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Agencies file lawsuit in scheme targeting the elderly
On February 1, the California Department of Financial Protection and Innovation (DFPI), along with the CFTC and 26 other state regulators, announced a complaint against a precious metals dealer and its owner (collectively, “defendants”) for allegedly perpetrating a $68 million fraudulent scheme against more than 450 individuals nationwide, specifically against the elderly. According to the complaint, the defendants allegedly utilized false statements on its website regarding the risk and safety of their traditional retirement accounts and used fear tactics to convince senior citizens to purchase the precious metals. The complaint alleged that the company violated the federal Commodity Exchange Act by targeting the elderly and advising them to dissolve their savings and traditional retirement accounts in order to purchase their highly inflated and overpriced products, and that defendants had misrepresented their credentials and advised customers that the products were “a safe and conservative investment.” The complaint seeks disgorgement, civil monetary penalties, restitution, permanent registration and trading bans, and a permanent injunction against further violations of the Commodity Exchange Act, state regulatory laws, and CFTC regulations.
The same day, the SEC filed a complaint against the defendants in the U.S. District Court for the Central District of California for allegedly violating the antifraud provisions of the federal securities laws. The complaint seeks permanent injunctions, disgorgement, plus interest, and civil penalties.
DFPI addresses several MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the purchase and sale of digital assets and agent of payee rules. Highlights from the redacted letters include:
- Purchase and Sale of Digital Assets; Payment Processing Services. The redacted opinion letter examines whether the inquiring company’s client is required to be licensed under the MTA. The letter describes two types of transactions proposed to be conducted on the client’s online trading platform: (i) transactions in which customers purchase and sell digital assets from the company in exchange for fiat currency (Direct Purchase Transactions); and (ii) transactions in which merchants use the platform as a payment processor to accept digital assets from customers in exchange for non-fungible tokens (Payment Processing Transactions). DFPI concluded that the Direct Purchase Transactions do not require an MTA license because they do not “involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI similarly concluded that the Payment Processing Transactions do not require licensure at this time because DFPI has “not yet determined that payment processing transactions involving digital assets constitute receiving money for transmission[.]” Notwithstanding, DFPI added that it has been “studying the cryptocurrency industry closely” and that “[a]t any time, the Department may determine these activities are subject to regulatory supervision. The Department may also adopt regulations or issue interpretive opinions that significantly restrict [the contemplated] business operations.”
- Agent of Payee. The redacted opinion letter addresses whether the inquiring company’s proposed payment processing activities are exempt from the MTA’s licensing requirements. The letter explains that the company proposes to process payments related to purchases of apps through a virtual marketplace that operates on the company’s point of sale terminals. Through the virtual marketplace, customers (generally small businesses or merchants) may purchase apps that are developed and licensed to customers by third-party developers. Pursuant to a developer agreement, the company is appointed by such third-party developers to act as an “agent” of the developers “to collect and hold all Gross Revenue on [the developers’] behalf and to remit the Remittance Amount to [the developers’] Payment Account.” DFPI concluded that receiving funds from a customer for the purposes of transmitting payments to the developer “constitutes ‘receiving money for transmission.’” However, DFPI noted that these activities also satisfy the “agent of payee” exemption requirements because, pursuant to the developer agreement, the company acts as an agent of the developer, and the company’s receipt of payment satisfies “the customer’s (payor’s) obligation to the Developer for goods or services.” Accordingly, DFPI concluded that while the activities described constitute “money transmission” the company is exempt from the MTA’s licensure requirement.
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions.
DFPI reminds licensees about submitting annual reports
On January 5, the California Department of Financial Protection and Innovation (DFPI) announced that, pursuant to Financial Code section 22159(a), all DFPI California Financing Law licensees are required to submit their annual reports by March 15, even if the licensee had no business activity during the 2021 calendar year. According to DFPI, pursuant to Financial Code section 22715(b), failing to submit the annual report by March 15 will result in penalties. Among other things, DFPI also noted that the form and instructions for submitting the Annual Report are available on DFPI’s website, and that the annual report must be submitted electronically through the DFPI portal.
