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Financial Services Law Insights and Observations


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  • FinCEN clarifies customer due diligence FAQs

    Agency Rule-Making & Guidance

    On August 3, the Financial Crimes Enforcement Network (FinCEN), in consultation with the federal functional regulators, issued responses to three frequently asked questions (FAQs) concerning customer due diligence (CDD) requirements under the Bank Secrecy Act for covered financial institutions. As previously covered by InfoBytes, the 2016 CDD Rule imposed standardized requirements for financial institutions to identify and verify beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The FAQs follow those issued by FinCEN in July 2016 and April 2018 (covered by InfoBytes here and here), and address procedures to collect customer information, methods to establish a customer risk profile, and obligations to update customer information.

    Agency Rule-Making & Guidance FinCEN CDD Rule Bank Secrecy Act

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  • CSBS: OCC’s proposed “non-branch” provisions undermine dual banking system

    Federal Issues

    On August 3, the Conference of State Bank Supervisors (CSBS) issued its comment letter to the OCC’s Notice of Proposed Rulemaking (NPR) on national bank and savings association activities concerning “non-branch” offices. Specifically, CSBS wrote that the “non-branch” provisions in the NPR make “far-reaching” revisions without legal authority, undermine the dual banking system, conflict with National Bank Act (NBA) preemption limits, and would allow national banks to operate branches without complying with related Community Reinvestment Act (CRA) obligations. Additionally, CSBS contended that the OCC’s rulemaking process is “truncated and flawed,” and afforded a particularly brief period for public comments during the Covid-19 pandemic.

    According to CSBS, the NPR, announced in June (covered by InfoBytes here), would “expand the scope of activities that may occur at non-branch offices purportedly without regard” to state restrictions.  These activities include: (i) performing loan approval and origination functions at a single, publicly accessible office; (ii) disbursing loan proceeds through an operating subsidiary; and (iii) establishing drop boxes and other unstaffed facilities. CSBS also contended that the NPR’s non-branch provisions would undermine Congressional intent and give national banks competitive advantages over state-charted banks. CSBS further argued that the non-branch provisions conflict with Congress’ clear intention that “NBA preemption does not apply to agents, affiliates or subsidiaries of national banks.” Finally, CSBS highlighted a distinction between the proposed non-branches (but de facto branches) and actual branch offices, arguing that the NPR creates a legal loophole allowing non-branch national banks to avoid CRA obligations associated with licensed branches.

    Federal Issues OCC CSBS Agency Rule-Making & Guidance Fintech National Bank Act CRA

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  • OCC grants first national bank charter to fintech company

    Federal Issues

    On July 31, the OCC presented its first full-service national bank charter to a fintech company permitting the establishment of a new national bank. The new bank received conditional approval from the agency in 2018, as well as regulatory approval from both the FDIC and the Federal Reserve according to a press release issued by the company. According to the press release, the charter will allow the bank to offer FDIC-insured nationwide banking services, including traditional loan and deposit products, through mobile, online, and phone-based banking. The bank will be located in Utah but will have no branches, deposit-taking ATMs, or offices open to the public. Acting Comptroller of the Currency Brian P. Brooks issued a statement noting that the opening of the bank “represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”

    Federal Issues OCC Fintech Bank Charter

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  • Federal legislation would apply TILA to small business financing

    Federal Issues

    On July 30, Congresswoman Nydia Velázquez (D-NY), the Chairwoman of the House Small Business Committee, announced new legislation titled, “Small Business Lending Disclosure and Broker Regulation Act,” which would amend TILA and subject small business financing transactions to APR disclosures. The federal legislation would track similar state legislation enacted in California and currently pending the governor’s signature in New York, covered by InfoBytes here and here. However, unlike both California and New York, the federal legislation does not exempt depository institutions from coverage. Highlights of the TILA amendments include:

    • CFPB Oversight. The legislation provides the CFPB with the same authority with respect to small business financing as the Bureau has with respect to consumer financial products and services.
    • Coverage. The legislation defines small business financing as, “[a]ny line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation of a partnership, corporation, cooperative, association, or other entity that is [$2.5 million] or less,” that is not intended for personal, family, or household purposes.
    • Disclosure. The legislation would require disclosure of the following information at the time an offer of credit is made: (i) financing amount; (ii) annual percentage rate (APR); (iii) payment amount; (iv) term; (v) financing charge; (vi) prepayment cost or savings; and (vii) collateral requirements.
    • Fee Restriction. The legislation prohibits charging a fee on the outstanding principal balance when refinancing or modifying an existing loan, unless there is a tangible benefit to the small business.

    Additionally, the legislation would amend the Consumer Financial Protection Act to create the Office of Broker Registration, which would be responsible for oversight of brokers who “solicit[] and present[] offers of commercial financing on behalf of a third party.” The legislation would, among other things: (i) require commercial brokers to register with the CFPB; (ii) require commercial brokers to provide certain disclosures to small business borrowers; (iii) prohibit the charging of fees if financing is not available or not accepted; and (iv) require the CFPB to collect and publicly publish broker complaints from small businesses. Lastly, the legislation would require each state to establish a small business broker licensing law that includes examinations and enforcement mechanisms.

    Relatedly, the FTC recently took action against New York-based merchant cash advance providers and two company executives for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. See detailed InfoBytes coverage on the complaint here.

    Federal Issues TILA Small Business Financing Broker CFPB Disclosures State Issues Licensing Federal Legislation FTC

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  • FTC charges merchant cash advance provider with deceptive and unfair practices

    Federal Issues

    On August 3, the FTC filed a complaint against two New York-based merchant cash advance providers and two company executives (collectively, “defendants”) for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. The FTC’s complaint alleges that when marketing and offering MCAs to small business customers, the defendants, among other things, (i) falsely advertised that MCAs do not require collateral or personal guarantees, but when consumers defaulted on their financing agreements, the defendants frequently filed lawsuits against them, including against individual business owners who provided personal guarantees, to collect the unpaid amount; (ii) misrepresented the amount of total financing in the contract that consumers would receive by withholding fees that are deducted from the promised funds; and (iii) made unfair, unauthorized withdrawals from customers’ bank accounts in excess of consumers’ authorization without express informed consent, and routinely continued to debit customers’ bank accounts after the MCAs were fully repaid. According to the FTC, the “unauthorized overpayments have been a typical occurrence for [the defendants’] customers, and have impacted at least thousands of them, in amounts ranging from hundreds to thousands of dollars.”

    The FTC seeks a permanent injunction against the defendants, along with monetary relief including “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief.”

    Federal Issues FTC Enforcement Merchant Cash Advance Small Business Lending FTC Act UDAP

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  • States urge Department of Education to protect federal student loans borrowers as CARES Act deadline approaches

    State Issues

    On August 6, the NYDFS sent a letter to the Department of Education, urging Secretary Betsy DeVos to take measures to protect student loan borrowers when federal student loan borrower relief under the CARES Act ends September 30. Currently, the CARES Act provides an automatic freeze for borrowers with Federal Family Education Loan Program and Federal Direct loans (covered by a Buckley Special Alert), and stipulates that during the suspension period, interest will not accrue, servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made.

    The letter, sent on behalf of seven state student loan ombudspersons, expresses concerns that, despite protections afforded by the CARES Act, “many borrowers are being left behind and . . . borrowers will face hardships once the CARES Act coverage expires.” Specifically, the letter requests DeVos to take additional proactive steps, including: (i) expanding the CARES Act protections to federal borrowers not currently eligible for relief (i.e., “borrowers whose loans are owned by commercial lenders and Perkins Loan borrowers whose loans are owned by their schools”) and extending the term of those protections; (ii) ensuring servicers are prepared for the September 30 end-date to ensure that borrowers are not harmed when their student loan accounts are placed back into repayment status; and (iii) streamlining access to income driven repayment (IDR) plans by eliminating “logistical and administrative barriers to automated IDR plan enrollment” and recommending “that borrowers be able to self-report income and that applications be deemed provisionally approved upon submission, even if incomplete, so that relief is given as quickly as possible.”

    State Issues NYDFS Student Lending Department of Education CARES Act Covid-19

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  • West Virginia extends remote working for depository and non-depository entities

    State Issues

    The West Virginia Division of Financial Institutions extended, through September 1, 2020, its guidance temporarily permitting employees of regulated entities to work from home or some other remote location approved by the financial institution, whether in West Virginia or another state.  The initial guidelines were announced on March 13 (previously discussed here) and had been previously extended through June 15, as previously covered here.

    State Issues Covid-19 West Virginia Non-Depository Institution Financial Institutions

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  • New York extends expiration date of licenses issued by the Division of Licensing Services

    State Issues

    Pursuant to Executive Order 202.11 (previously discussed here), the Department of State, Division of Licensing Services, announced that any license issued by the division that expires after March 27, 2020, will remain in effect until September 5, 2020. Further, the announcement notes that the Appraisal Subcommittee of the Federal Financial Institutions Examination Council has advised that appraisers within New York have been granted a 90-day deferment for meeting continuing education requirements. A license holder that is eligible to renew and does not need the extension is encouraged to renew the license. Other license holders may rely on the above extensions. 

    State Issues Covid-19 New York Licensing Appraisal Financial Institutions Examination

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  • FINRA fines firm for alleged financial risk management failures


    On July 30, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver and Consent (AWC), fining a global securities firm $650,000 for allegedly failing to “establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial risks of its market access business activity.” As a result, because the firm’s controls allegedly failed to monitor and prevent (i) orders exceeding pre-set customer credit thresholds, or (ii) erroneous orders, the firm executed erroneous orders on “at least two trade dates.” Additionally, FINRA claimed that even though the firm knew internally of the potential issues in its financial risk management controls, in several instances it took years for the identified gaps to be fixed. The firm neither admitted nor denied the findings set forth in the AWC agreement but agreed to pay the fine and complete a review of its financial risk management controls and supervisory procedures to ensure compliance with SEC regulations.

    Securities FINRA Risk Management

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  • Massachusetts AG requires debt buyer to discharge 300K in educational debt

    State Issues

    On July 30, the Massachusetts attorney general announced a Nevada-based debt buyer will discharge nearly $300,000 in student loan debt in connection with a for-profit education company that sold allegedly ineffective online study guides and education materials. According to the assurance of discontinuance (AOD), the education company allegedly engaged in unfair and deceptive acts in the marketing and selling of its educational materials and services, which included arranging for consumers to finance equivalency exam fees. The company arranged for consumers to obtain financing from certain credit unions and those credit unions subsequently sold the loans to other entities, including the Nevada-based debt buyer.

    The AOD requires the debt buyer to discharge and cease collection of the company’s loans for each of the 76 Massachusetts consumers, amounting to nearly $300,000 in debt. Additionally, the debt buyer is required to pay Massachusetts approximately $70,600 for the attorney general to distribute to consumers who made payments to the debt prior to the action, and is prevented from reporting any negative credit information.

    State Issues State Attorney General Massachusetts Debt Buyer Student Lending Debt Collection

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