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On February 12, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky released excerpts of remarks he delivered to the New York Bankers Association, which focused on the “troubling trend” of “the rapid and dramatic growth of so-called ‘non-bank mortgage servicers.’” Mr. Lawsky explained that because banks are being given “less credit” for mortgage servicing rights (MSRs) with respect to capital, they are offloading MSRs to non-bank mortgage servicers rather than building up additional capital. Further, he expressed concern that non-bank mortgage services are often more lightly regulated, and indicated that regulators need to intervene on the front end of MSR transactions to prevent undue harm to homeowners before it occurs. Mr. Lawsky indicated that the DFS will have more to say on the topic in the coming weeks and months.
On February 11, at an event on the future of virtual currency, New York DFS Superintendent Benjamin M. Lawsky reiterated his intention to move forward with a virtual currency rulemaking this year as the DFS is “increasingly coming to the conclusion that simply applying our existing money transmission regulations to virtual currency firms is not sufficient.” Mr. Lawsky’s remarks follow a recent two-day DFS hearing regarding the potential state regulation of virtual currency. According to his most recent remarks, the proposal may include a specifically tailored BitLicense that adapts existing money transmission rules to virtual currency. In addition, the proposed rules may, among other things, include “a strong set of specially tailored, model consumer disclosure rules” that could address, for example, the irreversible nature of most transactions, the need to keep private keys private, and potential volatility. The DFS proposal may also seek to address capital, collateral, net worth, and investment requirements. Mr. Lawsky explained that the DFS would like more input about whether it should require licensed firms to only use public ledgers and whether to ban or restrict the use of tumblers by licensed firms.
This week, New York State Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky presided over a two-day hearing regarding emerging virtual currencies and the appropriate role of regulation. The hearing was the next step in an inquiry announced last August, and was held as the NY DFS considers developing a state license specific to virtual currency that would subject operators to state oversight. The panels featured the views of private investors, virtual currency firms, regulatory experts, and law enforcement officials. From our view inside the room, the most prominent, theme to emerge is that regulators will need to strike a balance between protecting the public interest—both from a consumer protection standpoint and with regard to the potential for criminal activity—while allowing emerging virtual currency technologies to develop, evolve, and thrive.
Panelists agreed that bringing virtual currency activity into a regulatory framework is necessary, particularly with regard to ensure AML compliance. However, they added that recent criminal AML enforcement actions against virtual currency market participants suggested existing laws may be sufficient to meet the challenge. In general, they urged the NY DFS to apply existing laws and requirements and to otherwise “only regulate at the edges.” One panelist suggested implementing any new rules in tiered manner, allowing smaller players an “onramp” to compliance. All panelists stressed the potential economic benefits to allowing robust virtual currency markets to evolve domestically, and some panelists touted the potential broader positive impacts on ecommerce and the potential to reach individuals not served by the traditional banking sector.
Though cognizant of the potential economic benefits of allowing virtual currencies to take hold, NY DFS expressed concerns about too loose a regulatory structure, particularly with regard to the perceived risks of virtual currency to more easily facilitate money laundering and related illicit activity. In an interview between panels Mr. Lawsky stated: “It’s feeling more like little tweaks around the edges are not enough.” Federal and state law enforcement officials echoed those concerns. While they vowed to use existing laws to pursue wrongdoers, Deputy U.S. Attorney Richard Zabel and New York County District Attorney Cyrus Vance, Jr., challenged the assertion that enforcement of existing laws is sufficient to meet the challenges posed by virtual currencies.
Click here for links to written testimony and other hearing materials.
The hearing coincided with other events focused on virtual currency, including one co-hosted by BuckleySandler and Wells Fargo. Other industry experts discussed the rapidly emerging field of virtual currency. Panelists weighed-in on market trends, investment opportunities, compliance imperatives, and interoperability with traditional fiat currencies. Particular attention focused on regulatory compliance considerations, risk management, and policy frameworks.
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For additional information about the events above, or if you have questions about virtual currencies and other emerging financial services technologies, please contact any of the lawyers in our E-Commerce or Anti-Money Laundering practice areas, or any other BuckleySandler attorney with whom you have consulted in the past.
On January 22, New York Governor Andrew Cuomo launched a new Student Protection Unit within the New York Department of Financial Services dedicated to investigating potential consumer protection violations in the student loan industry. Its first public investigation is focused on companies the unit believes are charging “high, improper fees without adequate notice for enrolling students in debt relief programs that are available for free through the federal government.” The Student Protection Unit issued subpoenas to 13 debt relief companies seeking advertising materials, contracts, consumer disclosures, and fee schedules among other materials.
