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Financial Services Law Insights and Observations

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  • NYDFS creates Student Debt Advisory Board as student loan legislation takes effect

    State Issues

    On October 9, NYDFS announced the creation of the Student Debt Advisory Board, which will advise on consumer protection, student financial products and services, as well as issues facing communities significantly impacted by student debt. The new advisory board is a part of NYDFS’s “Step Up for Students” initiative intended to “safeguard student loan borrowers from discriminatory or predatory practices by student loan servicers.” The announcement comes the same day legislation to protect student borrowers takes effect in the state. As previously covered by InfoBytes, the law requires student loan servicers to comply with requirements set forth in amendments to the state’s banking law and be licensed by NYDFS in order to service student loans owned by residents of New York. Additionally, servicers must adhere to standards similar to regulations that govern mortgages and other lending products.

    State Issues NYDFS Student Lending Student Loan Servicer

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  • California attorney general releases proposed CCPA regulations

    Privacy, Cyber Risk & Data Security

    On October 10, the California attorney general released the highly anticipated proposed regulations implementing the California Consumer Privacy Act (CCPA). The CCPA—which was enacted in June 2018 (covered by a Buckley Special Alert), amended in September 2018, amended again in October 2019 (pending Governor Gavin Newsom’s signature), and is currently set to take effect on January 1, 2020 (Infobytes coverage on the amendments available here and here)—directed the California attorney general to issue regulations to further the law’s purpose. The proposed regulations address a variety of topics related to the law, including:

    • How a business should provide disclosures required by the CCPA, such as the notice at collection of personal information, the notice of financial incentive, the privacy policy, and the opt-out notice;
    • The handling of consumer requests made under the CCPA, such as requests to know, requests to delete, and requests to opt-out;
    • Service provider classification and obligations;
    • The process for verifying consumer requests;
    • Training and recordkeeping requirements; and
    • Special requirements related to minors.

    The California attorney general will hold four public hearings between December 2 and December 5 on the proposed regulations. Written comments are due by December 6.

    Notably, the Notice of Proposed Rulemaking states that “the adoption of these regulations may have a significant, statewide adverse economic impact directly affecting business, including the ability of California businesses to compete with businesses in other states” and requests that the public consider, among other things, different compliance requirements depending on a business’s resources or potential exemptions from the regulatory requirements for businesses when submitting comments on the proposal.   

    Buckley will follow up with a more detailed summary of the proposed regulations soon.

    Privacy/Cyber Risk & Data Security State Issues State Attorney General CCPA State Legislation Agency Rule-Making & Guidance

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  • New York AG sues student loan servicer for alleged PSLF and IDR failures

    State Issues

    On October 3, the New York attorney general announced an action filed against a national student loan servicer for allegedly failing to properly administer the Public Service Loan Forgiveness (PSLF) program and mishandling income driven repayment (IDR) plans. In the complaint, the attorney general asserts that, in violation of the Consumer Financial Protection Act (CFPA) and New York law, the servicer, among other things, (i) failed to accurately count borrower’s PSLF-qualifying payments; (ii) failed to provide timely explanations to borrowers for PSLF payment count determinations; (iii) failed to process IDR repayment plan paperwork accurately and timely; and (iv) lacked clear policies and procedures for addressing errors, resulting in inconsistent treatment of borrowers. As a result of the servicer’s alleged actions, the attorney general argues that borrowers’ loan balances increased, time was extended on repayment plans, and improper denials of PSLF were issued. The attorney general is seeking injunctive relief, restitution, and civil money penalties.

