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  • District Court grants Georgia regulator default judgment against unauthorized bank

    State Issues

    On July 26, the Georgia Department of Banking and Finance (Department) announced that the Superior Court of DeKalb County entered an order granting default judgment against defendants for unauthorized banking activities and the unapproved use of the word “bank.” Under Georgia law, it is unlawful to conduct, advertise, or be affiliated with a banking business in the state without a bank charter. Georgia law also prohibits the use of the words “bank” and/or “trust” in any entity’s name without permission from the Department. In 2020, the Department issued a cease and desist order against the defendants after the Department determined that it had no records of the entity and had not approved it or the individual defendant to organize a bank and/or conduct a banking business in or from Georgia. Nor had the Department granted the entity defendant the ability to use the word “bank” in its name. The Department later discovered that the defendants violated the cease and desist order by continuing to engage in unauthorized banking activities and continuing to advertise using the word “bank” without approval. The court ordered the defendants to comply with the cease and desist order and permanently enjoined them from, among other things, using bank nomenclature and advertising or providing financial products or services from within Georgia without written authorization from the Department.

    State Issues State Regulators Courts Georgia Compliance

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  • Massachusetts Division of Banks issues guidance to debt collectors and student loan servicers

    Recently, the Massachusetts Division of Banks published guidance related to the conduct of debt collectors, student loan servicers, and third-party loan servicers. 209 CMR 18.00 defines unfair or deceptive acts or practices for entities servicing loans or collecting debts within the commonwealth, and provides licensing, registration, and supervision procedures. Those provisions of the regulation that govern fair debt collection and third party loan servicing practices apply both to licensed entities, and entities exempt from licensure. Additionally, the regulation specifies that licensed debt collectors are not required to register as third party loan servicers but must still comply with all relevant state and federal laws and regulations that govern third party loan servicers when acting in that capacity. Student loan servicers engaged in third party loan servicing activities or debt collection activities within the scope of student loan servicing activities described within Massachusetts’ law are also required to comply with all applicable state and federal laws and regulations governing third party loan servicers and debt collectors when acting in such capacity. Additionally, 209 CMR 18.00 outlines, among other things, (i) licensing application requirements; (ii) licensing standards; (iii) registration procedures and standards; (iv) notice, reporting, and recordkeeping requirements; (v) collection practices and consumer communication restrictions; (vi) prohibitions related to harassment or abuse, false or misleading representations, and unfair, deceptive, or unconscionable practices; (vii) debt validation requirements; (viii) mortgage loan servicing practices; (ix) student loan servicing practices; and (x) confidentiality provisions. The regulation took effect July 1.

    Licensing State Issues State Regulators Massachusetts Debt Collection Student Lending Student Loan Servicer Third-Party Compliance

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  • Fed, OCC report on health of MDIs

    Federal Issues

    Recently, the Federal Reserve Board and the OCC issued reports pursuant to Section 367 of the Dodd-Frank Act generally detailing the health of Minority Depository Institutions (MDIs) and the agencies’ efforts taken to assist MDIs as the Covid-19 pandemic disproportionately affected low- and moderate-income communities and racial and ethnic minorities. The Fed’s report, “Promoting Minority Depository Institutions,” discussed, among other things, extra steps taken by the agency to support and assist MDIs over the past year, which included conducting individualized outreach on several topics like how to access the discount window and the Paycheck Protection Program Liquidity Facility (covered by InfoBytes here and here). The report also examined efforts taken by the Fed to preserve and promote MDIs through its Partnership for Progress program—“a national outreach effort to help MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace”—and covered the Fed’s unanimous approval last September to approve an Advance Notice of Proposed Rulemaking on modernizing the Community Reinvestment Act (covered by InfoBytes here).

