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Vehicle Financing Company Owners Plead Guilty to $11 Million Fraud
On May 25, the Massachusetts U.S. Attorney’s Office announced that two vehicle financing company owners (Defendants) entered guilty pleas admitting to counts of mail and wire fraud. The Defendants’ company raised capital by securing investments from individuals to fund its operations. In 2015, the DOJ filed a criminal complaint alleging the Defendants represented to investors that retirement account funds could be rolled over into investments held by the company without triggering the payment of income taxes on the transferred monies. Investors allegedly transferred retirement funds based on these representations, and the Company ultimately lost more than $11 million of the investors’ money. However, the Defendants allegedly never obtained approval from Treasury for the company to act as an authorized custodian or trustee of retirement funds as required in order for the rules permitting tax-free transfers to apply, and therefore solicited the investment funds based on “deceptive acts, false and fraudulent statements and misrepresentation of material facts.” The company ultimately filed for bankruptcy. The plea agreements stipulate maximum penalties of “20 years in prison, three years of supervised release, a fine of $250,000 or twice the gross gain or loss, whichever is greater, a mandatory special assessment of $100, restitution, and forfeiture to the extent charged in the Indictment” and can be accessed here and here. Sentencing is set for September 20, 2017.
City Agrees to Settlement of Housing Discrimination Suit with DOJ
On May 26, the Department of Justice (DOJ) and the city of Jacksonville, Florida (city), agreed on a settlement over claims that the city violated the Fair Housing Act (FHA) and the Americans with Disabilities Act (ADA). The DOJ alleged that the city denied permission for the development of permanent supportive housing for individuals with disabilities in an historic district and discriminated on the basis of the intended residents’ disabilities.
The settlement provides for a civil penalty of $25,000 to be paid to the U.S. Treasury as well as the creation by the city of a $1.5 million grant to be awarded to a qualified developer of permanent supportive housing in the community. The city also agreed to take additional specific steps to comply with the requirements of the ADA and FHA.
Two other plaintiffs whose suits were consolidated with the DOJ’s—Ability Housing, Inc. and Disability Rights Florida, Inc.—also received compensation for reasonable attorneys’ fees and other costs.
As part of the settlement, the city denied any wrongdoing alleged by the DOJ.
South Carolina Governor Amends Mortgage Lender, Broker Licensing Requirements
On May 19, South Carolina Governor Henry McMaster signed into law amendments (S 366) to the state’s Mortgage Lending Act, Mortgage Broker Act, and related laws to revise a variety of mortgage lending definitions, licensing procedures and requirements, and disclosure obligations. The legislation also adds license requirements for mortgage lenders who act as mortgage brokers on the majority of their mortgage loans. The amendments take effect September 16, 2017.
Texas Enacts Law Expanding Requirements for Holders of Debt Cancellation Agreements
On May 26, Texas Governor Greg Abbott signed into law SB 1052, which contains provisions related to retail installment contracts and debt cancellation agreements in the state. Notably, the revised and renumbered Section 354.007 of the Finance Code, “Refund for Debt Cancellation Agreements,” concerns the responsibilities of the holder or the administrator of the agreement. This section has been amended to add that if a debt cancellation occurs as a result of an early termination of the contract, the holder shall, within 60 days of the termination, “refund or credit an appropriate amount of the debt cancellation agreement fee” or refund or credit the appropriate amount of the fee through written instructions to the appropriate person. Revisions also dictate that the holder will ensure that the refund or credit of the debt cancellation agreement fee “made by another person” is also made no later than 60 days after the agreement terminates. Furthermore, the holder is now responsible for maintaining records pertaining to the refund or credit of the debt cancellation agreement fee, and likewise, must grant electronic access to the records per the terms of the provision. The law takes effect September 1, 2017.
Massachusetts Regulator Offers Interpretation of Mortgage Loan Originator Exclusivity Requirement
On May 10, the Division of Banks of the Massachusetts Office of Consumer Affairs and Business Regulations (Division) issued a letter determining that a professional employer organization (PEO) may provide limited human resources services to Massachusetts licensed mortgage lenders and brokers without violating an exclusivity requirement governing the employment of mortgage loan originators in the Commonwealth. The exclusivity requirement prohibits Massachusetts licensed mortgage loan originators from being employed by more than one “entity,” which, as defined by Massachusetts General Laws Chapter 255F, Section 4(b), effectively prohibits a mortgage loan originator from being employed by more than one mortgage lender or broker. The opinion letter stems from a request made last year from a Massachusetts-based human resources service provider (Service Provider) inquiring as to whether the exclusivity requirement prohibits Massachusetts licensed mortgage lenders and brokers employing mortgage loan originators from outsourcing human resource services. The Service Provider—operating as a PEO—stated that it provides human resources services to small business clients, and while it is deemed the “employer” of the client's employees solely for designated human resource functions, the client remains the employer for all other purposes. Because of this, and since the Service Provider offers functions that are unrelated to a loan originator's mortgage industry work, the Division asserted “that the exclusivity provision . . . operates to limit a mortgage loan originator to a single licensed mortgage broker or lender for purposes of the originator's mortgage industry work.” Accordingly, the Division concluded that the Service Provider may provide its services to Massachusetts licensed mortgage lenders and brokers without violating the exclusivity requirement.
