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Indiana Court of Appeals reverses state regulator’s finance charge action
On August 19, the Court of Appeals of Indiana reversed the Indiana Department of Financial Institutions (Department) finding that a car dealership charged an “impermissible additional charge” in violation of the state’s additional-charges statute when the dealership improperly disclosed a finance charge to its consumers. According to the opinion, the dealership charged, in addition to a third party titling fee, a $25.00 convenience fee to its credit customers for electronic titling through the third party. The service was required for credit customers but was optional for cash customers. After conducting a routine examination, the Department identified one violation from a transaction in July 2015, where the dealership did not disclose the convenience fee in the “finance charge” box of the disclosures, noting “the fee was only mandatory for credit customers and therefore was ‘a condition of the extension of credit.’” The dealership provided a contract from the same time period, showing it disclosed the fee in the “Itemization of Amount Financed” and “Amount Financed” boxes, not in the “Finance Charge” box. The Department charged the dealership with violating the state’s additional-charges statute, “for assessing ‘impermissible additional charges’ in the form of the $25.00 convenience fee,” as opposed to a charge for violating the state’s disclosure statute.
On review, the Court of Appeals concluded the charge was a finance charge because it was mandatory for the dealership’s credit customers but not its cash customers, and noted a finance charge cannot also be an additional charge. The Department argued it made no practical difference which violation it alleged, because the remedies under both statutes are the same, while the dealership noted a disclosure violation would entitle it to raise certain defenses under TILA. The appellate court did not address this issue, but nonetheless concluded “a finance charge doesn’t become an ‘impermissible additional charge’ when it’s not disclosed in the ‘Finance Charge’ box,” and remanded the case back to the Department for proceedings under the disclosure statute.
NYDFS announces multistate investigation of payroll advance industry
On August 6, NYDFS announced it is leading a multistate investigation into the payroll advance industry based on allegations of unlawful online lending. According to NYDFS, the investigation will focus on whether companies are violating state banking laws, including usury limits, licensing laws, and other applicable laws regulating payday lending. NYDFS alleges that some companies appear to collect unlawful interest rates disguised as “tips” as well as monthly membership and/or excessive additional fees, and may collect improper overdraft charges.
In addition to New York, other states in the investigation include: Connecticut, Illinois, Maryland, New Jersey, North Caroline, North Dakota, Oklahoma, Puerto Rico, South Carolina, South Dakota, and Texas.
23 states agree to streamline money service licensing process for fintech companies
On June 24, the Conference of State Bank Supervisors (CSBS) announced that financial regulators from 23 states have now agreed to a multi-state compact that will offer a streamlined licensing process for money services businesses (MSB), including fintech firms. As previously covered by InfoBytes, in February 2018, the original agreement included seven states. According to the announcement, 15 companies are currently involved in the initiative, and as of June 20, they have received 72 licenses. The 23 states participating in the MSB licensing agreement are: California, Connecticut, Georgia, Iowa, Idaho, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi. North Carolina, North Dakota, Nebraska, Ohio, Rhode Island, South Dakota, Texas, Tennessee, Utah, Vermont, Washington, and Wyoming.
Mortgage servicer agrees to pay $7.8 million in escrow interest in CDBO action
On June 18, the California Department of Business Oversight (CDBO) announced a $7.8 million settlement with a mortgage servicer to pay allegedly overdue escrow interest to more than 94,000 California homeowners. According to the stipulation reflecting the settlement, the allegations result from a 2017 CDBO mortgage servicing examination, which found that the servicer “had failed to pay [two percent] interest on escrow impounds in violation of” California Fin. Code § 50202(d) and California Civ. Code § 2954.8. The settlement requires the servicer to pay the two percent interest for the period of July 1, 2014, through December 31, 2018, to 94,483 borrowers with escrow impound accounts. The servicer also agreed to pay two percent interest on escrow impound accounts for California residential mortgages going forward, although it reserved the right to stop paying interest in certain circumstances, including a final civil order or decision from the California Supreme Court or U.S. Court of Appeals for the 9th Circuit finding that Financial Code Section 2954.8 is not applicable to national banks or their subsidiaries.
Nevada authorizes a regulatory sandbox program
On June 13, the Nevada governor approved SB 161, which requires the Director of the Department of Business and Industry to establish and administer the “Regulatory Experimentation Program for Product Innovation.” If the Director approves an applicant to participate in the Program, the participant’s product or service will be generally exempt from certain statutory and regulatory requirements related to financial products or services. Under the legislation, any consumer of the product or service must be a resident of Nevada and not more than 5,000 consumers may be provided the product or service during the period of testing, unless the Director approves up to 7,500 consumers. Participants must make certain disclosures to consumers, including, if applicable, that the participant does not hold a license to provide a product or service outside of the program and method of submitting a complaint to the Director. The Director may also require additional disclosures. The legislation also authorizes the Director to establish participant-reporting requirements by regulation and generally limits participation in the program to 2 years, although a participant may seek an extension of this period to apply for any license or other authorization otherwise required for the product or service. The legislation is effective on June 13 for the purpose of adopting any regulations and performing any other preparatory administrative tasks that are necessary to carry out the provisions of the bill, and on January 1, 2020, for all other purposes.
Nevada authorizes pilot program for marijuana banking
On June 5, the Nevada governor signed AB 466, requiring the State Treasurer to create a pilot program, authorized to operate from October 1, 2019 through June 30, 2023, for the establishment of one or more closed-loop payment processing systems that enable certain persons to engage in financial transactions relating to marijuana.
