InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FinCEN Imposes Civil Money Penalty Against Owner of Kentucky-Based Money Services Business
On March 24, FinCEN assessed a civil money penalty against a Kentucky-based MSB and its owner for violations of the Bank Secrecy Act (BSA). As the designated AML compliance officer of the MSB, the owner willfully violated the BSA’s AML program and reporting requirements by failing to ensure that the MSB complied with obligations under the BSA and its implementing regulations. In 2009, after an IRS Small Business/Self-Employed Division (IRS SB/SE) examination of the MSB’s activities, FinCEN issued a warning letter advising the company to take corrective actions. A subsequent 2013 IRS SB/SE examination found continued violations. Specifically, the MSB failed to (i) establish and implement an effective AML program by “failing to implement policies, procedures, and internal controls reasonably designed to assure ongoing compliance, failing to designate an adequate compliance officer, failing to provide adequate training, and failing to conduct independent testing of its compliance program”; and (ii) file accurate and timely currency transaction reports. The MSB’s owner admitted to violating the BSA’s AML program and reporting requirements and agreed to a $10,000 civil money penalty.
New York DFS Takes Action Against Online Payday Loan Lead Generator
Recently, the New York DFS announced that an online payday loan lead generator and its CEO will pay a $1 million penalty and cease payday loan lead generation activities in New York to resolve allegations that its payday loans charge fees had interest rates greater than the usury limits allowed under New York law, and that it failed to protect consumers' personal information. According to the DFS, the company (i) "advertised payday loans and connected New York consumers to payday lenders without disclosing that the payday loans contained terms that violate New York usury laws"; and (ii) failed to take any protective measures when selling leads to its network of lead buyers, despite advertising that it "prides itself in putting [its] customer's security and personal information protection at the top of [its] priority list." In the event that the company solicits non-payday lending services in New York in the future, the order requires it to establish and adhere to data security protocols for the secure use, transfer, and storage of consumers' personal information. This action represents the DFS's first action to require a company to implement consumer data security measures to its future collection of consumers' personal information.
Indiana Passes House Bill to Amend the Indiana Code
On March 21, Indiana Governor Mike Pence signed H.B. 1181, which makes various revisions to Indiana laws concerning, among other things, (i) first mortgage lien lenders; (ii) persons licensed under the Uniform Consumer Credit Code; (iii) exempt threshold amounts for credit; and (iv) debt management companies. Various sections of the bill are effective immediately, while others will take effect July 1, 2016.
CFPB Issues Interim Final Rule, Broadens Small Creditors' Eligibility to Originate Certain Mortgages
On March 22, the CFPB issued an interim final rule to implement the Helping Expand Lending Practices in Rural Communities (HELP) Act by providing broader eligibility under TILA for small creditors originating balloon-payment qualified and balloon-payment high-cost mortgages. Specifically, under the interim rule, a small creditor with no more than 2,000 first-lien covered transactions and total assets less than $2 billion will be eligible for Qualified Mortgage provisions if it originates at least one covered mortgage loan in an area designated rural or underserved per calendar year. Previously, the CFPB “adopted a single test to determine whether a small creditor operated predominantly in rural or underserved areas for the purposes of eligibility for the special previsions exemption,” requiring that a small creditor made more than half of its covered mortgage loans in the previous calendar year on properties that were designated rural or underserved.
The interim final rule also amends the definition of “rural” for the purposes of a procedural rule announced in early March to establish an application process for petitioning the CFPB to identify an area as rural or underserved for the purposes of Federal consumer financial law. “Rural” will now include any area so designated pursuant to the application process.
