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Financial Services Law Insights and Observations


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  • California DBO issues cannabis banking guidance

    State Issues

    On October 3, the California Department of Business Oversight (DBO) issued guidance for state-chartered financial institutions that serve cannabis-related businesses. The guidance, which is intended to help financial institutions manage risks appropriately, addresses cannabis program governance and compliance with the Bank Secrecy Act (BSA), as well as cannabis banking guidance issued in 2014 by the Financial Crimes Enforcement Network (FinCEN). As previously covered by InfoBytes, FinCEN’s guidance—which includes federal law enforcement priorities still in effect that were taken from a now-rescinded DOJ memo—details the necessary elements of a customer due diligence program, ongoing monitoring and suspicious activity report filing requirements, and priorities and potential red flags. Notably, the DBO states that while it will not bring regulatory actions against state-chartered financial institutions “solely for establishing a banking relationship with licensed cannabis businesses,” it expects all financial institutions to comply with FinCEN’s BSA expectations and guidance to make appropriate risk assessments. The DBO also referred bank examiners to its September Cannabis Job Aid, which is intended to assist with the examination of financial institutions that may be banking cannabis-related businesses.

    State Issues Cannabis Banking CDBO FinCEN Bank Secrecy Act Examination

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  • California cities allowed to form public banks

    State Issues

    On October 2, the California governor signed AB 857 to authorize the creation of “public banks” in the state to support local economies, community development, and address infrastructure and housing needs for localities. Under AB 857, public banks are defined as “a corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, as specified, local agencies, or a joint powers authority.”

    Among other things, cities who submit applications to the California Department of Business Oversight (DBO) to obtain a certificate of authorization will be required to provide a viability study, as well comply with “[a]ll provisions of law applicable to nonprofit corporations” and obtain deposit insurance through the FDIC. AB 857 also requires “a local agency that is not a charter city to obtain voter approval of a motion to submit an application to the [DBO].” The number of new public bank licenses the DBO is authorized to approve is limited to two per calendar year, with no more than 10 public banks operating at any time. In addition, public banks may only offer products to retail customers through partnerships with existing financial institutions, and are barred from competing with local financial institutions. AB 857 expires seven years after regulations under this law are promulgated.

    State Issues State Legislation CDBO

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  • Mortgage servicer agrees to pay $7.8 million in escrow interest in CDBO action

    State Issues

    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.

    State Issues CDBO Enforcement State Regulators Escrow

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  • California appoints Manuel Alvarez as DBO Commissioner

    State Issues

    On March 28, the California governor announced that Manuel Alvarez has been appointed Commissioner of the California Department of Business Oversight. Since 2014, Alvarez has been general counsel, chief compliance officer, and corporate secretary at an online purchase lender. Prior to those roles, he was an enforcement attorney with the CFPB, and a deputy attorney general at the California Department of Justice. Alvarez’s appointment will require the confirmation of the state Senate.

    State Issues CDBO Regulation Supervision

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  • California small-dollar lender reaches settlement resolving interest rate allegations

    State Issues

    On January 22, the California Department of Business Oversight (DBO) announced a $900,000 settlement with a California-based lender for allegedly steering borrowers into high-interest loans to avoid statutory interest rate caps. According to the DBO, the lender’s practice of overcharging interest and administrative fees violated the California Financing Law, which caps interest on small-dollar loans up to $2,499 at rates between 20 percent and 30 percent, but does not provide a cap for loans of $2,500 and higher. The DBO also asserts that the lender’s brochures, which advertised loans of “‘up to $5,000’ without stating that the minimum loan amount offered by [the lender] was $2,501,” were false, misleading, or deceptive. Moreover, the lender allegedly failed to allow certain borrowers the opportunity to make advance payments “in any amount on any loan contract at any time.”

    Additionally, the DBO alleges that the lender overcharged roughly $700,000 in payday loan transactions by (i) collecting charges twice; (ii) allowing borrowers to take out a new loan before paying off the old one; and (iii) depositing some borrowers’ checks prior to the specified date in the loan agreement without their written authorization.

    Under the terms of the consent order, the lender will, among other things, provide $800,000 in refunds to qualifying borrowers, pay $105,000 in penalties and other costs, and provide accurate verbal disclosures to borrowers concerning loan amounts and interest rate caps.

    State Issues Payday Lending Interest Rate Small Dollar Lending CDBO Settlement

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  • Federal, state financial regulatory agencies issue guidance for institutions affected by California wildfires; FinCEN encourages financial institutions to communicate BSA filing delays

    Federal Issues

    On November 19, the Financial Crimes Enforcement Network (FinCEN) issued a notice to financial institutions that file Bank Secrecy Act reports encouraging such institutions to communicate with FinCEN and their functional regulators regarding any expected filing delays caused by the California wildfires. FinCEN also reminded financial institutions to review advisory FIN-2017-A007, previously covered by InfoBytes, which discusses potential fraudulent activity related to recent disaster relief schemes.

    In a related action, the Federal Reserve Board, California Department of Business Oversight, Conference of State Bank Supervisors, FDIC, NCUA, and OCC (collectively, the “agencies”) issued a joint statement on November 15 providing guidance to financial institutions impacted by the California wildfires. The agencies encouraged lenders to work with borrowers in impacted communities to modify loans as appropriate based on the facts and circumstances of each borrower and loan. In addition, the agencies assured lenders that they would (i) expedite any request to operate temporary facilities to provide more convenient services to those affected by the wildfires; (ii) not generally assess penalties for institutions that take prudent steps to satisfy any publishing or reporting requirements, including by contacting their state or federal regulator to discuss satisfaction of such requirements; and (iii) consider granting institutions favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.

    Find continuing InfoBytes coverage on disaster relief here.

    Federal Issues OCC NCUA CSBS CDBO Federal Reserve FDIC Disaster Relief FinCEN Bank Secrecy Act

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