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DFPI announces investigation into crypto platform
On November 10, the California Department of Financial Protection and Innovation (DFPI) announced that it is investigating “the apparent failure” of a crypto asset platform, which recently announced that it filed for bankruptcy. According to DFPI, it takes “oversight responsibility very seriously,” and expects “any person offering securities, lender, or other financial services provider that operates in California to comply with our financial laws.”
DFPI revokes crypto lending company's license; issues notice to suspend a different crypto lending company
On December 19 , the California Department of Financial Protection and Innovation (DFPI) announced that it has moved to revoke a cryptocurrency lender’s license. According to DFPI revoking the license "is the result of the department’s examination, which found that the New Jersey-based finance lender failed to perform adequate underwriting when making loans and failed to consider borrowers’ ability to repay these loans, in violation of California’s financing laws and regulations." DFPI previously announced on November 18 an order suspending a cryptocurrency lender’s California license for 30 days pending DFPI’s investigation. The suspension follows the DFPI’s notice to suspend issued on November 11, which was prompted by the cryprocurrency lender's November 10 announcement that it would limit platform activity, including pausing client withdrawals. DFPI noted that the cryptocurrency lender confirmed its “significant exposure to [a crypto asset platform]” and affiliated entities. DFPI further noted that the cryptocurrency lender expected “that the recovery of the obligations owed to us by [the crypto company] will be delayed as [the crypto company] works through the bankruptcy process.” According to the cryptocurrency lender, withdrawals would continue to be paused. DFPI also noted that in February 2022, the respondent was ordered to desist and refrain from offering or selling unqualified, non-exempt securities in the form of its interest accounts in California.
Later, DFPI issued an order suspending a different cryptocurrency lender’s license license for 30 days pending DFPI’s investigation into the respondent’s recent announcement to limit its platform activity, including pausing client withdrawals. The respondent had sent a communication to customers signed by the CEO, stating: “I am sorry to report that the collapse of [the cryptocurrency lender that was issued a notice to suspend from DFPI on November 10] has impacted our business. Until we are able to determine the extent of this impact with specific details that we feel confident are factually accurate, we have paused deposits and withdrawals on [its own platform] effective immediately.” DFPI also noted that it is “investigating the extent to which [the cryptocurrency lender] has been affected by the bankruptcy of [the cryptocurrency lender that was issued a notice to suspend from the DFPI on November 10] and related companies.”
California DFPI concludes MTA licensure not required for crypto exchange
On November 3, 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 a cryptocurrency exchange’s transactions. The redacted opinion letter examines whether the inquiring company’s proposed business activities—which “will offer the purchase, sale, and trading of various cryptocurrencies using a platform provided by its affiliate and in conjunction with another affiliate that is a . . . registered broker-dealer”—are exempt from the MTA. Transactions on the company’s platform will involve the use of the company’s tokenized version of the U.S. dollar. Customers will deposit U.S. dollar funds into a company account where an equivalent amount of tokens will be created and used to facilitate a trade for cryptocurrency. The tokens can also be exchanged for U.S. dollars, or customers can hold the tokens in their wallet. According to the letter, the company says it “does not take custody of its client’s currencies or offer digital wallets,” but rather a “client’s digital wallet is directly linked to the platform and transacts on a peer-to-peer basis with other clients.” In addition to trading cryptocurrencies, the company also plans to allow customers to “trade in cryptographic representations of publicly listed securities,” thereby permitting customers to purchase, sell, or trade the securities tokens on the platform. The company will also be able to transfer customers’ shares of securities tokens from the platform to a customer’s traditional brokerage account. The company explained that these transactions of securities tokens will be covered by the company’s affiliate’s broker-dealer license.
DFPI concluded that because the Department has not yet “determined whether the issuance of tokenized versions of the U.S. Dollar or securities, or their use to trade cryptocurrencies, is money transmission,” it will not require the company to obtain an MTA license in order to perform the aforementioned services or to issue tokenized version of the U.S. dollar or securities. DFPI noted, however, that its conclusions are subject to change, and emphasized that its letter does not address whether the proposed activities are subject to licensure or registration under other laws, including the Corporate Securities Law of 1968.
