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Financial Services Law Insights and Observations


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  • Connecticut amends certain mortgage licensing provisions

    On July 7, the Connecticut governor signed SB 848, which, among other things, amends certain mortgage licensing provisions in the state’s banking statutes. Amendments include defining “residential mortgage loan” to include a “shared appreciation agreement” which is defined as “a nonrecourse obligation in which an advance sum of monetary value is extended to a consumer, as a lump sum or otherwise, in exchange for an equity interest in a dwelling, residential real estate or a future obligation to repay a sum upon the occurrence of an event, including, but not limited to, the transfer of ownership, repayment maturity date, death of the consumer or as outlined and explicitly agreed to within said agreement.” Amendments also include defining an “out-of-state mortgage loan originator” as “an individual who maintains a unique identifier through the system and holds a valid mortgage loan originator license issued pursuant to the laws of any state other than this state.” Additionally, effective October 1, all individuals must “obtain a mortgage loan originator license prior to conducting such business unless such individual does not engage directly in the activities of a mortgage loan originator or conducts such business pursuant to the temporary authority provided in subsection (e).”

    New Subsection (e) provides that individuals employed by a person licensed as a mortgage lender, mortgage correspondent lender, or mortgage broker in the state will be granted temporary authority to act as a mortgage loan originator in the state for the certain period of time, provided the individual meets certain specified criteria, including that the individual has not had a loan originator licensing application denied, has not had a loan originator license revoked or suspended, has not been subject to, or served with, a cease and desist order in any governmental jurisdiction or by the CFPB, has not been convicted of a misdemeanor or felony that would preclude licensure in this state, and was registered in the system as a registered loan originator during the one-year period immediately preceding the date on which the individual submitted an application and supporting materials. Temporary licenses will remain effective until a determination is made on the status of a permanent license, and temporarily licensed individuals will “be subject to the laws of this state to the same extent as if the individual is licensed as a mortgage loan originator in this state.” The amendments are effective October 1.

    Licensing State Issues State Legislation Mortgages

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  • Connecticut amends student loan servicer provisions

    On July 7, the Connecticut governor signed SB 890, which requires student loan servicers of federal student loans to register with the Department of Banking commissioner and comply with various state requirements and consumer protection mandates. The act now requires, subject to certain exemptions, entities servicing federal student loans (directly or indirectly) to obtain a license from the commissioner. Private student loan servicers are also still required to obtain licenses from the commissioner, and no licensee or registrant will be permitted to use any name other than its legal name or a fictitious name approved by the commissioner. Among other things, the act’s amendments provide new definitions and outline servicer duties, responsibilities, and prohibitions. Additionally, the amendments grant the commissioner the authority to impose civil penalties for violations of the act’s provisions after providing notice and an opportunity for hearing, and permits the commissioner to “suspend, revoke or refuse to renew any registration filed pursuant to section 3 of this act if any fact or condition exists which, if it had existed at the time of filing for registration, would have precluded eligibility for such registration.” The amendments took effect July 1.

    Licensing State Issues State Legislation Student Loan Servicer

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  • SEC settles with company over ETP implementation failure


    On July 19, the SEC announced a settlement with a financial services company for its role in alleged compliance failures connected to volatility-linked-exchange traded products (ETPs). According to the order, the issuer of the ETP, which was designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index, warned the company that it was not suitable to hold the product for extended periods of time, and that the product’s offering documents proved that the product’s value was likely to decline. The SEC alleged that the company violated the Advisers Act and Advisers Act Rule, such as Section 206(4), because the company failed to adopt reasonably designed written policies and procedures directed at ETPs and failed to implement its existing policies and procedures. The order includes allegations that the company prohibited brokerage representatives from soliciting sales of the product and placed other sales restrictions of the product, but did not place similar restrictions on some financial advisers’ use of the product in discretionary managed client accounts. The order further noted that the company allegedly adopted a concentration limit on ETPs but failed to implement a system for monitoring and enforcing that limit for five years. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of approximately $8 million and $96,344 in disgorgement, and requires the company to cease and desist from committing or causing any future violations of Section 206(4) of the Advisers Act and Advisers Act Rule.

