Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Spotlight on the Military Lending Act, Part 2: Planning for Compliance

    Consumer Finance

    Compliance with the revised Department of Defense (“DoD”) regulations under the Military Lending Act (“MLA”) is not mandatory until October 3, 2016 or, for most credit cards, until October 3, 2017.  However, as the recent implementation of the Dodd-Frank Act mortgage regulations shows, a year or even two can pass quickly.  Therefore, institutions should begin planning now.  The following are answers to three key questions that can help you start the planning process.

    1. Which products will be covered by the revised MLA regulations?

    The revised MLA regulations apply far beyond the narrow range of small dollar loan products covered today.  Instead, reflecting the DoD’s desire to match to the definition of consumer credit under the Truth in Lending Act’s Regulation Z, the MLA regulations will apply to credit offered or extended to a covered borrower that is:

    • Primarily for personal, family, or household purposes; and
    • Either subject to a finance charge or payable by a written agreement in more than four installments.

    However, the following types of credit are excluded:

    • Residential mortgages: Transactions secured by an interest in a dwelling, including a transaction to finance the purchase or initial construction of the dwelling.
    • Secured motor vehicle purchase loans: Transactions that are expressly intended to finance the purchase of a motor vehicle and are secured by that vehicle.
    • Secured personal property purchase loans: Transactions that are expressly intended to finance the purchase of personal property and are secured by that property.
    • TILA-exempt transactions: Transactions that are exempt from Regulation Z (other than pursuant to a State exemption under 12 CFR § 1026.29) or otherwise not subject to disclosure requirements under Regulation Z.

    Accordingly, the revised MLA regulations should not affect most mortgage, auto, or commercial lending.  The new regulations will, however, apply to most credit card accounts, overdraft or personal lines of credit, unsecured closed-end loans, and deposit advance products.  Therefore, institutions should focus on preparing the lines of business responsible for these products for compliance with the revised MLA regulations.

    1. How will I determine who is a covered borrower?

    If a product is covered by the MLA regulations, the next question is whether the borrower is also covered.  Creditors must build the systems and train their employees to determine whether the consumer is a “covered borrower” at the time the consumer becomes obligated or establishes an account.  To be a covered borrower, the consumer must be either:

    • A “covered member,” which is a member of the armed forces who is serving on: (1) active duty under titles 10, 14, or 32 of the United States Code under a call or order that does not specify a period of 30 days or fewer; or (2) active guard and reserve duty under 10 U.S.C. 101(d)(6); or
    • A “dependent” of a covered member as described in 10 U.S.C. 1072(2)(A), (D), (E), or (I), which includes: (1) a spouse; (2) a child under 21 (or 23 in certain circumstances); (3) a parent or parent-in-law dependent on the covered member for over one-half of their support and residing in the member’s household; and (4) certain persons over whom the covered member has legal custody.

    While a creditor is permitted to use its own method to determine whether a consumer is a covered borrower, the revised regulations provide a safe harbor if the creditor relies on:

    • Information obtained directly or indirectly from the DoD’s database; or
    • A “statement, code, or similar indicator” of the consumer’s status in a consumer report obtained from a nationwide credit bureau meeting certain criteria.
    1. What must be done for extensions of credit subject to the MLA?

    When a covered consumer credit product is provided to a covered borrower, the creditor must comply with both substantive restrictions and disclosure requirements.

    1. Substantive requirements

    The Military Annual Percentage Rate (“MAPR”) cannot exceed 36 percent on a closed-end loan or in any billing cycle for an open-end credit account.  Accordingly, creditors must develop systems for calculating the MAPR.

    The MAPR is generally calculated consistent with the APR in Regulation Z (for open end transactions, the MAPR is calculated like the “effective APR”).  However, while the Regulation Z APR includes only finance charges, the MAPR also includes credit insurance premiums, debt suspension fees, ancillary product fees, and certain application and participation fees, among other things.  For certain credit card accounts, the MAPR excludes “bona fide” fees that are comparable to fees “typically imposed by other creditors for the same or a substantially similar product or service.”

    A number of additional restrictions apply to covered transactions:

    • For certain non-depository creditors, roll-overs and vehicle title loans are prohibited.
    • The covered borrower cannot be required to waive legal recourse under State or Federal law, submit to arbitration, or comply with “onerous” or “unreasonable” notice requirements.
    • The covered borrower cannot be required to establish an allotment to repay the obligation and certain limitations apply to the use of checks or other methods of access to a deposit, savings, or other financial account maintained by the covered borrower.
    • Prepayment penalties and restrictions on prepayment are prohibited.
    1. Disclosure requirements

    Creditors must also build systems and train their employees to provide certain written and oral disclosures.

    1. Written disclosures

    In addition to the applicable Regulation Z disclosures, a covered borrower must receive “a statement of the MAPR applicable to the extension of consumer credit” before or at the time the borrower becomes obligated on the transaction or establishes an account.

