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DFPI addresses several MTA licensing exemptions
Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:
- Cryptocurrency and Agent of Payee Exemption. The redacted opinion letter reviewed whether MTA licensure is required for a company’s proposal to offer payment processing services that would enable merchants to receive payments in U.S. dollars from buyers of goods and services, automatically exchange these payments into dollar-denominated tokens on a blockchain network, and to store the tokens in a custodial digital wallet. DFPI currently does not require licensure for companies to receive U.S. dollars from a buyer for transfer to a merchant’s wallet as dollar tokens. DFPI explained that even if it did regulate this activity, the structure of the company’s payment processing services satisfies the requirements of the agent-of-payee exemption, wherein the company acts as the agent of the merchant pursuant to a preexisting written contract and the company’s receipt of payment satisfies the buyer’s obligation to the merchant for goods or services. DFPI further explained that while storing dollar tokens in a custodial digital wallet or making subsequent transfers out of a wallet do not currently require licensure under the MTA, DFPI may later determine the activities are subject to regulatory supervision.
- Asset-Backed Tokens and Other Cryptocurrency. The redacted opinion letter asked DFPI whether an MTA license is required to (i) provide technical services to enable owners of metal to create digital assets representing interests in that metal; (ii) facilitate trading in these digital assets; or (iii) provide digital wallets to customers. The company intends to create a platform to facilitate the creation, sale, and trading of metal asset-backed tokens, whereby a customer purchases metal asset-backed tokens (ABTs) or currency tokens using fiat currency stored in an FBO account. Customers will not be allowed to transmit fiat currency to each other except to facilitate the purchase of ABTs or currency tokens, to receive proceeds from ABTs, or to pay platform fees. DFPI explained that while issuing stored value is generally considered money transmission, “[p]roviding technical services to assist in the creation of a [m]etal ABT and [i]ndustrial [t]okens and issuing a digital wallet holding the [m]etal ABT does not require licensure.” DFPI noted that the company is not itself issuing the ABT or industrial tokens. DFPI further concluded that the company does not need an MTA license to issue a digital wallet holding metal ATBs because the digital wallet is not stored value nor can the wallet’s contents be redeemed for money or monetary value or be used as payment for goods or services. DFPI separately indicated that a license is not currently required to facilitate the sale of ABTs, nor the issuance and sale of currency tokens. However, DFPI warned the company that the opinion only pertains to MTA, and that the company should be aware that metal ABTs and industrial tokens “could be considered a commodity and California Corporations Code section 29520 generally prohibits the sale of a commodity, unless an exception applies.”
- Cryptocurrency-to-Precious Metals Dealer. The redacted opinion letter reviewed whether an online cryptocurrency-to-precious metals dealer, which accepts a variety of different cryptocurrencies in exchange for precious metals and also purchases precious metals from customers using different cryptocurrencies, requires MTA licensure. The company referenced a 2016 decision where DFPI determined that a company operating a software technology platform to facilitate the purchase and sale of gold was not engaged in money transmission, that gold and other precious metals were not payment instruments, that the transactions did not represent selling or issuing stored value, and that “the activity did not constitute receiving money for transmission because the sale or repurchase of gold was a bargained-for-exchange and did not involve transmission to a third party.” The company argued that purchasing and selling precious metals with cryptocurrency is similar and should not trigger MTA’s licensing requirement. DFPI agreed that the company’s business activities do not meet the definition of money transmission because precious metals are not payment instruments, and as such, purchasing and selling precious metals for cryptocurrency does not represent the sale or issuance of a payment instrument. Additionally, DFPI concluded that the company is not selling or issuing stored value, nor do the transactions “involve the receipt of money or monetary value for transmission within or outside the U.S.”
- Virtual Currency Wallet. The redacted opinion letter asked whether an MTA license is required to operate a platform that will provide customers with an account to store and transfer virtual currencies. The company will also provide customers access to an exchange where they can facilitate the purchase or sale of virtual currencies in exchange for other virtual currencies. Fiat currency will not be used on the platform. DFPI stated that it does not currently require companies to obtain an MTA license to operate a platform that provides customers with an account to store and transfer virtual currencies. DFPI further stated that a license is not required to operate a platform that gives customers access to an exchange to purchase or sell virtual currencies in exchange for other virtual currencies.