    Securities Enforcement SEC Investigations

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  • DFPI to start accepting debt collector licensing applications on September 1

    On July 12, the Nationwide Multistate Licensing System & Registry (NMLS) published an announcement reminding debt collectors that all persons must apply for a license through the California Department of Financial Protection and Innovation (DFPI) by December 31, 2021. As previously covered by InfoBytes, last September, California enacted the “Debt Collection Licensing Act” (the Act), which requires a person engaging in the business of debt collecting in the state, as defined by the Act, to be licensed and provides for the regulation and oversight of debt collectors by DFPI. Under the Act, debt collection licenses will be required starting January 1, 2022; however, debt collectors who submit applications before January 1, 2022 will be allowed to operate while their applications are pending. However, a debt collector that submits an application after December 31 must wait for DFPI to issue a license before it can operate in the state. All required application materials must be submitted through NMLS, and NMLS reminded applicants that fingerprints must also be submitted to the California Department of Justice. The application will be available on NMLS beginning September 1.

    Find continuing InfoBytes coverage on DFPI’s debt collector licensing requirements here.

    Licensing State Issues State Regulators DFPI Debt Collection NMLS

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  • OFAC reaches multiple settlements with companies that conspired to export equipment to Iran

    Financial Crimes

    On July 19, OFAC announced a $415,695 settlement with the United Arab Emirates (UAE)-based head regional office of a Sweden-based equipment company for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR). According to OFAC’s website notice, between 2015 and 2016, the UAE company allegedly conspired with Dubai- and Iran-based companies to export equipment from the U.S. to Iran. As a result, the UAE company caused its U.S.-based affiliate to indirectly export goods to Iran by incorrectly listing a Dubai-based company on its export documentation as the end-user. The conspiracy also allegedly included the organization of additional sales of the equipment in the same manner as the initial sale, which ultimately ended when the U.S. Department of Commerce’s Bureau of Industry and Security requested post-shipment verification that showed certain products in question were reexported to Iran.

    In arriving at the settlement amount, OFAC considered various aggravating factors, including that (i) the UAE company did not voluntarily self-disclose the apparent violations; (ii) the UAE company “willfully violated the ITSR” by conspiring to export goods from the U.S. to Iran by “obfuscating the end-user’s identity from its U.S. affiliate,” thus causing the U.S. affiliate to violate the ITSR; (iii) multiple managers had actual knowledge of the conduct giving rise to the apparent violations; and (iv) the UAE company “caused harm to the integrity of the ITSR by circumventing U.S. sanctions and conferring an economic benefit to Iran’s energy sector.”

    OFAC also considered various mitigating factors, including that (i) none of the relevant subsidiaries, including the UAE company, have received a penalty notice from OFAC in the preceding five years; (ii) the UAE company, through the U.S. affiliate, conducted an internal investigation resulting in numerous remedial measures, including taking disciplinary actions against participating individuals, adopting an enhanced review and screening process for Iran-related transactions, and conducting additional in-person training; and (iii) the UAE company, through the U.S. affiliate, provided substantial cooperation to OFAC during the investigation.

    OFAC separately reached a $16,875 settlement with a Virginia-based U.S. subsidiary for its apparent ITSR violations arising from this matter. The Virginia subsidiary did not voluntarily self-disclose the apparent violations, but agreed to the settlement on behalf of a former Pennsylvania-based subsidiary that allegedly referred a known Iranian business opportunity to its foreign affiliate in Dubai. This foreign affiliate, OFAC claimed, then “orchestrated a scheme to export goods” from the U.S. to Iran.

    Financial Crimes Department of Treasury OFAC Enforcement Of Interest to Non-US Persons OFAC Sanctions Settlement Iran

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  • OFAC amends Venezuela-related general license

    Financial Crimes

    On July 20, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Venezuela-related General License (GL) 5G, “Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After October 21, 2021,” which replaces and supersedes GL 5F. GL 5G, however, does not authorize any transactions or activities otherwise prohibited by the Venezuela Sanctions Regulations. OFAC also amended related FAQ 595, which reminds parties that, until October 21, 2021, “transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5 percent bond are prohibited, unless specifically authorized by OFAC.”