FinCEN, Banking Agencies Release Guidance on Applying Customer Identification Program Requirements to Holders of Prepaid Cards
On March 21, the Federal Reserve, FDIC, NCUA, OCC, and FinCEN published guidance to issuing banks (i.e., banks that authorize the use of prepaid cards) intended to clarify the application of customer identification program (CIP) requirements to prepaid cards. The guidance clarifies that when the issuance of a prepaid card creates an “account” as defined in CIP regulations, CIP requirements apply. The guidance indicates that a prepaid card should be treated as an account if it has attributes of a typical deposit product, including prepaid cards that provide the ability to reload funds or provide access to credit or overdraft features. Once an account has been opened, CIP regulations require identification of the “customer.” The guidance explains that the cardholder should be treated as the customer, even if the cardholder is not the named accountholder, but has obtained the card from a third party program manager who uses a pooled account with the bank to issue prepaid cards. Finally, the guidance stresses that third party program managers should be treated as agents, not customers, and that “[t]he issuing bank should enter into well-constructed, enforceable contracts with third-party program managers that clearly define the expectations, duties, rights, and obligations of each party in a manner consistent with [the] guidance.”
FATF Updates List of Jurisdictions with AML Deficiencies, FinCEN Issues Related Advisory
On March 21, FinCEN issued advisory bulletin FIN-2016-A002 notifying financial institutions of updates to the Financial Action Task Force’s (FATF) list of jurisdictions containing AML/CFT deficiencies. The FATF updated two documents categorizing certain jurisdictions: (i) the FATF Public Statement, identifying jurisdictions that are subject to the FATF’s call for countermeasures or are subject to Enhanced Due Diligence due to AML/CFT deficiencies; and (ii) the Improving Global AML/CFT Compliance: on-going process, identifying jurisdictions which have developed an action plan with the FATF to address strategic AML/CML deficiencies. Revisions to the FATF Public Statement include the removal of Myanmar (Burma); in turn, Myanmar was added to the Improving Global AML/CFT Compliance: on-going process list. Iran and North Korea remain listed as subject to countermeasures on the FATF Public Statement. Additional jurisdictions currently on the Improving Global AML/CFT Compliance: on-going process list include Afghanistan, Bosnia and Herzegovina, Guyana, Iraq, Lao PDR, Papua New Guinea, Syria, Uganda, Vanuatu, and Yemen. Algeria, Angola, and Panama were removed from the list. FinCEN reminded U.S. financial institutions that they are subject to a broad range of restrictions on dealing with Iran and North Korea. FinCEN also advised U.S. financial institutions to consider the risks associated with countries on the Improving Global AML/CFT Compliance: on-going process list, and reminded them of their general due diligence obligations, including for foreign correspondent accounts.
President Expands North Korean Sanctions
On March 16, the President issued an Executive Order broadening sanctions in response to North Korea’s continuing pursuit of its nuclear and ballistic missile programs. The order blocks the Government of North Korea and the Workers’ Party of Korea; prohibits the exportation of goods, technology and services (including financial services) to North Korea from the United States; prohibits new investment in North Korea by U.S. persons; and establishes nine new criteria for designation as a blocked person. One provision authorizes the Secretary of the Treasury to identify sectors of the North Korean economy to target for asset blocking sanctions. Under this authority, Treasury Secretary Jacob J. Lew determined that persons in the transportation, mining, energy, or financial services sectors of North Korea can be targeted.
Simultaneously, OFAC designated 17 officials or organizations of the Government of North Korea as SDNs, meaning that all of these persons’ property or interests in property in the United States or the possession or control of a U.S. person are blocked. OFAC also identified 20 vessels as blocked.
Finally, OFAC issued nine general licenses permitting certain activities involving North Korea that would otherwise be prohibited by the new Executive Order. These general licenses authorize, among other activities, noncommercial, personal remittances on behalf of individuals normally resident in North Korea; third-country consular funds transfers and transactions related to intellectual property; and support of non-governmental organizations and telecommunications and mail.
Federal Court in New York Dismisses State-Law Claims Against National Bank and Service Provider on Preemption Grounds
On March 9, the U.S. District Court for the Southern District of New York upheld the preemption of state-law claims brought against a national bank and its non-bank servicer provider. Edwards v. Macy’s Inc., No. 14-cv-8616 (S.D.N.Y. March 9, 2016). The plaintiff alleged that, without her consent, she had been enrolled in and charged for a payment-protection program in connection with her private-label, department store credit card. She sued the issuing bank – a national bank based in South Dakota – and the department store, asserting (among other things) that both had violated the South Dakota Consumer Deceptive Trade Practices Act. The court held that the plaintiff’s claims were preempted by the National Bank Act and Office of the Comptroller of the Currency (OCC) regulations.