- Purchase of Cryptocurrency. The redacted opinion letter examined whether a company that offers clients a direct opportunity to buy cryptocurrency in exchange for fiat currency requires MTA licensure. The company explained, among other things, that there is no transmission of cryptocurrency to third parties and that it does not offer money transmission services. DFPI concluded that because the company’s activities are limited to directly selling cryptocurrency to clients, it “does not require an MTA license because it does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.”
DFPI reminded the companies that its determinations are limited to the presented facts and circumstances and that any change could lead to different conclusions. Moreover, the letters do not relieve the companies from any FinCEN or federal regulatory obligations.
FATF updates virtual assets and service provider guidance
On October 28, the Financial Action Task Force (FATF) updated pre-existing guidance on its risk-based approach to virtual assets (VAs) and virtual asset service providers (VASPs). The updated guidance revises guidance originally released in 2019. According to FATF standards, countries are required to “assess and mitigate their risks associated with virtual asset financial activities and providers; license or register providers and subject them to supervision or monitoring by competent national authorities.” The guidance includes updates on certain key areas, such as: (i) expanding the definitions of VAs and VASPs; (ii) applying FAFT standards to stablecoins; (iii) adding guidance regarding the risks and the tools available to countries for the purpose of addressing money laundering and terrorist financing risks for peer-to-peer transactions; (iv) revising VASP licensing and registration guidance; (v) adding guidance for the public and private sectors on the implementation of the “travel rule”; and (vi) adding a section for principles of information-sharing and co-operation amongst VASP Supervisors. FATF also noted that the “guidance addresses the areas identified in the FATF’s 12-Month Review of the Revised FATF Standards on virtual assets and VASPs requiring further clarification and also reflects input from a public consultation in March - April 2021.”
Texas adopts numerous mortgage-related provisions
Recently, the Texas Finance Commission promulgated amendments to regulations governing residential mortgage licensees. Specifically, rules applicable to (i) licensed Mortgage Loan Companies under the Residential Mortgage Loan Company Licensing and Registration Act, Tex. Fin. Code Ann. § 156.001 et seq., and (ii) licensed Mortgage Bankers and Mortgage Loan Originators (MLOs) under the Mortgage Banker Registration and Residential Mortgage Loan Originator Act and the Texas Fair Enforcement for Mortgage License Act, Tex. Fin. Code Ann. § 157.001 et seq., included several substantive updates.
The amendments to rules governing Mortgage Loan Company licensees include:
- 7 TAC 80.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 80.101, .102, .105-.107, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, and implements a 10-day notice requirement for any material changes made to a licensee’s Form MU1.
- 7 TAC 80.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 80.2, which updates references to definitions.
The amendments to rules governing Mortgage Banker and Mortgage Loan Originator licensees include:
- 7 TAC 81.300, which provides in part that a “primary contact person” instead of the qualifying individual will receive any notice of examination.
- 7 TAC 81.101-.111, which sets forth new sponsorship requirements for MLOs, clarifies renewal procedures, implements a 10-day notice requirement for any material changes made to a licensee’s Form MU4, details new background check procedures for MLOs, and provides new criteria for reviewing an MLO applicant’s criminal history.
- 7 TAC 81.203, .204, .206, which sets forth new requirements for advertising, records storage, office locations, branch offices, and administrative offices, including requirements for licensees engaging in remote work.
- 7 TAC 81.2, which updates references to definitions.
These amendments are effective on November 4, 2021. It is recommended Mortgage Company, Mortgage Banker, and MLO licensees in Texas review the amendments to these new rules.
CSBS urges early NMLS licensing renewal
On October 28, the Conference of State Bank Supervisors (CSBS) issued a reminder to individuals and businesses operating in the mortgage, money transmission, debt collection and consumer financial services industry that they should begin renewing their licenses in the Nationwide Multistate Licensing System (NMLS) on November 1 to avoid licensing delays. According to CSBS, early renewal is critical due to an increase in the number of licensees eligible for renewal. Renewal periods in most states run from November 1 to December 31, and licensees are encouraged to review state-specific renewal requirements early. State regulators may employ operational efficiencies to streamline the renewal process, CSBS stated, adding that it also plans to implement an online request process on November 1 for licensees to resolve and check in on NMLS access issues, including password reset/unlocking, changes in email addresses, and confirming renewal status. The online request process is available on the NMLS Call Center Information webpage, available here. As a reminder federally-registered mortgage loan originators and institutions are also required to renew their registrations through NMLS by December 31.
