Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
District Court rules beneficiary bank without actual knowledge of wire transfer misdescription is not liable
On September 22, the U.S. District Court for the Middle District of Louisiana granted summary judgment to a defendant beneficiary bank in an action concerning a fraudulent wire transfer that was allegedly sent to a hacker instead of the intended recipient. According to the opinion, the originating bank executed a wire transfer on behalf of the commercial plaintiff to a supplier. However, a hacker had inserted false account information into the supplier’s email to the plaintiff, causing the plaintiff’s instruction to the originating bank to indicate the wrong account at the beneficiary bank. As a result, the funds were deposited by the beneficiary bank into an account for which the account number did not match its account name. A large sum of the plaintiff’s money was thereupon withdrawn by a hacker from the account into which the funds had been deposited. The plaintiff sued asserting several claims, including, negligence and gross negligence, violations of the EFTA and the Louisiana’s Uniform Commercial Code (UCC), and aiding fraud. After all the claims except for the UCC claim were dismissed, the defendant moved for summary judgment on the grounds that it did not violate the UCC “because it did not have actual knowledge that the wire transfer at issue misdescribed the beneficiary prior to payment of the wire transfer as contemplated by that statute.”
The court ruled that based on the evidence, no reasonable juror could find that the defendant had actual knowledge of the misdescription at the time it made the transfer, explaining that the defendant did not have actual knowledge that a hacker had accessed the plaintiff’s wire transfer order, provided false instructions, and changed the target account number to its own. The court stated that under Louisiana law, a bank’s liability for completing a wire transfer that misidentifies a beneficiary or account number depends on whether it has “actual knowledge prior to payment that there was a misdescription of a beneficiary”—constructive knowledge is not actionable, the court said. The defendant also did not have actual knowledge of the misdescription prior to the payment, but rather acquired actual knowledge of the misdescription roughly two weeks later when the originating bank alerted the defendant of the alleged fraud. The court further contended that under Louisiana law a beneficiary bank that uses a fully automated payment system for wire transfers is allowed “to act on the basis of the number without regard to the name if the bank does not know that the name and number refer to different persons.”
On June 29, the Court of Appeal for the Second District of Louisiana affirmed a trial court’s grant of summary judgment in favor of a national bank in an SCRA case. According to the opinion, an active duty servicemember and his wife filed for bankruptcy after purchasing a mortgage on a property from a national bank (defendant). The defendant appeared in the bankruptcy proceedings and moved to abandon the property for purposes of eventual foreclosure. The plaintiffs moved out of the state and were granted a discharge under Chapter 7 bankruptcy laws. The defendant has not foreclosed on the property, asserting that the mortgage account remains subject to the protections of the federal SCRA. The plaintiffs filed suit, claiming ownership of the property due to the defendant’s failure to foreclose against them within five years of the abandonment of the property in the bankruptcy, asserting that their obligations under the mortgage are prescribed.
The appellate court agreed that the mortgage account is subject to the protections of the SCRA, which tolls any state prescriptive period for the duration of one’s active-duty military service. According to the opinion, despite “no evidence of repayment” to the bank of any of the underlying mortgage debt, the plaintiffs claimed ownership of the subject property because the bank failed to “foreclose against them within five years of the abandonment of the property in the bankruptcy.” Agreeing with the bank that the mortgage account still remained subject to the protections of the SCRA, the court determined that: (i) the servicemember and his wife “cannot point to any law or jurisprudence that would provide an exception to the mandatory tolling provision of the SCRA [50 U.S.C. § 3936] in these circumstances;” (ii) the couple “never executed a waiver of rights form”; (iii) the “five-year prescriptive period [under Louisiana law] has been tolled on the mortgage” for the entirety of the servicemember’s active-duty military service; and (iv) the bank’s time to foreclose on the subject property “has not prescribed, as the prescriptive period has not started to run.” The appellate court concluded that the couple’s “obligations on the mortgage have not been extinguished, and they are not the owners of the subject property.”
Recently, the Louisiana governor signed HB 802, which permits financial institutions or trust companies to provide customers with virtual custody services so long as there are “adequate protocols in place to effectively manage risks and comply with applicable laws.” A “trust company” is defined as “a corporation or a limited liability trust company organized in accordance with this Title, the laws of another state, or pursuant to the laws of the United States, including a trust company organized pursuant to the laws of this state before June 27, 2003, or an entity chartered to act as a fiduciary that is neither a depository institution nor a foreign bank.”