The closed-loop payment processing system established under the pilot program must be designed to, among other things: (i) provide marijuana establishments and medical marijuana establishments a safe, secure and convenient method of paying state and local taxes; (ii) prevent revenue from the sale of marijuana from going to criminal enterprises, gangs and drug cartels, and; (iii) prevent lawful financial transactions relating to marijuana from being used as a cover or pretext for unlawful activities. The bill requires the State Treasurer to adopt regulations to carry out the pilot program and requires that the State Treasurer submit a report concerning the pilot program on or before December 1, 2020, and every 6 months thereafter.
CSBS seeks public comment on model state payments law
On February 21, the Conference of State Bank Supervisors (CSBS) issued a request for information (RFI) on issues related to state money transmission and payments regulation as state regulators begin coordinating model legislation for all 50 states to adopt in whole or in part. CSBS’ RFI is based upon recommendations made by the Fintech Industry Advisory Panel (a part of CSBS’ Vision 2020 previously covered by InfoBytes here) and seeks feedback on several areas of law and regulation to help states create harmonized definitions and interpretations on a national level. According to the Advisory Panel, “despite the general similarity of state money transmission laws, each state defines and interprets money transmission and its exemptions differently.” The RFI solicits comments framed towards outlined policy standards and risks on the following issues:
(i) The scope of covered money transmission activities and applicable exemptions; (ii) the change in control process, including the personal vetting requirements for individuals deemed new control persons; (iii) prudential regulations—in particular, permissible investment, net worth, and surety bond requirements; (iv) supervision processes; and (v) coordination—in particular, how states can ensure the areas outlined above are implemented consistently without state-by-state policy diversion or needless duplication of effort.
Comments on the RFI are due April 20 and will be made publicly available here.
Colorado regulator exempts certain cryptocurrency exchanges from money transmitter licensing requirements
On September 20, the Colorado Department of Regulatory Agencies Division of Banking (Division) issued interim guidance exempting certain types of cryptocurrency exchanges from the state’s money transmitter licensing requirements. Under the interim guidance—which outlines the Division’s interpretation of Colorado’s existing Money Transmitters Act (the Act)— the Division determined that the Act regulates the transmission of money, meaning legal tender, and that cryptocurrencies are not legal tender under the Act. As a result, virtual currency exchanges operating in Colorado do not require a license if transmitting only cryptocurrencies without any legal tender issued and backed by a government (fiat currency) involved in the transaction. However, if fiat currency is present in a transaction, then a virtual currency exchange may require a license. Additionally, a virtual currency exchange must obtain a license when it performs all of the following: (i) it engages in the business of selling and buying cryptocurrencies for fiat currency; (ii) it allows a Colorado customer to transfer cryptocurrency to another customer within the exchange; and (iii) it allows the transfer of fiat currency through the medium of cryptocurrency within the exchange. If a virtual currency exchange offers the ability to transfer fiat currency through the medium of cryptocurrency, the Division encourages the exchange to contact the Division to determine whether it must obtain a license.
State banking supervisors ask congressional leaders for marijuana banking services clarity
On August 24, 13 state banking supervisors sent a letter asking congressional leaders “to consider legislation that creates a safe harbor for financial institutions to serve state-compliant [marijuana] business, or entrusts sovereign states with the full oversight and jurisdiction of marijuana-related activity.” According to the letter, while 31 states, the District of Columbia, and two territories have legalized medical and/or recreational marijuana use as of August 1, many financial institutions choose not serve marijuana businesses due to a perceived threat of asset forfeitures or criminal penalties. The letter notes that this results in inadequate regulation, cash transactions that are difficult to track, “a diminished ability to identify operators acting to circumvent federal and state licensing and regulatory frameworks,” and concerns for public safety. In addition, according to the state regulators, the rescission of the 2013 “Cole Memo”—which outlined the DOJ’s marijuana enforcement priorities and was relied upon by a limited number of financial institutions—has led to greater uncertainty for banks that serve marijuana businesses. The letter also discusses the Financial Crimes Enforcement Network’s 2014 guidance—which clarifies expectations under the Bank Secrecy Act for financial institutions providing services to marijuana businesses—and further stresses that “the Rohrabacher amendment prohibiting federal funds being used to inhibit state medicinal marijuana programs [is] an impermanent approach that requires a permanent resolution.”
In July, and as previously covered in InfoBytes, the New York Department of Financial Services (NYDFS) issued guidance which encouraged New York state chartered banks and credit unions to consider establishing relationships with regulated and compliant medical marijuana and industrial hemp-related businesses operating in New York. NYDFS stated it will not impose any regulatory action on a New York financial institution that establishes a relationship with a regulated marijuana business as long as the institution also complies with other applicable guidance and regulations.
Washington state updates mortgage provisions of Consumer Loan Act
On July 24, the Washington Department of Financial Institutions adopted new mortgage-related provisions of the state’s Consumer Loan Act (CLA). In addition to technical changes and certain definition modifications, the rulemaking, among other things, (i) adds a requirement that if electronic records are stored using a closed service, the service must be located in the U.S. or its territories; (ii) prohibits certain servicing activities, such as receiving payments and collection activities, from being conducted outside the U.S. or its territories; and (iii) requires servicers to maintain a compliance management system with the functionalities that are described in the CFPB’s Supervision and Examination Manual. The rulemaking is effective September 1.