DOJ Enters $18 Million Settlement with Healthcare Providers Following False Claims Act Whistleblower Action
On April 27, the Department of Justice announced that two Indiana-based healthcare providers agreed to settle allegations that financial arrangements between the two entities violated the federal and state False Claims Act and the federal Anti-Kickback Statute. DOJ alleged that one of the providers made available to the other an interest-free line of credit consistently in excess of $10 million, the balance of which such other provider “was allegedly not expected to substantially repay” as a means of inducing referrals for obstetrics and gynecology patients to seek medical attention at a particular hospital. The Anti-Kickback Statute prohibits “the knowing and willful payment of any remuneration to induce the referral of services or items that are paid for by a federal health care program, such as Medicaid,” and claims that are submitted to federal health care programs in violation of the Anti-Kickback Statute can also constitute false claims under the False Claims Act. The settlement resolves a qui tam case filed by an individual under the whistleblower provisions of the False Claims Act. Under the terms of the settlement, the providers agreed to pay a total of $18 million, with each of them paying $5.1 million to the United States and $3.9 million to the State of Indiana.
Vermont Enacts Law Expanding Requirements for Certain Businesses Regulated by Department of Financial Regulation
On May 4, Vermont Governor Phil Scott signed into law H. 182, which amends a number of laws relating to businesses regulated by the state’s Department of Financial Regulation. Among other things, the law: (i) amends registration requirements for consumer litigation funding companies; (ii) amends the licensing requirements for licensed lenders, money transmitters, check cashers and currency exchangers, debt adjusters, and loan servicers; (iii) amends the mortgage loan originator prelicensing and relicensing education requirements; (iv) defines the term “virtual currency” under the Money Services chapter and provides that “virtual currency” is a permissible investment for licensees; and (v) sets forth requirements for money transmitters related to receipts and refunds. The law also creates new types of licenses (and other related requirements (e.g., disclosures, record retention)) for “loan solicitation” activity, which includes, among other things, lead generation. The law took effect May 4, 2017, with the exception of provisions relating to money transmitter receipts and refunds, lead generator disclosure requirements, and loan solicitor disclosure requirements, which take effect July 1, 2017.
Oklahoma Governor Vetoes Legislation Expanding High-Cost Payday Lending
On May 5, Oklahoma Governor Mary Fallin vetoed legislation that would have expanded consumer payday lending in the state. Oklahoma House Bill 1913—known as the “Oklahoma Small Loan Act”—would have allowed lenders to offer installment loans with terms no longer than 12 months and interest rates up to 17 percent per month. Fallin’s veto message to the House expressed concerns about adding another high interest loan product without eliminating or restricting existing payday loan products: “House Bill 1913 adds yet another level of high interest borrowing (over 200% APR) without terminating or restricting access to existing payday loan products.” Fallin further asserted that “some of the loans created by this bill would be more expensive than the current loan options.” Four years prior, Fallin vetoed Senate Bill 817 “due to [her] concerns with the frequency [with which] low-income families in Oklahoma were using these lending options, and the resulting high cost of repayment to those families.” In the veto message, Fallin requested that the state legislature seek advice from her office as well as consumer advocates and mainstream financial institutions if it decides to revisit these issues. Under Section 11 of Article 6 of the Oklahoma Constitution, the legislation can still be enacted if two-thirds of the members of both legislative chambers vote to override the veto. In earlier votes, the legislation fell short of the two-thirds threshold, passing the Oklahoma House 59-31 and the Senate by a 28-16 margin.
Notably, last year, the CFPB published proposed rules in the Federal Register affecting payday, title, and certain other high-cost installment loans (see previously posted Special Alert).
Gov. Cuomo Announces New Title Insurance Regulations Target Business Gifts, Ancillary Fees and Transactions with Affiliates
On May 1, New York Governor Andrew M. Cuomo announced two new proposed regulations to “crack down on unscrupulous practices in the title insurance industry.” According to the Governor, the proposed measures were drafted in response to an investigation by the state Department of Financial Services (“NYDFS”), which found that “meals, entertainment, gifts” and other “inducements” provided in exchange for referring business to a title insurance company or agents, were charged to customers under the guise of “marketing expenses.” The first proposed regulation would, among other things, clarify the rules about “meals and entertainment” expenses, and other ancillary fees that title agents or title insurers may charge a customer. The second proposed regulation would require title insurance companies or agents that generate a portion of their business from affiliates to function separately and independently from any affiliate and obtain business from other sources. Importantly, a press release issued by NYDFS explains that “emergency” versions of both of these regulations have already been adopted by NYDFS (in response to the aforementioned investigation). As explained by NYDFS, the emergency rules, which are currently in effect, will remain in effect until final regulations are adopted.
West Virginia Enacts Law Defining "Cryptocurrency" in Context of Money Laundering
On April 26, West Virginia Governor Jim Justice approved new legislation (H.B 2585) that defines cryptocurrency in the context of money laundering. Specifically, “cryptocurrency” is defined as “digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, and which operate independently of a central bank.” Furthermore, the term “monetary instruments”—traditionally defined, for example, as coin, currency, checks, gift and prepaid credit cards—would now include cryptocurrency. With respect to the anti-money laundering clause, the legislation makes it unlawful to “conduct or attempt to conduct a financial transaction,” which would include cryptocurrency transactions, “involving the proceeds of criminal activity knowing that the property involved in the financial transaction represents the proceeds of, or is derived directly or indirectly from the proceeds of, criminal activity.” H.B. 2585 also outlines penalty structures for violations of the legislation—misdemeanor or felony charges depending on the severity of the crime—and allows for forfeiture or disgorgement of cryptocurrency.