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New York Proposes First Virtual Currency Licensing Framework
On July 17, the New York DFS announced a proposal to establish a licensing regime for virtual currency businesses, the first by any state. In January, the DFS held a two-day hearing on developing a regulatory framework for virtual currency firms, and subsequently sought applications for virtual currency exchanges pending completion of the regulations. The proposed regulations define virtual currency as “any type of digital unit that is used as a medium of exchange or a form of digitally stored value or that is incorporated into payment system technology.” This would include digital units of exchange that: (i) have a centralized repository or administrator; (ii) are decentralized and have no centralized repository or administrator; or (iii) may be created or obtained by computing or manufacturing effort. It would exclude digital units that are used solely within online gaming platforms or that are used exclusively as part of a customer affinity or rewards program.
Under the proposal, the state would require companies engaged in the following activities to obtain a so-called BitLicense: (i) receiving or transmitting virtual currency on behalf of consumers; (ii) securing, storing, or maintaining custody or control of such virtual currency on the behalf of customers; (iii) performing retail conversion services; (iv) buying and selling virtual currency as a customer business (as distinct from personal use); or (v) controlling, administering, or issuing a virtual currency. To obtain a license, a business would be required to, among other things: (i) hold virtual currency of the same type and amount as any virtual currency owed or obligated to a third party; (ii) provide transaction receipts with certain required information; (iii) comply with AML rules; (iv) maintain a cyber security program; and (v) establish business continuity and disaster recovery policies. Licensed entities would be subject to DFS supervision, with examinations taking place no less than once every two calendar years. The proposal will be published in the New York State Register’s July 23, 2014 edition, which begins a 45-day public comment period.
New York Revises Proposed Debt Collection Regulations
On July 16, the New York DFS re-proposed a rule to regulate third-party debt collection. The revised proposal: (i) describes disclosures debt collectors must provide to consumers when the debt collector initially communicates with a consumer, and additional disclosures that must be provided when the debt collector is communicating with a consumer regarding a charged-off debt; (ii) requires debt collectors to disclose to consumers when the statute of limitations on a debt has expired; (iii) outlines a process for consumers to request additional documentation proving the validity of the charged-off debt and the debt collector’s right to collect the charged-off debt; (iv) requires debt collectors to provide consumers written confirmation of debt settlement agreements and regular accounting of the debt while the consumer is paying off a debt pursuant to a settlement agreement; (v) requires debt collectors to provide consumers with disclosures of certain rights when settling a debt; and (vi) allows debt collectors to correspond with consumers by electronic mail in certain circumstances. The DFS states that although comments on its initial proposal were “generally supportive,” the revised proposal responds to comments on how the rules could better correspond to the structure of the collection industry, and seeks to clarify the meaning of certain provisions. Comments on the revised proposal are due by August 15, 2014.
New York Adopts Shared Appreciation Mortgage Regulations
On July 9, the New York DFS announced that it finalized a rule that allows for shared appreciation mortgage modifications, which permit banks and mortgage servicers to reduce the amount of principal outstanding on a borrower’s mortgage in exchange for a share of the future increase in the value of the home. The option is limited to borrowers who are 60 or more days past due on their loan or whose loan is the subject of an active foreclosure action and who are not eligible for existing federal and private foreclosure prevention programs. The regulations detail the method for calculating a holder’s share of the appreciation, and limit the share to the lesser of: (i) the amount of the reduction in principal, plus interest; or (ii) 50% of the amount of appreciation in market value. In addition, banks and servicers would be required to provide specific disclosures to borrowers about the terms and nature of the shared appreciation mortgage modification. The regulations also: (i) specify allowable fees, charges, and interest rates; (ii) detail the calculation of unpaid principal balance and debt-to-income ratio; and (iii) list certain prohibitions, including, among others, that the holder cannot require the borrower to waive any legal claims or defenses as a condition to obtaining shared appreciation modification. The new regulations took effect immediately.