    The OCC outlined actions taken to preserve and promote MDIs in its “2020 Annual Report,” including the launch of the Roundtable for Economic Access and Change known as Project REACh (covered by InfoBytes here). OCC subject matter experts also provided regulatory technical assistance to MDIs on topics including safety and soundness, cybersecurity, compliance with Bank Secrecy Act/anti-money laundering requirements, and current expected credit loss accounting methodology, among others. The OCC also noted that despite a seven-basis-points drop on the average return on assets for MDIs through the pandemic, the health of those institutions “remained satisfactory.”

    Federal Issues Minority Depository Institution Federal Reserve OCC Covid-19 CRA Dodd-Frank Compliance Bank Secrecy Act Anti-Money Laundering Bank Regulatory

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  • FATF updates statements concerning jurisdictions with AML/CFT/CPF deficiencies

    Financial Crimes

    On July 1, the Financial Crimes Enforcement Network (FinCEN) announced updates to the Financial Action Task Force (FATF) statements concerning jurisdictions with strategic anti-money laundering, countering the financing of terrorism, and combating weapons of mass destruction proliferation financing (AML/CFT/CPF) deficiencies. Specifically, to ensure compliance with international standards, the FAFT updated the following two statements: (i) High-Risk Jurisdictions Subject to a Call for Action, which identifies jurisdictions with significant strategic deficiencies in their AML/CFT/CPF regimes and instructs FATF members to apply enhanced due diligence, and in the most serious cases, apply counter-measures to protect the international financial system from such risks; and (ii) Jurisdictions under Increased Monitoring, which “publicly identifies jurisdictions with strategic deficiencies in their AML/CFT/CPF regimes that have committed to, or are actively working with, the FATF to address those deficiencies in accordance with an agreed upon timeline.” Notably, Haiti, Malta, the Philippines, and South Sudan have been added to the Jurisdictions under Increased Monitoring, while Ghana has been removed from the list. Among other things, through the announcement, FinCEN further instructs financial institutions to comply with U.S. prohibitions against the opening or maintaining of any correspondent accounts, whether directly or indirectly, for North Korean or Iranian financial institutions, which are already prohibited under existing U.S. sanctions and FinCEN regulations.

    Financial Crimes FATF FinCEN Of Interest to Non-US Persons Anti-Money Laundering Combating the Financing of Terrorism Combating Weapons of Mass Destruction Proliferation Financing Compliance

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  • MSB out from under deferred prosecution agreement

    Courts

    On June 10, the U.S. District Court for the Middle District of Pennsylvania granted the DOJ’s unopposed motion to dismiss anti-money laundering charges brought against a money services business, ending an extended deferred prosecution agreement (DPA) related to deficiencies in the company’s anti-fraud and anti-money laundering (AML) programs. As previously covered by InfoBytes, the DOJ filed charges against the company in 2012 for allegedly “willfully failing to maintain an effective AML program and aiding and abetting wire fraud,” including scams targeting the elderly and other vulnerable groups that involved victims sending funds through the company’s money transfer system. In 2018, the DOJ and the company extended and amended the DPA through May 2021 after the DOJ alleged that the company continued to experience significant weaknesses in its AML and anti-fraud programs. At the time, the company agreed to, among other things, comply with additional enhanced anti-fraud and AML compliance obligations. The DOJ noted in its motion to dismiss with prejudice that the company has forfeited $225 million as required and has “satisfied the conditions and obligations imposed under the DPA and the Amendment.” Additionally, the DOJ confirmed that an independent compliance monitor has certified that the company’s “anti-fraud and anti-money laundering compliance program, including its policies and procedures, are reasonably designed and implemented to detect and prevent fraud and money laundering and to comply with the Bank Secrecy Act.”  