States reach $1.2 million settlement with MLOs over fraudulent SAFE Act education certifications
On January 18, the Conference of State Bank Supervisors (CSBS) announced that 441 mortgage loan originators (MLOs) have agreed to pay approximately $1.2 million to settle allegations that they falsely claimed to have completed annual mortgage education programs required under the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The enforcement action, which included the participation of 44 state agencies from 42 states, targeted a mortgage education scheme offered by a California-based company and its owner that provided false certificates claiming that MLOs took mandatory eight-hour continuing education courses as required for licensure under state and federal law. (See additional background information on the enforcement action here.) The states’ investigation—led by the California Department of Financial Protection and Innovation—revealed that the owner allegedly, in some instances, completed online education courses on behalf of the MLOs, and in other instances “granted course credit to [MLOs] who had enrolled in his approved course but who neither attended the course nor completed the required coursework necessary to receive course credit.” Administrative enforcement actions have been taken against the company, the owner, and members of the owner’s family. The settling MLOs have agreed to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license. CSBS noted that MLOs implicated in the investigation that did not sign a consent order will face further enforcement actions with their appropriate state financial regulator for additional disciplinary action against their MLO licenses.
DFPI enters into a settlement with a rent-to-own furniture provider
On January 10, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Los Angeles-based rent-to-own furniture provider for allegedly failing to comply with the Karnette Rental-Purchase Act (Karnette Act) in connection with its subscription agreements. This settlement constitutes the first action against a rent-to-own firm for violating the California Consumer Financial Protection Law (CCFPL). According to the settlement, in addition to charging excessive late fees, the company failed to: (i) disclose whether the property subject to the rental-purchase agreement is new or used; (ii) clearly and conspicuously provide the Karnette Act’s mandated contractual disclosures; and (iii) adhere to the Karnette Act’s prescribed formula for calculating the maximum cash price, among other things. As part of the settlement, the company must desist and refrain from violating the CCFPL, refund customers late fee overcharges, offer its rent-to-own products and services in compliance with the Karnette Act and applicable consumer laws, and report on its activities semi-annually to the DFPI. According to DFPI Commissioner Clothilde V. Hewlett, the consent order “reminds California businesses and consumers that the DFPI will be exercising its expanded authority under the new law.”
DFPI adopts debt collector license application and requirements
On December 22, the California Department of Financial Protection and Innovation (DFPI) adopted regulations, beginning at section 1850, title 10 of the California Code of Regulations, under the Debt Collection Licensing Act. As previously covered by InfoBytes, in July, DFPI issued a notice of proposed rulemaking to incorporate changes to its debt collection licensing requirements and application. Among other things, the regulations set forth the: (i) application form and procedures for filing a license application through the Nationwide Multistate Licensing System & Registry (NMLS); (ii) requirements for a licensee to maintain information filed through the NMLS current; and (iii) procedures for surrendering a license as a debt collector.
DFPI acknowledges challenges in obtaining a NMLS account
On December 23, the California Department of Financial Protection and Innovation (DFPI) released a notice on its website regarding DFPI’s awareness of a “temporary slowdown in obtaining a new Nationwide Multistate Licensing System or NMLS account.” DFPI noted that it is “working cooperatively with the NMLS team to be able to verify those that have attempted to apply.” DFPI observed that “[w]ith various DFPI year-end deadlines, the NMLS team is experiencing an unprecedented volume of account requests.” DFPI further acknowledged the “predicament this puts entities in who are trying to comply with the new debt collector licensing requirement to apply for a license by Dec. 31, 2021,” and stated it “will not take any action against a debt collector solely on the basis of the temporary slowdown with NMLS.”