NYDFS issues RFI on private student loan refinancing
On November 8, NYDFS issued a request for information (RFI) to student loan advocates, lenders, regulators, servicers, and other stakeholders, seeking information regarding private student loan refinancing in New York. The Private Student Loan Refinancing Task Force, tasked with “study[ing] and analyz[ing] ways lending institutions that offer non-federal student loans to students of New York institutions of higher education can be incentivized and encouraged to create student loan refinance programs,” issued questions to solicit information from stakeholders to inform a forthcoming report. According to the announcement, the Task Force is seeking responses to questions concerning private sector refinancing of student loans. The questions include, among other things: (i) “What options are available for student loan borrowers to refinance private student loans both in New York State and outside the state?”; (ii) “What options are available for student loan borrowers to refinance federal student loans both in New York State and outside the state?”; (iii) “What is the volume of private student loans refinanced, the terms of the borrowers’ prior loans, the terms of the borrowers’ refinancing loans, the unmet need for student loan refinancing, and the impact of these refinancing loans in New York and nationwide?”; (iv) “What is the volume of federal student loans refinanced, the terms of the borrowers’ prior loans, the terms of the borrowers’ refinancing loans, the unmet need for student loan refinancing, and the impact of these refinancing loans in New York and nationwide?”; and (v) “What publicly available data should the Task Force review? Is there privately owned data that could be made available to the Task Force?” Responses are due by December 8.
NYDFS announces fair lending settlement with indirect auto lender
On October 6, NYDFS announced a settlement with a New York State-licensed bank to resolve allegations that the bank violated New York Executive Law § 296-a while engaged in indirect automobile lending. NYDFS alleged that the bank’s practices resulted in minority borrowers paying higher interest rates than non-Hispanic white borrowers regardless of their creditworthiness. According to the announcement, the bank allegedly “failed to effectively monitor automobile dealers from which [the bank] agreed to purchase loans, thereby allowing the dealers to charge members of protected classes more in discretionary dealer markups than borrowers identified as non-Hispanic White.” Under the terms of the consent order, the bank agreed to pay a $950,000 civil money penalty to the state, as well as restitution to eligible borrowers impacted during the period of January 1, 2017 through March 31, 2022. The bank also agreed to undertake fair lending compliance remediation efforts to increase its monitoring of dealers participating in its indirect auto lending program to precent discriminatory markups in the future.
FDIC releases August enforcement actions
On September 30, the FDIC released a list of administrative enforcement actions taken against banks and individuals in August. During the month, the FDIC made public seven orders consisting of “one consent order, one order terminating consent order, two orders of prohibition from further participation and three orders granting permission to file application and approving application for consent to participate in the conduct of the affairs of any insured depository institution.” Among the orders is a consent order imposed against a Mississippi-based bank by the FDIC and the Mississippi Department of Banking and Consumer Finance, which alleged that the bank engaged in unsafe or unsound banking practices or violations of law relating to the Bank Secrecy Act (BSA). While the bank consented to the action, it did so without admitting or denying any charges. Under the consent order, the bank must, among other things: (i) develop, adopt, and implement a written customer due diligence program; (ii) develop and establish a system of internal controls; and (iii) establish and maintain an independent testing program for compliance with the BSA and its implementing rules and regulations. The bank must also “conduct a lookback review all transactions of $3M or more starting with July 1, 2020, through February 28, 2022, to ensure all suspicious activity is identified, investigated and/or a SAR filed or a documented decision not to file is completed.”