DFPI addresses MTA licensure requirements in new letters
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 bitcoin automated teller machines (ATMs) and kiosks and the Agent of Payee exemption.
- Bitcoin ATM Kiosk. The redacted opinion letter explains that the sale and purchase of bitcoin through ATMs/kiosks described by the inquiring company is not activity that is subject to licensure under the MTA. DFPI states that the customer’s purchase of bitcoin directly from the company “does not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” In each instance, the transaction would only be between the customer using the ATM/kiosk and the company, the bitcoin would be sent directly to the customer’s virtual currency wallet, no third parties are involved in the transmission, and the company does not hold digital wallets on behalf of customers. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion. Moreover, the letter does not relieve the company from any FinCEN or federal regulatory obligations.
- Agent of Payee Exemption. The redacted opinion letter analyzes a proposed future service to be provided by the inquiring company and determines whether the service meets the agent of payee exemption from the MTA. The company and its global affiliates “provide a global, fully integrated suite of back-end service, including sales compliance management, fraud prevention, risk management, tax and regulatory fee calculation, billing optimization, and remittance services to manufacturers, merchants, and retailers” (collectively, “brands”) that want to sell or license products and services to shoppers. The company proposes a future service, which will allow brands to sell products directly to shoppers and transfer the products to the shoppers. The company will not take title to or purchase the products and will continue to provide its suite of back-end services including payment processing, tax and regulatory fees calculations, and refund processing. The company’s contracts with the brands appoint the company as the agent of the brands for facilitating product sales and receiving payments and funds from shoppers. Agreements will also be entered between the company and the shoppers with terms that state a shopper’s payment to the company is considered payment to the brand, which extinguishes the shopper’s payment liability. The company will accept funds for the sale of products on behalf of the brands, and at the conclusion of the sale, will settle the funds paid by the shoppers and remit sales taxes to the appropriate authorities. The company will be the entity responsible for paying and reporting taxes accrued by the sales to shoppers.
DFPI states that the company will “receive[] money for transmission,” thus triggering the license requirement in the MTA, by receiving funds from the shoppers in the sales transactions. However, the company qualifies for the Agent of Payee exemption because the company will be the recipient of money from the shoppers as an agent of the brands pursuant to a written contract, and payments from the shoppers to the company as the agent will satisfy the shoppers’ payment obligation to the brands. DFPI further notes that refunds facilitated by the company on behalf of the brands will be a reversal of the original transactions with the shoppers, and therefore will not require licensure. Finally, DFPI notes that by contract, the company will be legally responsible for paying local sales taxes on transactions. According to the agreement, because the company will pay taxes on its own behalf, and will not be paying taxes owed by the shoppers, its tax payments will not constitute money transmission. DFPI reminds the company that its determination is limited to the presented facts and circumstances and that any change could lead to a different conclusion.
Creditor must pay fine for collecting debts under a different name
Recently, the Connecticut Department of Banking entered into a consent order with a North Carolina-based company resolving allegations that it violated Connecticut collection practices laws and regulations by allegedly using a name other than the company’s legal name when collecting unpaid debts without a Connecticut consumer collection agency license. The Department’s investigation stemmed from a newspaper article in which a Connecticut resident complained that he received bills from a company in an attempt to collect $314 for a Covid-19 test. The company responded to the Department’s inquiry by stating that a collection agency license was not required because the collections were made by an in-house division of the company, and not on behalf of a third party. The company also cited cases in which federal courts dismissed similar allegations under the federal FDCPA. After an investigation, the Department alleged that the company constituted as a “creditor” and by using a different name, was in violation of the Regulations of Connecticut State Agencies, “which prohibits the use of any business, company or organization name other than the true name of the creditor’s organization.” The consent order requires that the company pay a civil money penalty of $10,000 and that the company cease and desist from using any name other than its true legal name to collect debts.
