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Utah says blockchain tokens are not money transmissions
On March 26, the Utah governor signed SB 213, which, among other things, defines and clarifies blockchain technology-related terms and exempts from the state’s Money Transmitter Act certain persons who facilitate the “creation, exchange, or sale of certain blockchain technology-related products.” Specifically, the amendments state that blockchain tokens are not money transmissions. The amendments take effect 60 days after adjournment of the legislature.
CFPB and Federal Reserve update HMDA examination procedures; CFPB updates ECOA baseline review procedures
On April 1, the CFPB and the Federal Reserve Board (Federal Reserve) issued revisions to the HMDA examination procedures covering data collected since January 1, 2018, under the HMDA amendments issued by the Bureau in October 2015 and August 2017, as well as section 104(a) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (implemented and clarified by the 2018 HMDA Rule, which was covered by InfoBytes in August 2018 here.) According to the Federal Reserve’s CA 19-5, the HMDA examination updates include, (i) Narrative, Examination Objectives, and Examination Procedure sections that were developed by the Task Force on Consumer Compliance of the FFIEC; (ii) Review of Compliance Management System, Examination Conclusions and Wrap-Up, and Examination Checklist sections that were developed in consultation with the FDIC and the OCC; and (iii) sampling, verification, and resubmission procedures. With regard to HMDA data collected prior to January 1, 2018, institutions will continue to be examined according to the interagency HMDA examination procedures “transmitted with CA 09-10 and the HMDA sampling and resubmission procedures transmitted with CA 04-4.”
Additionally, in April, the CFPB also released updated ECOA baseline review procedures. The procedures consist of five modules: (i) Fair Lending Supervisory History; (ii) Fair Lending Compliance Management System (CMS); (iii) Fair Lending Risks Related to Origination; (iv) Fair Lending Risks Related to Servicing; and (v) Fair Lending Risks Related to Models. According to the Bureau, all exams will cover the Fair Lending CMS module and additional modules will be assigned depending on the scope of examination.
FTC and FDA warn companies on CBD advertising
On April 2, the FTC announced that it joined the Food and Drug Administration (FDA) in sending letters to three supplement companies warning them that making allegedly unsupported health and efficacy claims in their advertising may violate the FTC Act. According to the letters (available here, here, and here), the three companies advertise supplements they say contain cannabidiol (commonly known as CBD), and, allegedly, among other things, effectively treat diseases such as cancer, Alzheimer’s disease, fibromyalgia, and neuropsychiatric disorders. The letters emphasize that it is unlawful under the FTC Act “to advertise that a product can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.” The letters also note that the products constitute “new drugs” and cannot be introduced or delivered into interstate commerce without prior FDA approval. The letters appear related to the FTC’s initiative to target advertisers who make deceptive claims about their products. As previously covered by InfoBytes, FTC Chairman, Joseph Simons, spoke about this initiative at a recent conference, and cited several of the agency’s enforcement actions, including challenges to dietary supplement health benefit claims and deceptive environmental claims. Additionally, he stated the agency is prepared to “proceed in federal court as warranted.”
Arizona modifies its Regulatory Sandbox Program
On April 1, the Arizona governor signed HB 2177, which modifies the state’s Regulatory Sandbox Program (RSP). As previously covered by InfoBytes, in March 2018, Arizona became the first state to create a regulatory sandbox for companies to test innovative financial products or services without certain regulatory requirements. The bill clarifies the RSP to allow participants to temporarily test an innovation “with respect to providing a financial product or service or a substantial component of a financial product or service,” as opposed to, an “innovative financial product or service.” Among other things, the bill also (i) removes the Arizona consumer residency requirement when participants test innovative money transmitter products, requiring only that the consumer have physical presence in the state at the time of the transaction; (ii) removes record keeping requirements for participants testing investment management products; and (iii) provides sole enforcement authority of state regulatory laws applicable to RSP participants to the state Attorney General. The bill is effective 91 days after the state’s legislative session ends.
West Virginia exempts payment processing from some licensing requirements
On March 25, the West Virginia governor signed SB 603, which adds exemptions from the currency exchange licensing requirements. Among other things, the bill exempts from the state’s currency exchange licensing requirements a person or persons operating a payment system that provides processing, clearing, or settlement services in connection with wire transfers, debit/credit card transactions, ACH transfers, or similar fund transfers. Additionally, the bill also exempts from licensing requirements a person or persons that facilitate payment for goods or services (not including currency or money transmission) pursuant to a contract and the payment obligation is satisfied or extinguished. The bill is effective June 7.