    State Issues State Attorney General Student Lending CFPA

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  • District Court: New York’s interest on escrow law not preempted by National Bank Act

    Courts

    On September 30, the U.S. District Court for the Eastern District of New York held that the National Bank Act (NBA) does not preempt a New York law requiring interest on mortgage escrow accounts. According to the opinion, plaintiffs brought a pair of putative class actions against a national bank seeking interest on funds deposited into their mortgage escrow accounts, as required by New York General Obligation Law § 5-601. The bank moved to dismiss both complaints, arguing that the NBA preempts the state law. The district court disagreed, concluding that the plaintiffs’ claims for breach of contract can proceed, while dismissing the others. The court concluded there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” As for the OCC’s 2004 preemption regulation, the court determined that there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). Lastly, the court applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the banks’ power to administer mortgage escrow accounts, noting that it only “requires the Bank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”

    Courts State Issues National Bank Act Escrow Preemption Ninth Circuit Appellate U.S. Supreme Court Mortgages

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  • Washington Supreme Court: No reliance required under state securities act for RMBS claims

    Courts

    On October 3, the Washington Supreme Court reversed the dismissal of an action against two international banks, concluding that the Securities Act of Washington (the Act) does not require a plaintiff to prove reliance on misleading statements during the purchase of residential mortgage-backed securities (RMBS). According to the opinion, a Seattle Federal Home Loan Bank (FHL Bank) purchased over $900 million in RMBS from two international banks in 2005 and 2007, and in 2009, brought separate actions against the banks for allegedly making untrue or misleading statements in connection with the RMBS in violation of the Act. Specifically, the FHL Bank argued that the banks (i) made false statements concerning the loan-to-value ratios of the mortgage loans pooled in the RMBS; (ii) misrepresented the quality of their underwriting standards; and (iii) made false statements about the occupancy status of the mortgaged properties in the pool. The trial court granted summary judgment in favor of both banks, and the Court of Appeals affirmed, concluding that reasonable reliance on the misleading statements was required under the Act and that the FHL Bank did not rely on the statements from one bank and unreasonably relied on statements of the other. The FHL Bank appealed both decisions.

    The Supreme Court consolidated the actions and disagreed with the appeals court conclusions in both. Specifically, the Court determined that the plain language under the Act is clear and “unambiguously does not require reliance.” The Court emphasized that the refusal to “read reliance into the statue” furthers the Act’s foal of protecting investors, ensuring “that those harmed when a seller misrepresents material facts can recover.”

    In dissent, one state Justice argued that the Court’s opinion undermines nearly “50 years of case law and legislative acquiescence,” noting that federal courts “frequently resolve state securities fraud claims, and they too have consistently treated reliance as an element of our state-law claim.”

    Courts State Issues RMBS Securities

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  • New York launches online whistleblower submission system

    State Issues

    On October 2, New York’s Office of the Attorney General launched an online, open-source whistleblower submission system designed to enable witnesses to report information without compromising their identity. The N.Y.A.G. Whistleblower Portal allows whistleblowers to securely and anonymously submit information, while protecting individuals’ identity, location, and information provided. Whistleblowers will also be able to engage in two-way anonymous communications with the attorney general’s office through the portal. According to the press release, the attorney general’s office “is the first governmental agency in the United States to offer whistleblowers the capability to directly transmit documents and send and receive communications electronically without their identity being traceable.”

    State Issues State Attorney General Whistleblower

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  • California DBO issues cannabis banking guidance

    State Issues

    On October 3, the California Department of Business Oversight (DBO) issued guidance for state-chartered financial institutions that serve cannabis-related businesses. The guidance, which is intended to help financial institutions manage risks appropriately, addresses cannabis program governance and compliance with the Bank Secrecy Act (BSA), as well as cannabis banking guidance issued in 2014 by the Financial Crimes Enforcement Network (FinCEN). As previously covered by InfoBytes, FinCEN’s guidance—which includes federal law enforcement priorities still in effect that were taken from a now-rescinded DOJ memo—details the necessary elements of a customer due diligence program, ongoing monitoring and suspicious activity report filing requirements, and priorities and potential red flags. Notably, the DBO states that while it will not bring regulatory actions against state-chartered financial institutions “solely for establishing a banking relationship with licensed cannabis businesses,” it expects all financial institutions to comply with FinCEN’s BSA expectations and guidance to make appropriate risk assessments. The DBO also referred bank examiners to its September Cannabis Job Aid, which is intended to assist with the examination of financial institutions that may be banking cannabis-related businesses.