NMLS seeks comments on changes to Money Services Businesses Call Report
On October 18, the Conference of State Bank Supervisors (CSBS) issued a request for public comments on behalf of NMLS-participating state regulatory agencies on proposed changes to the NMLS Money Services Businesses Call Report (MSBCR). The MSBCR seeks to create “a nationwide repository of standardized information available to state regulators concerning the financial condition and activities of their Money Services Businesses licensees.” CSBS requests comments on edits to existing virtual currency transaction line items, new virtual currency line items addressing activities not already covered, revisions to the definition of existing permissible investments, and edits to definitions and titles of existing financial condition line items. Comments are due December 17.
Hawaii enacts installment loan provisions
Earlier this year, the Hawaii governor signed HB 1192, which amends certain provisions related to small dollar lending requirements. Specifically, the bill sets forth a new licensing requirement for “installment lenders” and specifies various consumer protection requirements. The bill defines installment lender broadly as “any person who is the business of offering or making a consumer loan, who arranges a consumer loan for a third party, or who acts as an agent for a third party, regardless of whether the third party is exempt from licensure under this chapter or whether approval, acceptance, or ratification by a third party is necessary to create a legal obligation for the third party, through any method including mail, telephone, the Internet, or any electronic means.” This language appears to capture loans offered under a bank partnership model under the purview of the new law.
Further, the bill: (i) caps installment loan amounts at $1,500, and restricts the total amount of changes to no more than 50 percent of the principal loan amount; (ii) limits monthly maintenance fees to between $25 and $35 depending on the installment loan’s original principal amount; (iii) stipulates that the minimum repayment term is two months for installment loans of $500 or less, or four months for loans of $500.01 or more; (iv) states that lenders must “accept prepayment in full or in part from a consumer prior to the loan due date and shall not charge the consumer a fee or penalty if the consumer opts to prepay the loan; provided that to make a prepayment, all past due interest and fees shall be paid first; (v) prohibits a consumer’s repayment obligations to be secured by a lien on real or personal property; (vi) prohibits lenders from requiring consumers to purchase add-on products such as credit insurance; (vii) provides that the maximum contracted repayment term of an installment loan is 12 months; (viii) caps the annual interest rate on installment loans at 36 percent; and (ix) states that any installment loan made without a required license is void (the collection, receipt, or retention of any principal, interest, fees, or other charges associated with a voided loan is prohibited).
The bill exempts certain financial institutions (e.g., banks, savings banks, savings and loan associations, depository and nondepository financial services loan companies, credit unions) from the installment lender licensing requirements.
The bill also repeals existing state law on deferred deposits. While HB 1192 became effective July 1, provisions related to the repeal of the existing law on deferred deposits and installment lender licensing requirements are effective January 1, 2022. License applications will be available via the Nationwide Multistate Licensing System.
CA governor signs legislation on money transmission website requirements
On October 4, the California governor signed AB 1320, which requires a licensee to supply a toll-free telephone number on its internet website so that a customer may contact the licensee for customer service issues and receive live customer assistance, in addition to displaying the days and times that the telephone line is operative. Among other things, the bill requires that a telephone number be included in the information contained in a receipt given to a customer at the time of a money transmission transaction. In addition, the bill specifies that the telephone line must be operative “at least 10 hours per day, Monday through Friday, excluding federal holidays.” The bill is effective July 1, 2022.
DFPI issues mortgage servicer requirements
On September 13, the California Department of Financial Protection and Innovation (DFPI) issued a notice detailing a new requirement that mortgage servicers provide information to DFPI describing the actions servicers are taking to help homeowners avoid foreclosure. According to the announcement, DFPI intends to “ensure that licensees tell consumers about assistance that is or will soon be available to delinquent mortgage borrowers and document their good faith efforts toward screening borrowers for applicable loan modifications, mortgage relief funds and other protections, including the upcoming federal Homeowner Assistance Fund,” which licensees are strongly encouraged to participate in. To protect vulnerable homeowners, DFPI will require licensees handling residential mortgages, either directly or through sub-servicers, to provide information describing the servicer’s: (i) screening process for determining borrower eligibility for foreclosure aid; (ii) compliance policies and procedures regarding loss mitigation; and (iii) assessment of the “magnitude of foreclosure risk among the loans they service.”
The same day, DFPI released a social media campaign designed to educate consumers about the California Homeowner Bill of Rights, the availability of HUD-certified housing counselors, and foreclosure options, among other things. The announcement also notes that DFPI recently launched a multi-pronged communications campaign to educate consumers and protect homeowners from foreclosure.