Federal, State Authorities Announce Coordinated Economic Sanctions Enforcement Actions Against Foreign Bank
On December 11, the Federal Reserve Board, the Treasury Department’s Office of Foreign Assets and Controls (OFAC), and the New York Department of Financial Services (DFS) announced that a foreign bank agreed to pay $100 million to resolve federal and state investigations into the bank’s practices concerning the transmission of funds to and from the U.S. through unaffiliated U.S. financial institutions, including by and through entities and individuals subject to the OFAC Regulations. The investigations followed a voluntary review by the bank of its U.S. dollar transactions, the results of which it submitted to federal, state, and foreign authorities. The federal and state authorities alleged that the bank engaged in payment practices that interfered with the implementation of U.S. economic sanctions, including by removing material references to U.S.-sanctioned locations or persons from payment messages sent to U.S. financial institutions. They assert the alleged failures resulted from inadequate risk management and legal review policies and procedures to ensure that activities conducted at offices outside the U.S. comply with applicable OFAC Regulations. As part of the resolution, the bank consented to a Federal Reserve cease and desist order and civil money penalty order, pursuant to which the bank must pay $50 million, continue to enhance its compliance controls, and retain an independent consultant to conduct an OFAC compliance review. A separate settlement with OFAC requires the bank to pay $33 million, which will be satisfied as part of the payment to the Federal Reserve. The DFS order assesses an additional $50 million penalty. The DFS highlighted that, as part of its cooperation with authorities, the bank took disciplinary action against individual wrongdoers, including through dismissals.
On December 3, New York Governor Andrew Cuomo announced that the state Department of Financial Services (DFS) sent subpoenas to 16 online “lead generation” companies as part of its expanding investigation into online payday lending. The DFS alleges the target companies are engaged in deceptive or misleading marketing of illegal, online payday loans in New York, and claims lead generation companies offer access to quick cash to encourage consumers to provide sensitive personal information and then sell that information to, among others, payday lenders operating unlawfully in New York. The DFS publicly kicked off an investigation of online payday lending earlier this year when it sent letters to 35 online lenders, including lenders affiliated with Native American Tribes, demanding that they cease and desist offering allegedly illegal payday loans to New York borrowers. Under New York law, it is civil usury for a company to make a loan or forbearance under $250,000 with an interest rate exceeding 16% per year, and a criminal violation to make a loan with an interest rate exceeding 25% per year. The DFS cites as part of the basis for its expanded investigation consumer complaints about false and misleading advertising (including celebrity endorsements), harassing phone calls, suspicious solicitations, privacy breaches, and other issues.
On November 14, New York State Department of Financial Services (DFS) Superintendent Benjamin Lawsky issued a notice that the DFS intends to hold a public hearing on virtual currency regulation in New York City “in the coming months.” The hearing will focus on the interconnection between money transmission regulations and virtual currencies. Additionally, the hearing is expected to consider the need for and feasibility of a licensing regime specific to virtual currency transactions and activities (i.e. a “BitLicense”), which would include anti-money laundering and consumer protection requirements for licensed entities. The notice makes clear that no decisions on licensing or other regulation of virtual currencies has been made. Rather the hearing and license notice is part of the agency’s broader inquiry launched in August into the need for a regulatory framework specific to virtual currencies. With regard to potential licensing, the DFS would like stakeholders to consider: (i) what, if any, specific types of virtual currency transactions and activities should require a BitLicense; (ii) whether entities that are issued a BitLicense should be required to follow specifically tailored anti-money laundering or consumer protection guidelines; and (iii) whether entities that are issued a BitLicense should be required to follow specifically tailored regulatory examination requirements.
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry and states that it already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin. The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.
The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. On August 12, the leaders of that committee, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans,” “strategies,” or “ongoing initiatives” regarding virtual currencies. The letter specifically notes the importance of balancing the need to deal with “potential threats and risks . . . swiftly” with the goal of ensuring that “rash or uninformed actions don’t stifle a potentially valuable technology.”
This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
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- Daniel P. Stipano to discuss "BSA/AML culture of compliance roundtable" at the FiSCA Annual Conference
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- Michelle L. Rogers to discuss "What's trending in enforcement" at the Mortgage Bankers Association Annual Convention & Expo
- Kathryn L. Ryan and Moorari K. Shah to discuss "Today's regulatory environment - Are you in the know?" at the Equipment Leasing and Finance Association Annual Convention
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- H Joshua Kotin to discuss "CMS - Components of a successful monitoring program" at the RegList Annual Workshop
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- Sherry-Maria Safchuk to discuss "Cybersecurity" at the RegList Annual Workshop
- Jeffrey P. Naimon to discuss "Hot topics in mortgage origination" at the Conference on Consumer Finance Law Annual Consumer Financial Services Conference
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference