InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
NAAG Urging Congress to Refrain From Passing Federal Data Breach Legislation Preempting State Authority
On July 7, as Congress considers proposed legislation on data breach notification and security, the National Association of Attorneys General (NAAG) sent a letter to leaders of both houses of Congress urging them to refrain from passing federal data breach and identity theft laws that would preempt states’ authority to enforce their own legislation, or pass legislation that exceeds federal standards. The 47 state attorneys general argued that “preempting state law would make consumers less protected than they are right now” because (i) states are closer to people affected consumers and can better respond to their concerns; (ii) states are “better equipped to quickly adjust to the challenges presented by a data-driven economy”; (iii) although helpful for a national data breach, a single federal agency would be unable to “respond effectively” to the large number of smaller data breaches that “have a large impact in a particular state or region”; and (iv) “with the increasing speed rate of technological developments,” states need the ability to surpass minimal and continually obsolete federal requirements. Accordingly, the state attorneys general asserted it was “crucial” that they “maintain their enforcement authority under their states’ laws, and that any legislation be tailored to ensure complementary enforcement authority.”
Update: OFAC Releases Guidance on the Continuation of Certain Temporary Sanctions Relief Under the JPOA
On July 7, the P5 + 1, EU, and Iran agreed to extend the JPOA for three days to further negotiations in reaching a comprehensive solution surrounding Iran’s nuclear program. As a result, OFAC issued updated guidance informing that all JPOA sanctions relief detailed in the Guidance, FAQs, and Statement of License Policy issued in November 2014 has been extended through July 10, 2015. This updated guidance replaces guidance previously issued by OFAC on June 30, 2015.
CFPB Report Details Ongoing Challenges Between Servicemembers and Student Loan Servicers
On July 7, the CFPB released a report detailing the continued challenges military servicemembers experience related to the servicing of their student loans, particularly when trying to invoke certain rights granted under the Servicemembers Civil Relief Act (SCRA). This report follows the CFPB’s May announcement seeking public comment on student loan servicing practices related to servicemembers. Based on over 1,300 complaints received, the report details how both private and federal student loan servicers continue to make mistakes handling servicemembers’ student loan repayments, leading to wrongful denial of legal benefits and negative credit reporting for military families. Specifically, the report highlights servicemembers’ difficulties in (i) obtaining the SCRA’s 6-percent interest rate cap; (ii) receiving adequate information or having requests properly processed, especially regarding deferment plans (leading to unwarranted delinquencies, defaults, and debt collections); and (iii) discharging the debts of severely injured veterans or the families of deceased servicemembers.
Federal Reserve Orders Bank Holding Company to Strengthen its Firmwide Risk Management, Cites Capital Planning and Liquidity Risk Deficiencies
On July 7, the Board of Governors announced the execution of an enforcement action against a Boston-based bank holding company over deficiencies identified by the Federal Reserve Bank of Boston concerning the company’s governance, risk management, capital planning, and liquidity risk management operations. Pursuant to the Agreement, within 60 days of its execution the company must submit written plans detailing their efforts to strengthen board oversight of the company’s management and operations, bolster the risk management program, improve capital planning to match the company’s size and complexity, and strengthen liquidity risk management. No civil money penalty was imposed on the company.
HUD Proposes to Establish Deadline for FHA-Approved Lenders to File Insurance Claims
On July 6, HUD’s Federal Housing Administration (FHA) proposed a rule to establish a maximum time period for FHA-approved lenders to file insurance claims for benefits following the foreclosure of FHA-insured mortgages. Currently, HUD does not require mortgagees to file claims by a certain time, but the proposed rule will require lenders to file insurance claims (i) three months from when they obtain marketable title to the property; or (ii) when the property is sold to a third party. Since the housing market collapse, which dramatically increased mortgage defaults, mortgagees have chosen to forgo promptly filing insurance claims with the FHA, instead opting to wait and file multiple claims at once. This uncertainty of when claims will be filed, along with the high number filed at the same time, has strained FHA resources and negatively impacted its ability to project the future state of the Mutual Mortgage Insurance Fund (MMIF), which it is statutorily obligated to safeguard. In addition to the deadline, the proposed rule would ban from insurance payouts certain expenses incurred by mortgagees that are the result of their failure to timely fulfill the requirements necessary to submit an insurance claim (such as promptly initiating foreclosure). Comments on the proposed rule are due September 4, 2015.
Federal Banking Agencies Reveal Location For Latest EGRPRA Outreach Meeting Highlighting Rural Banking Issues
On July 6, federal banking agencies – the Board of Governors, FDIC, and OCC – announced the date and location of the latest outreach meeting under the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA). Scheduled for August 4 at the Federal Reserve Bank of Kansas, the upcoming meeting will examine rural banking issues and will feature remarks from agency officials. This is the fourth of six scheduled outreach meetings around the country focused on identifying newly issued, outdated, or burdensome regulatory requirements imposed on financial institutions.
Digital Insights & Trends: It's All About the Blockchain
Just returning from a blockchain workshop in London, where I worked with a number of incredible people to consider solutions to some of the pressing regulatory issues impacting the blockchain technology. While considering these issues I wondered if Bitcoin had gained popularity solely as a protocol and not as a currency, would it have evolved faster and more readily. The almost instantaneous (compared to current standards) transfer of value across the globe would be just one component of the potential possibilities for the technology as recognized by the mainstream public. A secure ledger of property ownership, notarization, recordation of wills and trusts, claims for corporate names and intellectual property – all would be pursued at a much faster, or perhaps more public, pace. Currently, progressive financial institutions have announced their active experiments with the technology, while others quietly research the potential use cases.
