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Senate Committees Begin Review Of Virtual Currency Regulation
This week, two Senate Committees—Homeland Security and Governmental Affairs and Banking, Housing and Urban Affairs—held hearings to hear from regulators and other stakeholders about how virtual currencies fit within the existing regulatory framework, and to assess whether there is a need to alter that framework in response to potential risks presented by emerging virtual currency technologies. The hearings followed an inquiry initiated by Senate Homeland Security leaders over the summer. Senators who participated in the hearings did not indicate any desire to move quickly to establish new federal regulations to address potential risks presented by innovation in virtual currencies. Rather, the lawmakers generally expressed a desire not to inhibit continued innovation, while supporting market participants who want to play by the rules and protecting the market from those who do not. In both hearings, FinCEN Director Jennifer Shasky Calvery described her agency’s ability to address the BSA/AML and terrorism financing risks presented by virtual currencies by employing FinCEN’s existing statutory authority and regulatory tools. Similarly, during the Senate Banking hearing, the Conference of State Bank Supervisors expressed confidence in the ability of state regulators to address consumer protection and other risks posed by virtual currencies through the existing state regulatory framework and processes. Still, committee members raised broader questions about the how to define or categorize virtual currencies (e.g. as a currency versus as a security) and the impact of such a classification on a range of other issues including monetary policy and tax administration. The breadth of the issues, which may need to be addressed by a range of government actors, formed the basis of Senate Homeland Security Committee Chairman Tom Carper’s (D-DE) call for a “whole government” approach to virtual currency.
Senate Blocks FHFA Director Nomination
On October 31, the U.S. Senate voted 56-42 on a procedural motion and blocked the advance of President Obama’s nomination of Rep. Mel Watt (D-NC) to serve as FHFA Director. The nomination needed 60 votes to clear the procedural hurdle and advance to a confirmation vote. Senate Majority Leader Reid (D-NV) voted “no” in a move to preserve his procedural options for bringing the nominee to the floor again at a later time.
Senate Commerce Committee Continues Data Broker Inquiries
Recently, Senate Commerce Committee Chairman Jay Rockefeller (D-WV) continued his committee’s examination of the way data brokers collect and share personal information. The Senator sent a letter to one data broker seeking additional information about the broker’s customer vetting practices and how it shares consumer information with those customers. As the basis for the letter, Senator Rockefeller cited news reports alleging that a company acquired in March 2012 by the data broker receiving the letter had sold data to an identity theft scheme. At least one report suggested that the alleged activity continued after the broker conducted its due diligence and completed the acquisition. The Senator’s letter also poses follow up questions based on the broker’s response to the Senator’s original October 2012 request to numerous data brokers, which the Senator expanded to include other industry participants in September 2013.
Senators Challenge CFPB On Indirect Auto Finance Guidance
On October 30, a bipartisan group of 22 Senators sent a letter to the CFPB raising concerns about CFPB guidance affecting the indirect auto financing market and auto dealers’ ability to negotiate retail margins with consumers. The guidance at issue, contained within CFPB Bulletin 2013-02, advised bank and nonbank indirect auto financial institutions about compliance with federal fair lending requirements in connection with the practice by which auto dealers “mark up” the financial institution’s risk-based buy rate and receive compensation based on the increased interest revenues.
In August, the CFPB responded to a similar inquiry from House members. The Senate letter asserts that the CFPB still has not explained a basis for alleging that discrimination under a “disparate impact” theory of liability exists in the indirect auto financing market. Nor, the letter continues, has the CFPB released the statistical methodology it uses to evaluate disparate impact in an indirect auto lender’s portfolio.
The Senators request details concerning the CFPB’s statistical methodology and also seek information about: (i) coordination among the CFPB, Federal Reserve Board, and FTC regarding the CFPB’s fair lending guidance to financial institutions; (ii) the decision to issue the guidance via a bulletin without public comment rather than employing the Administrative Procedures Act rulemaking process; and (iii) any cost-benefit analysis conducted into the affect that industry adoption of a flat-fee dealer compensation mechanism would have on the cost for consumers across the credit spectrum.
The letter comes on the heels of a related inquiry to the FTC last week, which urged the FTC to investigate, among other things, auto dealer practices regarding interest rate markups and requested information on the FTC’s auto dealer markup enforcement activity.
Congressional Democrats Seek Information on Student Debit Cards; CFPB Plans "Banking on Campus" Event
On September 26, several Democratic Members of Congress, including Assistant Senate Majority Leader Dick Durbin (D-IL), House Financial Services Ranking Member Maxine Waters (D-CA), House Education Committee Ranking Member George Miller (D-CA), and Senate Banking Committee members Sherrod Brown (D-OH) and Elizabeth Warren (D-MA), sent letters to the CEOs of numerous financial institutions asking that the institutions explain their student debit card deals with colleges and universities. The letters ask each financial institution for: (i) a list of colleges/universities where the institution has an agreement to enroll students in any deposit account or prepaid debit account and where the marketing, materials or financial instruments used to access such accounts are co-branded with a college or university logo, symbol, mascot or name; (ii) the number of accounts opened through agreements at each institution of higher education listed from the previous question, and the total fees collected from such accounts over the last three academic years; (iii) the total value of monetary and non-monetary remuneration provided to such institutions of higher education for the marketing of these products over each of the last three academic years; and (iv) whether any of the institution’s employees or agents have ever provided any monetary or non-monetary gift to an employee or agent of an institution of higher education, including meals, entertainment, gift cards, or compensation for an advisory committee above a $10 value as part of the institution’s marketing strategy over the past three academic years.
Earlier this year the CFPB initiated a review of campus affinity relationships, and on Monday, September 30, the CFPB is hosting an event regarding financial products offered at colleges.
Senator Expands Data Broker Investigation
On September 25, Senator Jay Rockefeller (D-WV) released letters he recently sent to 12 popular “personal finance, health, and family-focused websites” for assistance in an ongoing Senate Commerce Committee investigation into the way data brokers collect and share personal information. According to Senator Rockefeller, the letters were sent in part because “several data brokers have refused to disclose to the Committee specific sources of consumer data, preventing the Committee from fully understanding how the industry operates.” Senator Rockefeller began this investigation in October 2012 with letters to a number of data brokers. In connection with this latest round of letters, the Senator states that “hundreds of thousands of websites that gather information directly from consumers may be a source of consumer information for data brokers,” and that he believes some websites’ privacy policies “leave room for sharing a consumer’s information with data brokers or other third parties.” The Senate investigation parallels an investigation by members of the House of Representatives and the FTC’s ongoing activity with regard to data brokers.
Senator Warren Presses DOJ on National Mortgage Servicing Settlement FHA-Related Releases
On August 21, Senator Elizabeth Warren (D-MA) sent a letter to Attorney General Eric Holder raising concerns about the provisions of the National Mortgage Settlement that relate to the government’s release of potential FHA-related False Claims Act-based claims against the settling servicers. Senator Warren’s letter questions the settlement amount that the government obtained for the release of such claims. The Senator calls for a “clearer and more public accounting of the [alleged] damages FHA incurred” as a result of the settling servicers’ conduct, and presses DOJ more broadly on its enforcement approach to large financial institutions. Senator Warren is seeking information and documents relating to the DOJ’s assessment of any potential FHA claims and the process by which it agreed to settle those claims.
Senate Committee Expands Review of Virtual Currency Policies
On August 12, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), the leaders of the Senate Committee on Homeland Security and Government Affairs, sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that virtual currency Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans” “strategies” or “ongoing initiatives” regarding virtual currencies. This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
State, Federal Authorities Increase Scrutiny of Virtual Currencies, Emerging Payment Providers
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.
The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. On August 12, the leaders of that committee, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans,” “strategies,” or “ongoing initiatives” regarding virtual currencies. The letter specifically notes the importance of balancing the need to deal with “potential threats and risks . . . swiftly” with the goal of ensuring that “rash or uninformed actions don’t stifle a potentially valuable technology.”
This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
Congress Passes Reverse Mortgage Legislation; Senate Banking Committee Approves Broader FHA Reform Legislation
On July 30, the U.S. Senate passed by unanimous consent the Reverse Mortgage Stabilization Act, H.R. 2167. The bill, which was passed by the House in June and now goes to the President for his signature, will allow HUD to use notices or mortgagee letters to establish additional or alternative requirements necessary to improve the fiscal safety and soundness of the Home Equity Conversion Mortgage (HECM) program.
On July 31, the Senate Banking Committee voted 21-1 to approve the FHA Solvency Act of 2013, S. 1376, as amended during committee markup. As previously reported, that bill also includes reverse mortgage provisions, as well as measures to more broadly reform the FHA. The bill as approved by the committee includes amendments that would, among other things, (i) provide that in addition to the principal dollar amount limitation on all insured HECM loans, fixed rate HECMs may not involve a principal limit with a principal limit factor in excess of .61, (ii) allow HUD to promulgate rules to require servicers of FHA loans to enter into a subservicing arrangement with any independent specialty servicer approved by HUD, and (iii) prohibit FHA from insuring a mortgage executed by a borrower who was the borrower under any two residential properties that have been previously foreclosed upon. In addition, during the markup committee members offered and then withdrew numerous amendments that later could be included in the bill that is considered by the full Senate. For example, those amendments would (i) create a statutory requirement that HUD/FHA repay Treasury for any funds needed to stabilize the MMI Fund, (ii) revise the indemnification provisions to provide certainty for lenders, and (iii) provide the FHA additional flexibility in times of financial crisis to ensure it can play a countercyclical role. Finally, committee members agreed to work with the FHA to expand loss mitigation options for individuals who receive income from sources other than employment.