    Financial Crimes Of Interest to Non-US Persons Department of Treasury OFAC Sanctions OFAC Designations Venezuela

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  • SEC obtains TRO and asset freeze against investment scam


    On July 19, the SEC announced that it had obtained a temporary restraining order and asset freeze to halt an ongoing fraud offering by a Las Vegas-based company and two individual defendants, including a recidivist, (collectively, “defendants”) that allegedly raised more than $12 million from nearly 300 retail investors. According to the complaint, the defendants violated several provisions of securities laws by allegedly promising investors that their money would be invested in securities, bitcoin, and other cryptocurrencies based on recommendations made by an “[a]rtificial intelligence supercomputer,” which allegedly “consistently generate[d] enormous returns” and allowed the defendants to guarantee fixed returns of 20-30 percent annually with compounding interest. However, the SEC alleged that over 90 percent of the defendants’ funds came from investors, and that the defendants did not use these funds for the stated purposes. Rather, defendants transferred millions of dollars to one of the individual defendant’s personal bank accounts, paid millions of dollars to promoters who led investors to the defendants, and made “Ponzi-like” payments to other investors. The complaint seeks permanent injunctions, disgorgement, prejudgment interest, and civil penalties.

    Securities SEC Enforcement Cryptocurrency

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  • New Jersey orders company to stop selling unregistered securities


    On July 19, the New Jersey Bureau of Securities (Bureau) announced a cease and desist order against a financial services company for allegedly selling unregistered securities in the form of interest-earning cryptocurrency accounts and failing to explain to investors that the accounts were not licensed in New Jersey. According to the order, the company has been funding its lending operations and proprietary trading business since 2019 by selling interest-bearing cryptocurrency accounts that are not protected by or registered with any federal or state securities regulator. The order notes that the company “held the equivalent of $14.7 billion from the sale of these unregistered securities in violation of the Securities Law.” In addition, the order, which become effective July 22, requires the company to stop selling any unregistered security or violating any securities law. According to the Bureau, the recent action “comes amid rising concerns over the proliferation of decentralized finance platforms like [the company] that seek to reinvent traditional financial systems such as banks and brokerages for digital asset investors,” and that “[u]nlike traditional, regulated banks and brokerage firms, however, investors’ losses are not insured against or protected by the Federal Deposit Insurance Corporation or Securities Investor Protection Corporation.”

    Securities State Issues New Jersey Cease and Desist Cryptocurrency

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  • FINRA to require filing of retail communications for private placement offerings


    On July 15, FINRA announced amendments to Rules 5122 and 5123 to require that members file retail communications that promote or recommend private placement offerings. Rule 5122 applies to private placements of unregistered securities issued by a member or a control entity, and requires that the member or control entity provide prospective investors with a private placement memorandum (PPM), term sheet, or other offering document that reveals the intended use of the offering proceeds and expenses, among other things. Rule 5123 requires that “members file with FINRA any PPM, term sheet or other offering document, including any material amended versions thereof, used in connection with a private placement of securities within 15 calendar days of the date of first sale.” According to FINRA, the amendments require a member to file retail communications with the FINRA Corporate Financing Department “no later than the date on which the member must file the private placement offering documents under Rules 5122 and 5123.” The amendments become effective on October 1.

    Securities Agency Rule-Making & Guidance FINRA

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  • FDIC argues “valid-when-made rule” fills statutory gaps


    On July 15, the FDIC filed a reply in support of its motion for summary judgment in a lawsuit challenging the agency’s “valid-when-made rule.” As previously covered by InfoBytes, last August state attorneys general from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act],” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered that the AGs’ arguments “misconstrue” the rule because it “does not regulate non-banks, does not interpret state law, and does not preempt state law,” but rather clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority (covered by InfoBytes here).

    The AGs disagreed, arguing, among other things, that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of [12 U.S.C.] § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” (Covered by InfoBytes here.) In its reply in support of the summary judgment motion, the FDIC’s arguments included that the rule is a “reasonable interpretation of §1831d” in that it filled two statutory gaps by determining that “the interest-rate term of a loan is determined at the time when the loan is made, and is not affected by subsequent events, such as a change in the law or the loan’s transfer.” The FDIC further claimed that the rule should be upheld under Chevron’s two-step framework, and that §1831d was enacted “to level the playing field between state and national banks, and to ‘assure that borrowers could obtain credit in states with low usury limits.’” Additionally, the FDIC refuted the AGs’ argument that the rule allows “non-bank loan buyers to enjoy § 1831d preemption without facing liability for violating the statute,” pointing out that “if a rate violates § 1831d when the loan is originated by the bank, loan buyers cannot charge that rate under the Final Rule because the validity of the interest is determined ‘when the loan is made.’”

    Courts Agency Rule-Making & Guidance State Issues State Attorney General FDIC Madden Interest Valid When Made

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