    Courts DOJ Anti-Money Laundering Fraud Compliance Money Service Business Financial Crimes

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  • CFPB releases mortgage servicing FAQs

    Agency Rule-Making & Guidance

    On June 2, the CFPB released new FAQs regarding the Mortgage Servicing Rule and Regulation X and Regulation Z relating to escrow account guidance and analysis. General highlights from the FAQs are listed below:

    • Regulation X provides that (i) an escrow account is any account established or controlled by a servicer for a borrower to pay taxes or other charges associated with a federally related mortgage loan, including charges that the servicer and borrower agreed to have the servicer collect and pay; and (ii) the computation year for an escrow account is a 12-month period that the servicer establishes for the account, starting with the borrower’s first payment date and including each subsequent 12-month period, unless the servicer issues a short year statement.
    • Servicers must send the borrower an annual escrow account statement “within 30 days of the completion of the escrow account computation year.” 
    • Disbursement date is defined as “the date the servicer pays an escrow item from the escrow account.”
    • “The initial escrow statement is the first disclosure statement that the servicer delivers to the borrower concerning the borrower’s escrow account,” and must include: (i) “the amount of the monthly mortgage payment”; (ii) “the portion of the monthly payment going into the escrow account”; (iii) “itemized anticipated disbursements to be paid from the escrow account”; (iv) “anticipated disbursement dates”; (v) “the amount the servicer elects as a cushion”; and (vi) “trial running balance for the account.”
    • The annual escrow statement must include, among other things, “an account history that reflects the activity in the escrow account during the prior escrow account computation year and a projection of the activity in the account for the next escrow account computation year.”
    • An escrow account analysis is the accounting a servicer conducts in the form of a trial running balance for an escrow account to: (i) “determine the appropriate target balances”; (ii) “compute the borrower’s monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account”; and (iii) “determine whether a shortage, surplus, or deficiency exists.”
    • “If there is a shortage that is equal to or more than one month’s escrow account payment, the servicer may accept an unsolicited lump sum repayment to resolve the shortage. However, the servicer cannot require or provide the option of a lump sum payment on the annual escrow account statement. In addition, Regulation X does not govern whether borrowers can freely pay the servicer to satisfy an escrow account shortage. Therefore, “the acceptance of a voluntary, unsolicited payment made by the borrower to the servicer to satisfy an escrow account shortage is not a violation of Regulation X.”
    • Servicers may inform borrowers that borrowers “may voluntarily provide a lump sum payment to satisfy an escrow shortage if they choose to” if “the communication is not in the annual escrow account statement itself and does not appear to indicate that a lump sum payment is something that the servicer requires but rather is an entirely voluntary option.”

    Agency Rule-Making & Guidance CFPB Compliance Compliance Aids Regulation X Regulation Z Mortgages Mortgage Servicing Escrow

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  • OCC examines effects of Covid-19 on federal banking system

    Federal Issues

    On May 18, the OCC released its Semiannual Risk Perspective for Spring 2021, which reports on key risk areas posing a threat to the safety and soundness of national banks and federal savings associations. While, overall, banks maintained sound capital and liquidity levels throughout 2020, the OCC noted that bank profitability remains stressed as a result of low interest rates and low loan demand.

    Key risk themes identified in the report include:

    • Credit risk. The OCC reported that credit risk is evolving a year into the Covid-19 pandemic, specifically as the economic downturn continues to affect some borrowers’ ability to service debts and government assistance programs start to expire.
    • Strategic risk. Strategic risk associated with how bank manage net interest margin compressions and earnings is elevated. The OCC suggested that banks attempting to improve earnings could implement various measures, including cost cutting and increasing credit risk.
    • Operational risk. Elevated operational risk can be attributed to complex operating environments and increased cybersecurity threats. A flexible, risk-based approach, including surveillance, reporting, and managing third-party risk, is important for banks to be operationally resilient, the OCC stated.
    • Compliance risk. Compliance risk is also elevated due to the expedited implementation of a number of Covid-19-related assistance programs, including the CARES Act Paycheck Protection Program and federal, state, and bank-initiated forbearance and deferred payment programs. These programs, the OCC noted, require “increased compliance responsibilities, high transaction volumes, and new fraud typologies, at a time when banks continue to respond to a changing operating environment.”