New York DFS Launches New Database Of Online Payday Lenders
On June 16, the New York DFS launched a new database of online lenders that have been subject to actions by DFS based on evidence of illegal payday lending, and announced that one national bank had agreed to start using the tool. The DFS believes the database will help financial institutions meet “know your customer” obligations with regard to online lenders and will help ensure that electronic payment and debit networks are not used to transmit or collect on allegedly illegal, online payday loans made to New York residents. According to the DFS, the national bank plans to use the information about companies that may be engaged in illegal lending to (i) help confirm that its merchant customers are not using their accounts to make or collect on illegal payday loans to New York consumers; and (ii) identify payday lenders that engage in potentially illegal payday loan transactions with its New York consumer account holders, and, when appropriate, contact the lenders’ banks to notify them that the transactions may be illegal. The bank also agreed to provide DFS with information about payday lending activities by lenders listed in the database, including identifying lenders that continue to engage in potentially illegal lending activities despite the DFS’s previous actions. The database announcement is just the latest step taken by the DFS with regarding to online payday lending. Over the past year, the DFS has opened numerous investigations of online lenders and has scrutinized or sought to pressure debt collectors, payment system operators, and lead generators in an attempt to halt lending practices that the DFS claims violate state licensing requirements and usury restrictions.
New York Announces Numerous Initiatives To Update Its Mortgage Licensing Processes, Rules, And Resources
On June 5, the New York Department of Financial Services (DFS) announced several changes to streamline the state’s mortgage licensing requirements and processes, and new mortgage-related resources. The DFS also is proposing additional changes to the state’s mortgage licensing regulations.
Uniform State Test
The DFS announced that it will adopt the Uniform State Test (UST) for mortgage loan originators (MLOs) effective September 2, 2014. The UST will replace the current state-specific test for New York. Further, any MLO that passed the UST even prior to the effective date will satisfy the testing requirements for MLOs in New York starting on September 2, 2014. Adoption of the UST will not change the current educational requirements for MLOs in New York.
Transitional Licensing
Effective immediately, DFS is offering transitional licensing for MLOs currently licensed in other states and seeking licensure in New York. Specifically, individuals can now apply for a New York license prior to being employed with a New York licensed entity. This eliminates the previous delay in obtaining licensure until after one had been employed by such an entity, thus resulting in an inability to actually perform work in New York pending approval. Now, applicants can apply and have their application fully processed prior to being hired by a New York licensed entity so there is no delay in the ability to start working once hired and affiliated with the new employer.
Revised Processes and New Resources
The DFS also announced several changes to its practices and procedures, and new resources for industry participants.
- Streamlined applications review process. The DFS has reorganized its internal workflows to eliminate excess layers of review of license applications and approvals. DFS also will now send a single letter to applicants identifying all items missing from an application package, which will reduce back-and-forth with the DFS and hopefully expedite application processing.
- Dedicated Mailboxes to Answer Questions. The DFS has created encrypted inboxes dedicated to particular topics. This change is intended to remove the burden from licensees and applicants seeking the right person to answer a question. Instead, DFS will staff the inboxes and will find the appropriate person to answer a given question. The DFS has committed to provide responses within one business day in most cases. For mortgage bankers or mortgage banker applicants, the address is mortgage.banker@dfs.ny.gov; for mortgage brokers or applicants, the address is mortgage.broker@dfs.ny.gov; for mortgage loan servicers or applicants, the address is mls@dfs.ny.gov; and for mortgage loan originators or applicants, the address is mlo@dfs.ny.gov.
- Electronic Submissions. TheDFS will now accept all application materials at the four email addresses listed above and will acknowledge receipt of documents. Where the DFS needs originals of certain documents, it will accept online submission first, and the original can follow by mail. DFS is also accepting materials by secure file transfer and will soon be accepting materials through a secure online portal.
- Elimination of “Placeholder Applications.” Effective immediately, an applicant for a mortgage license may no longer file a placeholder application. Instead, when an application is filed, the DFS will review it and write a letter in response identifying any missing information. The applicant will then have 30 days to address these missing items or the application will be deemed withdrawn and the fee forfeited.