    However, rather than providing the numerical value of the MAPR, the following or a substantially similar statement may be included in the agreement with the covered borrower:

    Federal law provides important protections to members of the Armed Forces and their dependents relating to extensions of consumer credit.  In general, the cost of consumer credit to a member of the Armed Forces and his or her dependent may not exceed an annual percentage rate of 36 percent.  This rate must include, as applicable to the credit transaction or account:  The costs associated with credit insurance premiums; fees for ancillary products sold in connection with the credit transaction; any application fee charged (other than certain application fees for specified credit transactions or accounts); and any participation fee charged (other than certain participation fees for a credit card account).

    1. Oral disclosures

    The creditor must also orally provide the above MAPR statement and a “clear description of the payment obligation” (such as a Regulation Z payment schedule or account-opening disclosure) either in person or through a toll-free telephone number included on the application form or in a written disclosure.

    Military Lending Act Manley Williams

  • FinCEN Determines That Issuing a Digital Certificate Evidencing Ownership in Precious Metals, and Buying and Selling Precious Metals, Are Subject to The BSA

    Fintech

    On August 14, FinCEN issued an Administrative Ruling, FIN-2015-R001, determining that a company who: i) provides Internet-based brokerage services between buyers and sellers of precious metals; ii) buys and sells precious metals on its own account; and iii) holds precious metals in custody, opens a digital wallet, and issues a digital proof of custody certificates evidencing ownership of such metals, is subject to the BSA.

    FinCEN determined that, as a broker or dealer in e-currencies and e-precious metals, the company did not fall under the e-currencies or e-precious metals trading exemption from money transmission:  “when the Company issues a freely transferable digital certificate of ownership to buyers, it is allowing the unrestricted transfer of value from a customer’s commodity position to the position of another customer of a third-party, and it is no longer limiting itself to the type of transmission of funds that is a fundamental element of the actual transaction necessary to execute the contract for the purchase of sale of the currency or the other commodity.” As such, it is acting as a convertible virtual currency administrator (the freely transferable digital certificates being the commodity-backed virtual currency). Further, the purchases and sales of precious metals made on its own account render the Company a dealer in precious metals (subject to certain monetary thresholds and other considerations), and thus a financial institution for purposes of the BSA.

    FinCEN Bank Secrecy Act Virtual Currency

  • Special Alert: Second Circuit Will Not Rehear Madden Decision That Threatens To Upset Secondary Credit Markets

    Two months ago we issued a Special Alert regarding the decision of the Court of Appeals for the Second Circuit in Madden v. Midland Funding, LLC, which held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. We explained that the Second Circuit’s reasoning in Madden ignored long-standing precedent upholding an assignee’s right to charge and collect interest in accordance with an assigned credit contract that was valid when made. And, because the entire secondary market for credit relies on this Valid-When-Made Doctrine to enforce credit agreements pursuant to their terms, the decision potentially carries far-reaching ramifications for securitization vehicles, hedge funds, other purchasers of whole loans, including those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to marketplace lending industries and various types of on-line consumer credit.

    After the decision, Midland Funding, the assignee of the loan at issue, petitioned the Second Circuit to rehear the case either by the panel or en banc – a petition that was broadly supported by banking and securities industry trade associations in amicus briefs.  On August 12, the court denied that petition.

     

    Click Here to View the Full Special Alert

     

    ***

     

    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    National Bank Act Usury Second Circuit Madden

  • Illinois Governor Signs Reverse Mortgage Act

    Consumer Finance

    On August 10, Illinois Governor Bruce Rauner signed into law Senate Bill 1440, the Reverse Mortgage Act which provides new consumer protections for borrowers with respect to reverse mortgage loan transactions. Among other things, the legislation establishes a regulatory framework to govern reverse mortgage loan transactions made within the state including provisions that (i) require lenders to provide certain mortgage disclosures to potential borrowers; and (ii) implement a three-day “cooling off” period in which a potential borrower can rescind the loan. The Act also grants the Illinois Attorney General sole enforcement authority to pursue any violations of the Reverse Mortgage Act, which would constitute as an unlawful practice under the state’s Consumer Fraud and Deceptive Business Practices Act. The law becomes effective January 1, 2016.

    Reverse Mortgages

  • District Court Invalidates NYC Ordinance Making Banks Service Under-Served Areas as Requirement to Receive Municipal Deposits

    Consumer Finance

    On August 7, the U.S. District Court for the Southern District of New York granted summary judgment for the New York Bankers Association (NYBA) in a case challenging the City of New York’s Local Law 38, entitled the Responsible Banking Act (RBA). New York Bankers Ass’n, Inc. v. City of New York, No. 15-CV- 4001, 2015 WL 4726880 (S.D.N.Y. Aug. 7, 2015). Passed in 2012, the RBA imposes various requirements on banks operating within New York City, including, as a prerequisite to receiving certain municipal deposits, requirements to document efforts to provide affordable housing, access to credit for small businesses, and other services. The court held that the RBA was preempted both by (i) federal law (including the National Bank Act, the Community Reinvestment Act, and OCC regulations) because, among other reasons, the RBA “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress”; and (ii) New York state law, because the New York Banking Law “evinces an intent to preempt the field of regulating state-chartered banks.” Thus, the RBA was “void in its entirety.”