    Federal Issues OCC Covid-19 SBA Compliance Risk Management Fintech Net Interest Margin Bank Regulatory

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  • FINRA fines firm for failing to follow its own AML policies

    Financial Crimes

    On April 16, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which resulted in a $250,000 fine against a New York-based trading firm for allegedly failing to establish an anti-money laundering (AML) compliance program and a tailored Customer Identification Program (CIP) over a four-year period, which permitted potentially suspicious trading out of accounts based in China and other foreign countries. As a result, the firm allegedly failed to detect red flags concerning potentially suspicious activity and failed to investigate or report the activity in a timely manner. According to FINRA, the firm’s failure to set up a “reasonable” AML program and a tailored CIP between September 2016 and September 2020 resulted in the failure to “detect, investigate, and respond” to red flags in four related accounts, including suspicious activity related to: (i) possible trading of low-priced securities and other activity connected to the foreign accounts; (ii) transactions that lacked business sense or apparent investment strategy; (iii) a customer account that had “unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity”; and (iv) a customer account, which showed an unexplained high level of account activity with very low levels of securities transactions. FINRA stated that although the “firm’s written procedures required the use and review of exception reports to assist with the identification of red flags for suspicious trading and suspicious money movements, they did not identify any exception reports that the firm would use and did not describe how supervisors should use them.” The firm neither admitted nor denied the findings set forth in the AWC letter.

    Financial Crimes FINRA Settlement Anti-Money Laundering Compliance Of Interest to Non-US Persons

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  • CFPB updates debt collection small entity compliance guide

    Federal Issues

    On April 16, the CFPB updated its small entity compliance guide to incorporate amendments in the December 2020 debt collection rule (covered by InfoBytes here). Updates to the guide, originally issued in January (covered by InfoBytes here), include: (i) a new section discussing the prohibition against legal action and threats of legal action to collect time-barred debt; (ii) a new section discussing the prohibition on passive collection; (iii) the incorporation of requirements and guidance on providing validation information; (iv) an updated discussion of the prohibition against overshadowing consumer rights to incorporate reference to the safe harbor; (v) an updated discussion of requests for original-creditor information to include reference to applicable requirements if the current creditor and the original creditor are the same; and (vi) a new annotated version of the model validation notice in Appendix B of the December 2020 Rule. Miscellaneous administrative changes have been made throughout the guide as well.  

    Federal Issues CFPB Debt Collection Compliance FDCPA

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  • CFPB urges servicers to stave off foreclosure wave

    Agency Rule-Making & Guidance

    On April 1, the CFPB urged mortgage servicers “to take all necessary steps to prevent a wave of avoidable foreclosures this fall.” Citing to the millions of homeowners currently in forbearance due to the Covid-19 pandemic, the Bureau’s compliance bulletin warns servicers that consumers will need assistance when pandemic-related federal emergency mortgage protections begin to expire later this year. The Bureau notes that it “will closely monitor how servicers engage with borrowers, respond to borrower requests, and process applications for loss mitigation,” and “will consider a servicer’s overall effectiveness in helping consumers when using its discretion to address compliance issues that arise.” According to the Bureau, industry data suggests that almost 1.7 million borrowers will exit forbearance programs starting in September, many of whom will be a year or more behind on mortgage payments. The Bureau cautions servicers to take proactive measures to prevent avoidable foreclosures, including by (i) contacting borrowers before the end of the forbearance period; (ii) working with borrowers to ensure they obtain all necessary information; (iii) addressing language access and maintaining compliance with ECOA and other applicable laws; (iv) evaluating income fairly when determining loss mitigation options; (v) handling inquiries promptly; and (vi) preventing avoidable foreclosures through compliance with foreclosure restrictions under Regulation X and other federal and state restrictions.

    Agency Rule-Making & Guidance CFPB Compliance Mortgages Mortgage Servicing Foreclosure Forbearance

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