- Dedicated Webpage. A new section of the DFS website, www.dfs.ny.gov/mortgage, will serve as a comprehensive resource center. It includes (i) information regarding new proposed regulations; (ii) step-by-step directions on how to apply for a license to become a mortgage banker, mortgage broker, mortgage loan servicer, or mortgage loan originator; (iii) information about how and when to apply for a change of control of a regulated entity, and how to apply for a new branch location, and more; and (iv) links to updated forms.
- New Guidebooks. The DFS announced that it soon will issue comprehensive guidebooks that help companies and individuals apply for and maintain a license. Thee guidebooks will be made available on the mortgage webpage.
Additional Proposed Changes
The DFS also proposed to amend in several ways the mortgage licensing provisions of the New York Code of Rules and Regulations (NYCRR) as well as several General Supervisory Policies and Procedures.
The proposed changes would clarify the requirement that mortgage license applicants must have direct experience or several enumerated qualifications to obtain licensure. Specifically, the proposed regulations would require an applicant to demonstrate that “they are, or have in their employ, a qualifier who is a licensed mortgage loan originator” with the requisite qualifications and experience.
The proposal also would provide for situations in which an applicant may have fewer than three executive officers. Specifically, with respect to mortgage banker applications, the proposed regulations would require personal information from either three executive officers, or if there are not three such officers, two officers and the compliance officer. With respect to mortgage broker applicants that do not have three such officers, personal and financial information would be required of all executive officers.
The DFS also proposes to require applicants to submit, among other materials, business plans that outline marketing strategy, products, target markets and operating structure, as well as a compliance program summary and a fair lending plan. The regulations also would provide new treatment of incomplete applications, which under the proposal would be considered withdrawn after 30 days of failure to provide outstanding documents and information.
The proposed regulations grant the superintendent authority to require applicants to attend, via phone or in person, a meeting for conferral of licenses and to review regulatory requirements associated with holding such licenses.
Finally, the DFS proposes to repeal Part 413 of the NYCRR and Supervisory Procedure mb 106, which provide authority and establish the application process for mortgage brokers to act as FHA mortgage loan correspondents.
Comments in response to the proposed regulations are due 45 days from publication in the State Register.
New York DFS Superintendent Promises Scrutiny Of Nonbank Servicer Affiliates, Previews Originator Licensing Changes
On May 20, New York DFS Superintendent Benjamin Lawsky spoke during the Mortgage Bankers Association’s National Secondary Market Conference and extended his recent focus on nonbank mortgage servicers. As detailed in excerpts from the remarks he delivered, Mr. Lawsky specifically addressed concerns about ancillary services offered by nonbank mortgage servicer affiliates—e.g. vacant property inspections, short sales marketed through online auctions, foreclosure sales, and debt collection. He asserted that such arrangements put borrowers and investors at risk of becoming “fee factories” and promised to expand DFS’s investigation of ancillary services. Though not reflected in the excerpts released by the DFS, Mr. Lawsky also previewed changes intended to streamline the DFS’s application process for mortgage originator licenses and branch locations in an effort to reduce burden on licensees and improve processing times.
Swiss Bank Pleads Guilty In Alleged Tax Evasion Conspiracy
On May 19, the DOJ announced that a Swiss bank pleaded guilty and entered into agreements with federal and state regulators to resolve a multi-year investigation into the bank’s alleged conspiracy to assist U.S. taxpayers in filing false income tax returns and other documents with the IRS by helping those individuals conceal undeclared foreign bank accounts. Under the plea agreement, the bank agreed to (i) disclose its cross-border activities; (ii) cooperate in treaty requests for account information; (iii) provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed; (iv) close accounts of account holders who fail to come into compliance with U.S. reporting obligations; and (v) enhance compliance, recordkeeping, and reporting programs. The plea agreement also reflects a prior related settlement with the SEC in which the bank paid $196 million in disgorgement, interest, and penalties. Under the current agreements, the bank will pay $2.6 billion in fines and penalties, including $1.8 billion to the DOJ, $100 million to the Federal Reserve Board, and $715 million to the New York DFS. Federal authorities did not individually charge any officers, directors, or senior managers, and the agreements do not require the bank to dismiss any officers or employees, but eight bank executives have been indicted since 2011 and two of those individuals pleaded guilty. Further, federal and state regulators did not directly restrict the bank’s ability to operate in the U.S.—the New York Federal Reserve Bank allowed the bank to remain a primary dealer and the New York DFS did not revoke the bank’s state banking license.