DFPI cracks down on crypto-asset Ponzi schemes
On September 27, the California Department of Financial Protection and Innovation issued desist and refrain orders against 11 entities, including nine crypto asset trading platforms, one metaverse software development company, and one decentralized finance platform for violating California securities laws. While each of the 11 entities allegedly offered and sold unqualified securities through their platforms and promised various fixed rates of return to investors, DFPI claimed that the entities actually engaged in Ponzi-like schemes and used investor funds to distribute supposed profits and returns to other investors. Additionally, DFPI accused the entities of “luring” new investors through referral programs that operated like pyramid schemes in which investors would be paid commissions to recruit new investors. Referring to these as “high yield investment programs (HYIPs),” DFPI claimed the entities provided investors with few details about the people operating the HYIPs, how the HYIPs make money, or how the HYIPs facilitate deposits and withdrawals with crypto assets, among other things. DFPI also accused 10 of the 11 entities of making material representations and omissions to investors about the qualifications of their securities under California law as well as the purported risks. DFPI said in its announcement that it had been directed by an executive order issued by the governor in May (covered by InfoBytes here) to initiate enforcement actions to stop violations of consumer financial laws and to increase residents’ awareness of the benefits and risks associated with crypto asset-related financial products and services.
States accuse crypto platform of offering unregistered securities
On September 26, the New York attorney general sued a cryptocurrency platform for allegedly offering unregistered securities and defrauding investors. New York was joined by state regulators from California, Kentucky, Maryland, Oklahoma, South Carolina, Washington, and Vermont who also filed administrative actions against the platform. The states alleged that the platform failed to register as a securities and commodities broker but told investors that it was fully in compliance. According to the New York AG’s complaint, the platform promoted and sold securities through an interest-bearing virtual currency account that promised high returns for participating investors. The NY AG said that a cease-and-desist letter was sent to the platform last year, and that while the platform stated it was “working diligently to terminate all services” in the state, it continued to handle more than 5,000 accounts as of July. The complaint charges the platform with violating New York’s Martin Act and New York Executive Law § 63(12), and seeks restitution, disgorgement of profits, and a permanent injunction.
California’s Department of Financial Protection and Innovation (DFPI) said in a press release announcing its own action that it will continue to take “aggressive enforcement efforts against unregistered interest-bearing cryptocurrency accounts.” DFPI warned companies that crypto-interest accounts are securities and are therefore subject to investor protection under state law, including disclosure of associated risks.
Oregon issues remote work guidance to licensed loan originators
On September 21, the Oregon Department of Consumer and Business Services filed permanent administrative order FSR 3-2022 with the Secretary of State to allow licensed loan originators and employees to work from home. Under the order, Oregon licensed mortgage loan originators “may originate loans from a location other than from a licensed branch office if the location is the licensed mortgage loan originator’s home; the licensed mortgage loan originator is an employee of a mortgage banker or mortgage broker; and the mortgage banker or the mortgage broker complies with OAR 441-860- 0040, as applicable.” Mortgage bankers or brokers must have in place appropriate policies and procedures to supervise licensees working from home, including data security measures to protect consumers’ personal data. Additionally, licensees working from home “are prohibited from engaging in person with consumers for loan origination purposes at the home of the loan originator or employee, unless the home is licensed as a branch.” Licensees may, however, “engage with consumers for loan origination purposes at the home of the loan originator or employee by means of conference telephone or similar communications equipment that allows all persons participating in the visitation to hear each other, provided that participation is controlled and limited to those entitled to attend, and the identity of participants is determinable and reasonably verifiable.” Licensees who work from home are also prohibited from keeping any physical business records at any location other than a licensed location, and must also ensure that all origination records are available at a licensed location.
California passes UDAAP legislation
On September 15, the California governor signed AB 1904, which amends Section 1770 of the Civil Code relating to financial institutions and addresses certain provisions under the Consumers Legal Remedies Act. Among other things, the bill prohibits a covered person or a service provider from engaging in unlawful, unfair, deceptive, or abusive acts or practices regarding consumer financial products or services, such as, among other things: (i) misrepresenting the source, sponsorship, approval, or certification; (ii) using deceptive representations of geographic origin; (iii) representing that goods are original or new if they have deteriorated unreasonably or are altered; (iv) advertising goods or services with the intent not to sell them as advertised; and (v) making false or misleading statements of fact concerning reasons for, existence of, or amounts of, price reductions. The bill authorizes the California Department of Financial Protection and Innovation to bring a civil action for a violation of the law. The bill would also make unlawful the failure to include certain information, including a prescribed disclosure, in a solicitation by a covered person, or an entity acting on behalf of a covered person, to a consumer for a consumer financial product or service.