Before offering virtual currency custody services, a financial institution or trust company must conduct a “methodical self-assessment” to examine the risks involved in offering such services. Should it decide to offer such services, the financial institution or trust company must: (i) “[i]mplement effective risk management systems and controls to measure, monitor, and control relevant risks associated with custody of digital assets such as virtual currency”; (ii) confirm adequate insurance coverage for such services is in place; and (iii) “[m]aintain a service provider oversight program to address risks to service provider relationships as a result of engaging in virtual currency custody services.” A financial institution or trust company may provide virtual currency custody services in either a fiduciary or non-fiduciary capacity, consistent with its charter. If such services are provided in a nonfiduciary capacity, the financial institution or trust company will “take possession of the customer’s asset for safekeeping while legal title remains with the customer” (i.e., “the customer shall retain direct control over the keys associated with his virtual currency”). Should services be provided in a fiduciary capacity, a financial institution or trust company must “require customers to transfer their virtual currencies to the control of the financial institution or trust company by creating new private keys to be held by the financial institution or trust company.” In its fiduciary capacity, a financial institution or trust company has the “authority to manage virtual currency assets as it would any other type of asset held in such capacity.” Additionally, a financial institution or trust company may also provide virtual currency custody services through third-party service providers. HB 802 takes effect August 1.
Louisiana enacts student loan servicer provisions, establishes requirements for private education lenders
On June 18, the Louisiana governor signed HB 610, which defines terms and outlines provisions related to student loan servicers. Among other things, the act prohibits servicers from misleading student loan borrowers or engaging in any unfair, abusive, or deceptive trade practice. Servicers are also prohibited from making misrepresentations or omitting information related to fees, payments, repayment options, loan terms and conditions, or borrower obligations. Moreover, servicers may not “[a]llocate a nonconforming payment in a manner other than as directed by the student loan borrower” under certain circumstances. The act also outlines duties related the furnishing of information to consumer reporting agencies, providing that a servicer may not (i) submit inaccurate information to a consumer reporting agency; (ii) refuse to correct inaccurately furnished information; (iii) fail to report a borrower’s favorable payment history at least once a year; (iv) refuse to communicate with a borrower’s authorized representative; and (v) make false statements or omit material facts connected to a state or local agency investigation. Additionally, the act specifies responsibilities related to responding to written inquires and complaints from consumers.
The same day, the governor also signed HB 789, which establishes a private student loan registry and outlines provisions related to private education lenders. The act stipulates that all private education lenders operating in the state must register with the commissioner, which may include the payment of fees and registration through the Nationwide Multistate Licensing System and Registry. However, the act allows the commissioner to prescribe an alternative registration process and fee structure for postsecondary education providers. These registration requirements are not applicable to banks, savings banks, savings and loan associations, or credit unions operating pursuant to authority granted by the commissioner. Private education lenders will also be required to comply with certain reporting requirements, including providing information related to the schools where the lender has made loans to students residing in the state, the total number and dollar amount of loans made annually, interest rate ranges, borrower default rates, copies of promissory notes and contracts, and cosigner loan statistics, among others.
Both acts take effect August 1.
On June 20, the Louisiana Office of Financial Institutions (OFI) published proposed rules in the Louisiana Register to implement the Louisiana Virtual Currency Business Act (VCBA), which governs the licensing process for businesses or individuals who are currently operating, or intend to soon begin operating, a virtual currency business in the state. As previously covered by InfoBytes, the Act (HB 701), which took effect August 1, 2020, provides for the licensing and regulation of virtual currency businesses in the state. Subject to certain exceptions, the bill establishes licensing and registration requirements, and, among other things, (i) authorizes reciprocity of licensure with other states; (ii) specifies that licensee applications must be submitted through the Nationwide Multi-State Licensing System; (iii) adds provisions related to licensee examinations; (iv) outlines licensee surety bond requirements “based on the nature and extent of risks in the applicant’s virtual currency business model”; (v) provides the state’s office of financial institutions with enforcement authority; and (vi) prohibits licensees from engaging in unfair, deceptive, or fraudulent practices.
The proposed rules are intended to enable OFI to achieve its regulatory goals and supervision and oversight of such persons included within the scope of the VCBA in an efficient, effective manner. OFI also proposes to implement a fee structure to cover regulatory and supervisory costs in order for the agency to effectively ensure compliance with the VCBA, and allow for licensure and registration of covered persons. Among other things, the proposed rules:
- Outline various definitions, including terms related to control, net worth, unfair or deceptive acts or practices, and unfair or unsound acts or practices.
- Describe processes for the approval of a control person or approval of a change in control; licensing renewal or registration notice; determination of net worth; examination and investigation procedures; and requirements for reporting, recordkeeping, and implementation of policies and procedures.
- Stipulate that “failure to provide any disclosure or disclosures required by Subsection 1931(C) of this rule shall be an unfair or deceptive act or practice for purposes of taking enforcement action against a licensee, registrant, or person that is neither a licensee nor registrant but is engaging in virtual currency business activity or activities.” While the proposed rules do not specifically identify the required disclosures, they state that the “commissioner shall also determine, by policy, the time and form required for such disclosures. Disclosures required by this section must be made separately from any other information provided by the licensee to a person and in a clear and conspicuous manner. A licensee may propose, for the commissioner’s approval, alternate disclosures as deemed more appropriate for its virtual currency business activity with, or on behalf of, persons in Louisiana.”
- Clarify that an unsafe or unsound act or practice includes engaging in an activity “which creates the likelihood of material loss, insolvency, dissipation of the licensee’s or registrant’s assets, materially prejudices the interests of its customers, and any other set of facts and circumstances, as determined by the commissioner in his discretion.”
- Allow the commissioner to assess a civil penalty for violations of the VCBA (or any rule promulgated pursuant to the VCBA or an commissioner-issued orders) not to exceed $1,000 for each violation.
The proposed rules provide that “[n]oncompliance with any provisions of the VCBA, including but not limited to any provisions pertaining to ownership, control, security, net worth, registration, or failure to pay any fee may likewise be considered in determining whether to deny issuance or renewal of a license or notice of registration.” Once the rules are implemented, any person already engaged in virtual currency business activity or activities in the state must either apply for a license or file a notice of registration, and submit a completed application within 90 days of the effective date. Persons engaged in virtual currency business activity that fail to submit a completed licensing application or notice of registration within 90 days of the effective date of the rules shall be deemed to be conducting unlicensed or unregistered virtual currency business activity or activities and will be subject to civil and criminal penalties. Starting November 1, 2023, “all applications for renewal for all licenses and notices of registration to engage in virtual currency business activities shall begin submitting an application or notice of registration for renewal on the first day of November of each calendar year.”
Comments on the proposed rules are due July 10.
On April 5, the FTC approved a final order settling charges arising from a 2017 FTC administrative complaint alleging that a Louisiana appraisal board unreasonably restrained price competition for real estate appraisal services provided to appraisal management companies in the state. Under the Dodd-Frank Act, appraisal management companies are required to pay “a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.” The FTC alleged that the appraisal board exceeded Dodd-Frank’s mandate by requiring appraisal fees “to equal or exceed the median fees” identified in survey reports commissioned and published by the appraisal board, and then investigated and sanctioned companies that paid fees below the specified levels. Under the terms of the order, the appraisal board is prohibited from adopting a fee schedule for appraisal services or taking any other actions that may raise, fix, maintain, or stabilize prices, compensation levels, rates, or payment terms for real estate appraisal services. Additionally, the appraisal board must rescind Rule 31101 in the Louisiana Administrative Code, which effectively sets minimum fees for real estate appraisals.
On June 10, the FDIC issued FIL-40-2021 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Louisiana affected by severe storms, tornadoes, and flooding. The FDIC acknowledged the unusual circumstances faced by institutions affected by the storms and suggested that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC further stated that it will also consider regulatory relief from certain filing and publishing requirements.
On July 25, the Louisiana Office of Financial Institutions issued an emergency declaration to notification filers. The declaration waives the $50 late fee for notification filer renewal applications postmarked after April 16, 2020, and grants notification filers an extension to submit the renewal application and renewal fee until August 31, 2020.
Louisiana Office of Financial Institutions extends emergency declarations to non-depository entities
On July 24, the Louisiana Office of Financial Institutions extended emergency declarations for residential mortgage lenders, check cashers, bond for deed escrow agents and repossession agents, brokers and lenders licensed under the Louisiana Consumer Credit Law and Deferred Presentment and Small Loan Act, and pawnbrokers. The orders were previously covered here. Such entities are granted the authority to temporarily close licensed locations within Louisiana or to temporarily close and/or relocate to another location within the state. Mortgage loan originators are permitted to work from home, whether located in Louisiana or another state, even if the home is not registered with the LOFI. The declarations also provide instructions for notifying the LOFI of a temporary location change. The declarations will remain in effect as long as there is a public health emergency relating to Covid-19, or until rescinded or replaced.
Louisiana Office of Financial Institutions extends relief provided to state-chartered financial institutions
On July 24, the Louisiana Office of Financial Institutions issued an emergency declaration continuing relief previously provided to Louisiana-chartered financial institutions, as provided in an earlier declaration previously covered here. Among other things, the declaration extends parity granted to loans made under the Main Street Lending Program established by the Federal Reserve System and loans made under the Small Business Administration's Paycheck Protection Program. The declaration also extends relief relating to temporary branch office closures, relocations, reduced operations, and annual meetings.