The court held that the plaintiff’s state law claims against the bank were expressly preempted by OCC regulations, which provide that “[n]ational banks’ debt cancellation contracts and debt suspension agreements are governed by this part and applicable Federal law and regulations, and not by State law.” Opinion at 7 (citing 12 C.F.R. § 37.1). In addition, the court held that the state law claims were impliedly preempted because the OCC regulations are “sufficiently comprehensive as to crowd out state law,” and requiring the bank “to comply with state law that reaches the same subject matter would impermissibly ‘prevent or significantly interfere with the national bank’s exercise of its powers.’” Id. at 9 (citing Barnett Bank, N.A. v. Nelson, 517 U.S. 33 (1996)).
Significantly, the court held that claims brought against the non-bank department store also were preempted. The court agreed with the plaintiff that the Second Circuit’s recent holding in Madden v. Midland Funding means that “OCC preemption extends to an entity that is not a national bank only where that entity is an agent or subsidiary of a national bank or is otherwise acting on behalf of the national bank in carrying out the bank’s business.” Id. at 13 (citing Madden v. Midland Funding, LLC, 786 F.3d 246, 249 (2d Cir. 2015)). However, it held that the plaintiff’s complaint clearly alleged that the department store did act on behalf of the bank in carrying out the bank’s powers. Specifically, the complaint alleged that the department store provided marketing services, credit processing, collections, and customer service to the bank with respect to the private-label credit cards and ancillary products such as the payment protection program. The court therefore concluded that “[t]he federal preemption that cloaks [the bank] extends to [the department store] in connection with the activities in suit,” and it dismissed the complaint. Id. at 14.
It should be noted that the opinion is silent on the Dodd-Frank Act’s express rejection of federal preemption for agents (and subsidiaries) of national banks. In its preemption analysis, the court stated that it was unclear whether “Dodd–Frank even applies to Plaintiff’s claims, because Dodd–Frank’s preemption amendments regarding national banks did not go into effect until July 21, 2011, months after Plaintiff enrolled in Payment Protection.” Id. at 8. As such, the case can be viewed (and distinguished by other courts) as applying pre-Dodd-Frank Act preemption standards in analyzing the specific question of whether federal preemption extends to non-banks that provide services to banks in connection with loans or other extensions of credit.
Senator Murray Sponsors Bill to Expand and Strengthen the SCRA
On March 17, Senator Patty Murray (D-WA) sponsored the SCRA Enhancement and Improvement Act of 2016 (the Act). The Act focuses especially on student loan servicers, but encompasses all financial institutions covered by the SCRA. Although the text of the Act is not yet available, the recently issued press release on the Act describes its proposed changes to the SCRA. Among other changes, the Act would revise the SCRA by: (i) requiring automatic application of the SCRA’s interest rate cap; (ii) ensuring that student loan servicers have a dedicated SCRA representative; (iii) reducing the SCRA’s interest rate cap from 6% to 3%; (iv) protecting servicemembers when their loans are transferred or sold by requiring “sufficient notice”; (v) forgiving all federal and private student loan debt if a servicemember dies in the line of duty; (vi) expanding the interest rate cap to all debts, no matter when incurred; (vii) clarifying that servicemembers may bring a private right of action under the SCRA; (viii) doubling the fines for violations of the SCRA; and (ix) expanding certain protections on mortgages, leases, and cable and internet contracts.
DOJ Announces Prison Sentences of Former Derivatives Traders for LIBOR Manipulation
On March 10, the DOJ announced that U.S. District Judge Jed S. Rakoff sentenced two former derivatives traders for a Netherlands-based bank to prison for their roles in a scheme to manipulate the London Interbank Offered Rates (LIBOR) for the U.S. Dollar (USD) and Japanese Yen (JPY) from 2005-2009. The defendants, who were convicted of bank fraud, wire fraud and conspiracy charges in November 2015, were sentenced to 24 months and 12 months and a day in prison. Two additional bank employees were convicted in the same LIBOR investigation after pleading guilty to one count of conspiracy each for their roles in the scheme; two other individuals were charged and are awaiting trial.