5th Circuit: District courts lack jurisdiction over claims arising from FDIC enforcement proceedings
On March 28, the U.S. Court of Appeals for the 5th Circuit held that federal district courts lacked subject matter jurisdiction over claims arising out of certain FDIC enforcement proceedings. According to the opinion, the FDIC brought two enforcement actions against the bank and its directors (plaintiffs), alleging violations of various banking laws and regulations, which resulted in civil money penalties and cease-and-desist orders. The plaintiffs petitioned the 5th Circuit for review. While the first appeal was pending, the plaintiffs filed a lawsuit in federal district court alleging the FDIC committed constitutional violations during the enforcement actions. Specifically, the plaintiffs alleged that the FDIC (i) targeted the bank due to the bank president’s age and denied it equal protection; and (ii) violated due process by preventing the plaintiffs from offering certain evidence and preventing the president’s ability to talk with his counsel at certain times. These allegations were raised and rejected during the FDIC’s second enforcement proceeding. The FDIC moved to dismiss the action for a lack of subject matter jurisdiction, asserting that the statutory review process precludes district court jurisdiction over actions arising from enforcement proceedings. The district court agreed and dismissed the action without prejudice, indicating that the bank could assert its claims in the district court on direct review of the agency’s final order. The bank appealed.
On appeal, the 5th Circuit noted that the language in the statute “virtually compels” it to concede that Congress intended to preclude district court jurisdiction over claims against the FDIC arising from enforcement proceedings. The appellate court then addressed whether the claims raised by the plaintiffs were the type of claims Congress intended to be reviewed within the statutory scheme. The appellate court determined that the Federal Deposit Insurance Act allows for “meaningful judicial review,” by authorizing review of challenges to a final agency order by a federal circuit court. Moreover, the court rejected the plaintiffs’ argument that its claims are “wholly collateral” to the administrative order because they did not challenge the merits of the order but rather, the claims “arise directly from alleged irregularities in the agency enforcement proceedings.” Lastly, the court found that the plaintiffs’ constitutional claims do not fall outside of the agency’s expertise. Based on the foregoing, the court found that the district court correctly dismissed the action.
Kentucky amends consumer loan company requirements
On March 26, the Kentucky governor signed HB 285, which amends licensing procedures and requirements for consumer loan companies. Specifically, HB 285, among other things:(i) increases application fees; (ii) establishes financial requirements for applicants and licensees; (iii) amends the process for approving applications and appealing denials; (iv) restricts licensing eligibility for individuals who previously had a license denied or revoked; and (v) authorizes use of the State Regulatory Registry by the state’s Department of Financial Institutions. HB 285 also establishes when the state commissioner may take adverse action and permits the commissioner to seek temporary or permanent relief against persons in violation of the law. The amendments take effect 90 days after the official end of the session.
District Court finds text messages were not sent by autodialer
On March 29, the U.S. District Court for the Northern District of Illinois granted a telecommunication company’s summary judgment motion in a putative TCPA class action involving text messages. The plaintiff asserted that the company sent him text messages asking survey questions, even though he did not consent and was registered on the Do Not Call list. The company argued that it did not use an automated dialing system (autodialer) to send the text messages to the plaintiff. The court agreed. Citing to the D.C. Circuit’s decision in ACA International v. FCC and analyzing the definition of an autodialer under the TCPA, the court concluded that the system used by the company to send the text messages was not an autodialer because it could not “generate telephone numbers randomly or sequentially.” The court also rejected the consumer’s argument that the system had “the capacity” to generate numbers randomly by selecting numbers to dial from a compiled list of accounts, noting that the TCPA “does not support a reading where ‘using a random or sequential number generator’ refers to the order numbers from a list are dialed.”
Federal agencies propose rule to reduce impact of large bank failures
On April 2, the FDIC, Federal Reserve Board, and the OCC (together, the “Agencies”) released a joint statement announcing a notice of proposed rulemaking (NPR) to limit the “interconnectedness” of large banking organizations and reduce systemic risk resulting from the failure of global systemically important bank holding companies (GSIBs), certain intermediate holding companies, and GSIB foreign banking organizations. Among other measures, the NPR proposes that, to discourage GSIBs and advanced approaches banking organizations (generally firms with total consolidated assets of $250 billion or more or at least $10 billion in on-balance sheet foreign exposure) from purchasing large amounts of unsecured debt issued by GSIBs, the Agencies propose to subject these investments “to deduction from the . . . organization’s own regulatory capital.” This debt, the Agencies note in the statement, is used to recapitalize the GSIB during bankruptcy or resolution as a result of failure, and the proposal is intended to reduce both interconnectedness within the financial system and systemic risk. Comments on the NPR are due 60 days after publication in the Federal Register.
West Virginia creates banking framework for medical marijuana-related transactions
On March 26, the West Virginia governor signed HB 2538, which establishes a legal banking framework in West Virginia for handling medical marijuana-related funds. Medical marijuana was legalized in 2017 and distribution was authorized to begin July 1. Among other things, HB 2358 permits the state’s treasurer to “competitively bid” one or more financial institutions—including credit unions and non-bank entities—to provide banking services for fees, penalties, and taxes collected under the West Virginia Medical Cannabis Act (the Act). The Act also does not prohibit or otherwise impair a financial institution from providing services to a person or entity involved in a medical cannabis-related business functioning under the Act “solely because the person or entity is a grower, processor, dispensary, owner of any proportion, operator, employee, patient, caregiver, family or household member, financial broker, or other similar person or entity” except that the Commissioner of Financial Institutions has authority to enforce applicable laws and regulations related to ensuring the safety and soundness of a financial institution. HB 2538 serves to provide a solution to banking problems West Virginia has encountered in connection with the Act. HB 2538 takes effect 90 days after passage.