    CRA SDNY

  • CFPB, FDIC, and OCC Order Large Financial Institution and Subsidiaries to Pay Nearly $40 Million for Deposit Discrepancies

    Consumer Finance

    On August 12, in coordinated enforcement actions, the CFPB, FDIC, and OCC ordered a large financial institution and two of its banking subsidiaries to pay nearly $40 million in fines and restitution for failing to credit consumers the full amounts of their deposited funds. The regulators allege that, from 2008 through 2013, the bank entities (i) failed to credit consumers the full amount of their deposits when the amount scanned on the deposit slip was less than the amount of the checks and cash deposited; and (ii) falsely claimed that they would verify the deposits. The CFPB consent order requires the bank entities to pay approximately $11 million in restitution and a $7.5 million civil money penalty. The FDIC order requires one of the banking subsidiaries to pay nearly $5.8 million in restitution and a $3 million civil money penalty, while the OCC consent order assessed a $10 million civil money penalty on the other banking subsidiary.

    FDIC CFPB OCC Enforcement

  • FTC Announces Action Against Data Brokers for Fraud Allegations, Settles with Three Defendants

    Consumer Finance

    On August 12, the FTC announced an action against a data broker enterprise for violations of the FTC Act. The FTC’s complaint alleges that, from at least 2011 to 2013, the data broker enterprise (i) sold payday loan applications to Ideal Financial Solutions and other non-lender third party companies for less than market value; and (ii) knew or had reason to know that Ideal Financial used the information to make unauthorized debits from consumers’ bank accounts. The complaint further alleges that the financial information of over 500,000 consumers was provided to Ideal Financial, which resulted in over $7.1 million of unauthorized debits to consumers’ accounts. Three of the defendants have agreed to settle the FTC’s allegations. The proposed settlement orders prohibit all three defendants from selling or otherwise benefitting from consumers’ personal information, and impose a $7.1 million judgment against two defendants and a $3.7 million judgment against the third. The settlement orders are subject to approval by the U.S. District Court for the District of Nevada.

    FTC Payday Lending

  • Former SAP Executive Pleads Guilty to Paying "Necessary" Bribes

    Federal Issues

    On August 12, the DOJ and SEC announced joint enforcement actions against software giant SAP International’s former head of Latin American sales, Vicente Garcia. Garcia pleaded guilty to conspiracy to violate the FCPA and will be sentenced on December 16, 2015 in the Northern District of California. The DOJ alleges that SAP paid bribes to Panamanian officials to secure software license sales in late 2009, using sham contracts and fake invoices. Garcia “admitted that he believed paying such bribes was necessary” to secure the contracts.

    The SEC simultaneously issued an administrative cease and desist order against Garcia describing a scheme by which Garcia, in violation of SAP’s internal controls, gave discounts to a local business partner to generate excess earnings, which were used to create the slush fund used to pay at least $145,000 in bribes to secure approximately $3.7 million in sales. Garcia and others also arranged to receive kickbacks from the sales. Garcia agreed to pay disgorgement of the kickbacks he received plus prejudgment interest, totaling $92,395.

    FCPA SEC DOJ

  • Orthofix Deferred Prosecution Agreement Extended for Two Months

    Financial Crimes

    In a recently-filed status report, the DOJ and medical device manufacturer Orthofix revealed that the company’s Deferred Prosecution Agreement (DPA) will be extended by two months. The DPA was due to expire on July 17, 2015, but the status report states that Orthofix agreed to the extension in June to give DOJ “additional time to (1) evaluate Orthofix’s compliance with the internal controls and compliance undertakings in the DPA and (2) further investigate potentially improper conduct the company disclosed during the term of the DPA.” The report continued that DOJ intended to complete its investigation in August and inform Orthofix “of its proposed course of action shortly thereafter.”

    Orthofix entered into the DPA on July 10, 2012 to resolve allegations that a Mexico-based subsidiary paid bribes to employees of Mexico’s government-operated health system (see prior FCPA scorecard coverage).

    Earlier this year, another medical device manufacturer, Biomet, announced that its DPA would be extended for one year after it disclosed additional potential FCPA violations to the DOJ and SEC.

    FCPA DOJ

  • PetroChina Class Action Dismissed

    Federal Issues

    On August 3, a federal district court in New York dismissed with prejudice a securities class action suit filed against Chinese oil and gas company PetroChina Co. Ltd. The suit alleged that statements in the company’s 2011 and 2012 financial statements claiming the company was in compliance with its internal rules and securities regulations were false or misleading. The plaintiffs filed the suit after the Chinese government announced that it was investigating four of the company’s top executives for corruption.

    The court dismissed the complaint in its entirety, finding that the plaintiffs failed to allege any acts of bribery or corruption that predated the filing of the 2011 and 2012 financial statements. The court wrote: “[T]his Court is not requiring that Plaintiffs allege a detailed account of the particular illicit deals that PetroChina officials were allegedly engaged in. Plaintiffs are required, nonetheless, to establish—at a bare minimum—that the underlying fraud took place during the time period covered by the purportedly false public statements and that someone at PetroChina knew or had reason to know about it.”

    Similar class action suits against Wal-Mart and Avon have also been dismissed in the past year.

    Class Action China

Pages

Upcoming Events