies must maintain a journal of mortgage loan transactions that clearly identifies when any MLO utilizes Temporary Authority at any point in the application or loan process. The transaction journal should also notate the outcome of the MLO’s license application as either “approved, withdrawn, or denied.”
- Signature requirements. Any MLO operating under temporary authority must indicate “TAO,” (temporary authority to operate) or use a substantially similar designation next to any signature on a loan document, including those that relate to the negotiation of terms or the offering of a loan.
- Administrative fines. Mortgage companies who employ a person who does not satisfy the federal Temporary Authority requirements but engages in licensable MLO activities under Georgia law will be subject to a fine of $1,000 per occurrence and the mortgage companies’ license shall be subject to suspension or revocation.
Comments on the proposed rule must be received by December 18.
Visit here for additional guidance on MLO temporary authority from APPROVED.
FDIC creates advisory committee for state regulators
On November 19, the FDIC announced a new advisory committee between the agency and state regulators to discuss issues related to the regulation and supervision of state-chartered financial institutions. The committee, titled the Advisory Committee of State Regulators (ACSR), will explore topics such as (i) safety and soundness; (ii) consumer protection issues; (iii) the creation of new banks; and (iv) financial system risks, including cyberattacks or money laundering. Members of the ACSR will be composed of state financial regulators, as well as other individuals “with expertise in the regulation of state-chartered financial institutions.”
NYDFS to ease restrictions on sharing confidential supervisory information
On November 14, NYDFS announced a proposed regulation, which would allow regulated entities to share confidential supervisory information with legal counsel or with independent auditors without obtaining prior written approval from the agency. Currently, entities are required to receive prior written approval for each instance in which they want to share confidential supervisory information with hired legal counsel or independent auditors. The proposal would allow a regulated entity to share this information without prior written approval from NYDFS as long as there is a written agreement between the parties, in which the hired legal counsel or independent auditor agrees to, among other things, (i) only use the information for the purposes of legal representation or auditing services; (ii) not to disclose the information to its employees except on a “need to know” basis; (iii) promptly notify NYDFS of any requests for the information; and (iv) maintain records for all information disclosed pursuant to the regulation. Comments on the proposal will be accepted for 60 days following publication in the state register on November 27.
FTC, Utah file action against real estate seminar company
On November 5, the FTC and the Utah Division of Consumer Protection filed a complaint in the U.S. District Court for the District of Utah against a Utah-based company and its affiliates (collectively, “defendants”) for allegedly using deceptive marketing to persuade consumers to purchase real estate training packages costing thousands of dollars. According to the complaint, the defendants violated the FTC Act, the Telemarketing Sales Rule, and Utah state law by marketing real estate training packages with false claims through the use of celebrity endorsements. The defendants’ marketing materials allegedly told consumers, among other things, that they would (i) receive strategies for making profitable real estate deals during seminars included in the packages; and (ii) learn how to access wholesale or deeply discounted properties. The complaint argues, however, that the promises were false and misleading, as, among other things, the seminars promoted additional workshops costing more than $1,100 to attend where consumers largely received general information about real estate investing, along with promotions for “advanced training” costing tens of thousands of dollars. In addition, the discounted properties were typically sold or brokered to consumers by the defendants at inflated prices with concealed markups, the complaint alleges. Among other things, the FTC and Utah Division of Consumer Protection seek monetary and injunctive relief against the defendants.