The opportunities for developing a cryptographic, distributed, public ledger are endless, rendering predictions for the future, even 5 years from now, difficult. What is clear is that the way we conduct financial transactions will be forever altered – for the better. Payments and payment systems will be more efficient, secure, faster, and less expensive for all in the ecosystem and will also lead to financial inclusion. Government regulation – while antithetical to the original thesis of the Bitcoin protocol – is a necessary component of the “algorithm” as the protection of the public from acts of terrorism and other crimes is in everyone’s interest. So let’s work with it, think creatively about it, and help prepare the protocol, governments and the public for the next 5 years.
Financial Action Task Force Issues Guidance Urging Risk-Based Approach to Virtual Currencies and Services
On June 29, the Financial Action Task Force (FATF) issued a report, Guidance for a Risk-Based Approach to Virtual Currencies,part of a staged approach focusing on the points of intersection that provide gateways to the regulated financial system, in particular, convertible virtual currency exchangers. The Guidance explains the application of the risk-based approach to AML/CFT measures in the virtual currency context, identify the entities involved in virtual currency payment products and services (VCPPS), and clarify the application of the relevant FATF Recommendations to convertible virtual currency exchangers. The guidance provides, among other things, recommendations and encourages member nations to adopt regulations and guidelines similar to those applicable to traditional financial institutions to reduce risk exposure to the banking system.
Court Holds That Evidence of Clickwrap Assent Not Always Sufficient When Evidence Disputing Assent is Presented
On June 29, in Jim Schumacher, LLC v. Spireon, Inc., Civ. Action No. 3:12-cv-00625-TWP-CCS, a Tennessee federal judge denied the motion for partial summary judgment as to the breach of contract claim because there was evidence that the plaintiff did not use the defendant’s portal or authorize an agent to use the defendant’s portal to manifest assent to the modified contract terms even though the defendant had digital evidence of such assent to the clickwrap agreement, thus creating a factual dispute. In 2005, the plaintiff became a reseller of the defendant’s vehicle location devices. In 2009, the defendant modified its agreement, and placed the modified agreement on its customer portal website through which resellers manage purchases, sales, and customer data. Visitors to the portal were required to click “I Accept” or “I Decline” before being permitted to access any other information on the portal. The defendant produced digital evidence demonstrating that someone with the correct login and password accepted the 2009 agreement, and further digital evidence that someone with the correct login and password accepted an agreement in 2010 as well. The plaintiff claims that he did not use the portal after the defendant placed the 2009 agreement on the portal, and thus could not have assented to the clickwrap agreement. During this time, the plaintiff also did not authorize his representative to agree to the terms of the 2009 amendment, nor did he give any other users the ability to execute the agreement on his behalf. The plaintiff filed a lawsuit alleging a breach of contract claim and a fraud claim based on the 2005 agreement.
The defendant argued that the 2005 agreement was superseded by the plaintiff’s acceptance of the 2009 agreement, which itself was superseded by the plaintiff’s acceptance of the 2010 agreement, and that the defendant had digital evidence of the plaintiff’s assent. The plaintiff contended that neither argument was properly executed on his behalf. The defendant argued that the plaintiff cannot avoid summary judgment by asserting a failure to see, read, or sign the 2009 or 2010 agreements. In so doing, the defendant relied on two cases where the terms of the “clickwrap” agreement were enforced against a party who claimed lack of agreement to the terms. The court distinguished this case from those two cases by noting that in both of those cases, undisputable evidence existed that the party assented to the terms of the clickwrap, either because the party used the website to make travel arrangements or because the party incorporated software into its own products that could only have been installed if the party agreed to the clickwrap agreement. Here, the court noted, the plaintiff did not use the portal after the defendant posted the amended agreements. Regarding the defendant’s argument that some with apparent authority executed the agreements, the court found that no evidence existed that the plaintiff granted anyone but his representative authority to act on his behalf and that the record was silent regarding whether the plaintiff’s representative did execute the agreements. Therefore, the court denied the defendant’s motion for summary judgment regarding the breach of contract claim because a factual dispute existed regarding which contract controlled. Finally the court allowed the plaintiff’s fraud claims to proceed only regarding alleged statements made between January 2011 and March 10, 2011, when the defendant claims it terminated the 2010 agreement with the plaintiff.
Maryland Court of Appeals Rules Borrowers Barred By Three-Year Statute of Limitations in HELOC Decision
On June 23, The Court of Appeals of Maryland reversed the judgment of the Court of Special Appeals in Windesheim v. Larocca, 2015 WL 3853500 (MD. 2015), holding that the statute of limitations for a mortgage origination fraud case began to run at origination because the borrowers had inquiry notice of the loan terms. Under the alleged “buy-first-sell-later” scheme, the borrower-plaintiffs contend that the realtor and lender-defendants encouraged the borrowers to open home equity lines of credit (HELOCs) on their current homes while simultaneously selling their current homes. The lenders allegedly forged documents and signatures in order to approve both the HELOCs and the mortgages on new homes. The trial court initially found that the claims were time-barred, as the plaintiffs should have discovered the alleged fraud when the loans were originated. On appeal to the Court of Special Appeals, Maryland’s intermediate appellate court, the plaintiffs succeeded in reversing the decision of the trial court. The defendants then filed their own appeal, and the Court of Appeals sided with the trial court in holding that the three-year statute of limitations had run. In particular, the Court of Appeals held that the borrowers had inquiry notice at origination because they signed the loan applications and thus were “presumed to have read and understood their contents.” Furthermore, the statute of limitations was not tolled by Maryland law or the fiduciary rule “because there is neither evidence that the Petitioners encouraged Borrowers not to read the Applications nor evidence that the Borrowers and Petitioners were in a fiduciary relationship.” The Court of Appeals further held that the defendants neither engaged in nor conspired to engage in false or misleading indirect advertising regarding secondary mortgage loans.