    State Issues Cannabis Banking CDBO FinCEN Bank Secrecy Act Examination

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  • California cities allowed to form public banks

    State Issues

    On October 2, the California governor signed AB 857 to authorize the creation of “public banks” in the state to support local economies, community development, and address infrastructure and housing needs for localities. Under AB 857, public banks are defined as “a corporation, organized as either a nonprofit mutual benefit corporation or a nonprofit public benefit corporation for the purpose of engaging in the commercial banking business or industrial banking business, that is wholly owned by a local agency, as specified, local agencies, or a joint powers authority.”

    Among other things, cities who submit applications to the California Department of Business Oversight (DBO) to obtain a certificate of authorization will be required to provide a viability study, as well comply with “[a]ll provisions of law applicable to nonprofit corporations” and obtain deposit insurance through the FDIC. AB 857 also requires “a local agency that is not a charter city to obtain voter approval of a motion to submit an application to the [DBO].” The number of new public bank licenses the DBO is authorized to approve is limited to two per calendar year, with no more than 10 public banks operating at any time. In addition, public banks may only offer products to retail customers through partnerships with existing financial institutions, and are barred from competing with local financial institutions. AB 857 expires seven years after regulations under this law are promulgated.

    State Issues State Legislation CDBO

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  • California addresses robocall spoofing

    State Issues

    On October 2, the California governor signed SB 208, the “Consumer Call Protection Act of 2019,” which requires telecommunications service providers (TSPs) to implement specified technological protocols to verify and authenticate caller identification for calls carried over an internet protocol network. Specifically, the bill requires TSPs to implement “Secure Telephone Identity Revisited (STIR) and Secure Handling of Asserted information using toKENs (SHAKEN) protocols or alternative technology that provides comparable or superior capability by January 1, 2021. The bill also authorizes the California Public Utilities Commission and the Attorney General to enforce certain parts of 47 U.S.C. 227, making it unlawful for any person within the U.S. to cause any caller identification service to knowingly transmit misleading or inaccurate caller identification information with the intent to defraud, cause harm, or wrongfully obtain anything of value.

    As previously covered by InfoBytes, in June 2019, the FCC adopted a Notice of Proposed Rulemaking (NPRM) requiring voice providers to implement the “SHAKEN/STIR” caller ID authentication framework. The FCC argued that once “SHAKEN/STIR” is implemented, it would “reduce the effectiveness of illegal spoofing and allow bad actors to be identified more easily.” 

    State Issues State Legislation State Attorney General FCC Robocalls Federal Issues Privacy/Cyber Risk & Data Security

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  • CSBS seeks comments on money services businesses model law

    State Issues

    On October 1, the Conference of State Bank Supervisors (CSBS) issued a request for comments on its Draft Model Law Language for money services businesses (MSBs). According to CSBS, state regulation of MSBs is a primary part of Vision 2020—a state regulator initiative to modernize the regulation of fintech companies and other non-banks by creating an integrated, 50-state system of licensing and supervision. (Previously covered by InfoBytes here.) The model MSB law draft addresses recommendations made by the Payments Subgroup of the Fintech Industry Advisory Panel, and “is based on and overlays the Uniform Money Services Act.” In addition, the draft amends definitions and interpretations that vary between states, and consists of three primary policies: (i) regulations “must sufficiently protect consumers from harm, including all forms of loss”; (ii) regulations “must enable the states’ ability to prevent bad actors from entering the money services industry”; and (iii) regulations “must preserve public confidence in the financial services sector, including the states’ ability to coordinate.” According to the Fintech Industry Advisory Panel, differences in standards and procedures for change in control have created significant administrative burdens, which the working group addressed by standardizing change of control triggers and the definition of control persons. The draft also includes implementation language designed to provide the legal framework to facilitate interstate coordination and the adoption of consistent standards and processes. The proposed language is adapted from current state laws, which focus “on permitting interstate supervision and creating parity between national and state chartered banks.” CSBS notes that using these models will grant states the legal authority to adjust to new products, risks, processes, and technological capabilities in a coordinated manner.

    Comment are due November 1.

    State Issues CSBS Money Service / Money Transmitters Uniform Money Services Act

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