New York Plans Targeted Bank Cybersecurity Examinations
On May 6, New York Governor Andrew Cuomo released a report on bank cybersecurity preparedness and directed the New York State Department of Financial Services (DFS) to conduct targeted cybersecurity preparedness assessments of the DFS-regulated banks. The DFS is revising its examination procedures to add questions to assess IT management and governance, incident response and event management, access controls, network security, vendor management, and disaster recovery. DFS plans to release additional details about the timing and content of these examination procedures in the coming weeks. The report follows a year-long survey of 154 DFS-regulated banks, which revealed that “most institutions experienced intrusions or attempted intrusions into their IT systems over the past three years.” The review revealed that third-party payment processor breaches were reported by 18% and 15% of small and large institutions, respectively, and that large institutions also cited mobile banking exploitation, ATM skimming/point-of-sale schemes), and insider access breaches. Last year, the DFS announced a similar inquiry into cyber preparedness at insurance companies it regulates.
FSOC Annual Report Calls For Heightened Scrutiny Of Nonbank Mortgage Servicers
On May 7, following a short open meeting, the Financial Stability Oversight Council (FSOC)—the body established by the Dodd-Frank Act to identify and respond to risks to the stability of the U.S. financial system—released its 2014 annual report. As with past reports, this report reviews market and regulatory developments, and identifies emerging risks to the financial system. Among several new risks identified by the FSOC are those related to the increase in the transfer of mortgage servicing rights (MSRs) from banks to nonbank servicers. The report asserts that many nonbank servicers “are not currently subject to prudential standards such as capital, liquidity, or risk management oversight,” and that where mortgage investors’ ability to collect on mortgages is dependent on a single mortgage servicing company, “failure could have significant negative consequences for market participants.” The FSOC recommends that, in addition to continuing to monitor risks associated with transfers to nonbanks, state regulators should work together and with the CFPB and the FHFA on prudential and corporate governance standards for nonbank servicers. The report elevates and reinforces recent regulatory scrutiny of MSRs and nonbank servicers. Earlier this year, the CFPB's deputy director detailed the CFPB's expectations with regard to the transfer of MSRs and compliance with the CFPB's mortgage servicing rules, and New York financial services regulator Benjamin Lawsky expressed his view that nonbank mortgage services are insufficiently regulated and that state regulators need to intervene on the front end of MSR transactions to prevent undue harm to homeowners before it occurs.
New York Targets Online Lenders Through Debit Card Networks
On April 30, the New York State Department of Financial Services (DFS) again expanded the scope of its activities targeting online payday lenders by announcing that two major debit card network operators agreed to halt the processing of payday loan deductions from bank accounts owned by New York consumers who allegedly obtained illegal online payday loans. The DFS asserts that in response to increased regulatory pressure on online lenders’ use of the ACH network—known as Operation Choke Point—those lenders are using debit card transactions to collect on payday loans originated online to New York residents. The DFS believes such loans violate the state’s usury laws. The DFS also sent cease-and-desist letters to 20 companies it believes are “illegally promoting, making, or collecting on payday loans to New York consumers.” The DFS’s assault on online lenders publicly began in February 2013 when it warned third-party debt collectors about collecting on allegedly illegal payday loans, and was first expanded in August 2013 when the DFS 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. At the same time, the DFS asked banks and NACHA to limit such lenders’ access to the payment system. DFS subsequently expanded its effort in December 2013 when it began targeting payday loan lead generation companies.