FDIC releases November enforcement actions
On December 30, the FDIC released a list of administrative enforcement actions taken against banks and individuals in November. During the month, the FDIC made public fourteen orders consisting of “three Orders to Pay Civil Money Penalty, one Consent Order, three Termination of Consent Orders, one Order Terminating Supervisory Prompt Corrective Action Directive, one Amended Supervisory Prompt Corrective Action Directive, two Orders of Prohibition from Further Participation, and three Section 19 Orders.” Among the orders is an order to pay a civil money penalty imposed against a Nebraska-based bank related to alleged violations of the Flood Disaster Protection Act. Among other things, the FDIC claimed that the bank: (i) “made, increased, extended, or renewed loans secured by a building or mobile home located or to be located in a special flood hazard area without requiring that the collateral be covered by flood insurance”; (ii) “made, increased, extended or renewed a loan secured by a building or mobile home located or to be located in a special flood hazard area without providing timely notice to the borrower and/or the servicer as to whether flood insurance was available for the collateral”; and (iii) “failed to comply with proper procedures for force-placing flood insurance in instances where the collateral was not covered by flood insurance at some time during the term of the loan.” The order requires the payment of a $6,500 civil money penalty.
The FDIC and the California Department of Financial Protection and Innovation also issued a consent order to a California-based bank, which alleged that the bank had unsafe or unsound banking practices relating to management, capital, asset quality, liquidity and funds management, and violations of law. The bank neither admitted nor denied the alleged violations but agreed to, among other things, retain qualified management and “maintain its total risk-based capital ratio in such an amount as to equal or exceed 12 percent.”
Treasury issues final rule supporting the Covid-19 response
On January 6, the U.S. Treasury Department issued the final rule for the State and Local Fiscal Recovery Funds (SLFRF) program, which was established under the American Rescue Plan Act, and has delivered approximately $350 billion to state, local, and Tribal governments for Covid-19 pandemic relief. According to Treasury, the “SLFRF program ensures governments have the resources needed to respond to the pandemic, including providing health and vaccine services, supporting families and businesses struggling with the pandemic’s economic impacts, maintaining vital public services, and building a strong and equitable recovery.” Highlights of the final rule include providing additional clarity and flexibility for recipient governments by, among other things: (i) expanding the list of eligible uses for funds; (ii) increasing support for public sector hiring and capacity; (iii) streamlining options to provide premium pay for essential workers; and (iv) broadening eligible water, sewer, and broadband infrastructure projects. The rule is effective April 1, 2022.
The same day, the California Department of Financial Protection and Innovation (DFPI) announced that its efforts to spur mortgage servicers’ participation in the California Mortgage Relief Program, which is funded by Treasury under the American Rescue Plan Act, has “helped forge a national model to protect homeowners impacted by the COVID-19 pandemic.” According to the announcement, among other things, DFPI “issued a historic reporting requirement for residential mortgage servicing licensees to report how they would be protecting homeowners through increased mortgage relief staffing, mitigation efforts such as repayment plans, and state and federal mortgage relief funding,” and “encouraged mortgage lenders and servicers to work with affected customers and communities to avoid foreclosures.”
DFPI takes action against auto loan company
On December 14, the California Department of Financial Protection and Innovation (DFPI) issued a consent order with an auto title lender, resolving allegations that the company (respondent) violated the Fair Access to Credit Act’s prohibition on making loans of $2,500 to less than $10,000 with interest rates greater than 36 percent. According to the consent order, the respondent was an established auto title lender that entered into an agreement with a Utah state-chartered bank to provide the bank with marketing and servicing services in connection with auto title loans offered to California consumers (Bank Loan Program). The respondent and the bank began offering Bank Loan Program loans to California residents in January 2020. That same month, the Fair Access to Credit Act amended the California Financing Law to prohibit licensed lenders from making loans with principal amounts of $2,500 to less than $10,000 with interest rates greater than 36 percent, plus the Federal Funds Rate. The consent order noted that “some loans made to California borrowers under the Bank Loan Program had principal amounts of $2,500 to less than $10,000 and were at interest rates that exceeded 36% plus the Federal Funds Rate.” The Commission served a subpoena seeking documents and information related to the Bank Loan Program with respect to California borrowers. After DFPI initiated the investigation, the respondent ceased marketing Bank Loan Program loans of less than $10,000 to California borrowers.
Pursuant to the consent order, the respondent agreed to not market auto title loans of less than $10,000 with interest rates exceeding 36 percent plus the Federal Funds Rate in a program involving a state-chartered bank and to not service such loans until September 2023, unless there is an intervening change in the law or regulation that would otherwise permit it to do so.