In This Issue:
- Real Estate and Money Laundering: FinCEN Issues Advanced Notice of Regulations for the Real Estate Industry
- CFPB and DOJ Send Joint Letters to Landlords and Mortgage Servicers on CARES Act and SCRA Protections
- This Week’s Podcast: What Every CEO and General Counsel Needs to Know About New CFPB Director Chopra, With Special Guest Raj Date, Managing Partner of Fenway Summer LLC
- Podcast: The Federal Trade Commission’s Updated Gramm-Leach-Bliley Act Safeguards Rule – What You Need to Know.
- OCC Issues Final Rule Rescinding June 2020 CRA Rule and Restoring 1995 Framework.
- CFPB Looking for Whistleblowers to Report Potential Discrimination Arising From the Use of Artificial Intelligence
- CFPB/FTC/DOJ/Federal Reserve Board File Joint Amicus Brief Arguing Consumers Not Applying for Credit Are 'Applicants' Under ECOA
- CA DFPI Provides Assurance of No Action to Debt Collection License Applicants Experiencing NMLS Delays
- CFPB Files Brief With Fifth Circuit in Trade Groups’ Challenge to CFPB Payday Loan Rule
- California DFPI Announces Consent Order With Auto Title Loan Servicer That Was Subject of 'True Lender' Investigation
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center.
On December 6, FinCEN announced that it was issuing an Advanced Notice of Proposed Rulemaking (AMPRM) to solicit public comment on potential requirements under the Bank Secrecy Act (BSA) for certain persons involved in real estate transactions to collect, report, and retain information. If finalized, such regulations could affect a whole new set of professionals and one of the largest industries in the U.S.—an industry which, heretofore, has not been subject to the requirements of the BSA, with limited exceptions.
The ANPRM envisions imposing nationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold. Fundamentally, FinCEN highlights two alternate, proposed rules. One proposed option, promulgated under 31 U.S.C § 5318(a)(2), would involve implementing specific and relatively limited reporting requirements, similar to those currently required of title insurance companies in the non-financed real estate market. This rule would require covered persons to collect and report certain prescribed information, such as, presumably, beneficial ownership. Alternatively, FinCEN is considering imposing more fulsome Anti-Money Laundering (AML) monitoring and reporting requirements, including filing Suspicious Activity Reports (SARs) and establishing AML/CFT programs under 31 U.S.C. § 5318(g)(1) and 31 U.S.C. §§ 5318(h)(1)-(2). This latter option would require covered persons to adopt adequate AML/CFT policies, designate an AML/CFT compliance officer, establish AML/CFT training programs, implement independent compliance testing, and perform customer due diligence.
Notably, FinCEN suggests that any new rule may cover attorneys and law firms, along with other client-facing participants. FinCEN also is considering regulations applicable to both residential and commercial real estate transactions.
As we discuss, real estate and money laundering has been a long-simmering issue. We repeatedly have blogged on AML and real estate, and previously published a detailed chapter, The Intersection of Money Laundering and Real Estate, in Anti-Money Laundering Laws and Regulations 2020, a publication issued by International Comparative Legal Guides. FinCEN’s ANPRM appears to represent the culmination of an inevitable march towards the issuance of regulations under the BSA regarding real estate transactions, following years of increasing focus by the U.S. government and others on perceived AML risks in the real estate industry.
Introduction to the ANPRM
The ANPRM states that its goal “is to implement an effective system to collect and permit authorized uses of information concerning potential money laundering associated with non-financed transactions in the United States real estate market.” The ANPRM defines the terms “non-financed purchase,” “non-financed transaction,” “all-cash purchase,” and “all-cash transaction” as referring to “any real estate purchase or transaction that is not financed via a loan, mortgage, or other similar instrument, issued by a bank or non-bank residential mortgage lender or originator, and that is made, at least in part, using currency or value that substitutes for currency (including convertible virtual currency (CVC)), or a cashier’s check, a certified check, a traveler’s check, a personal check, a business check, a money order in any form, or a funds transfer.” The ANPRM concedes that its potential applicability is vast: in 2020, and putting aside the amount of commercial deals, there were almost 6.5 million residential real estate transactions in the U.S.
In prefatory comments, the ANPRM describes U.S. and international reports and findings regarding perceived money laundering risks in the real estate industry. According to the ANPRM, “[s]everal key factors contribute to the systemic vulnerability of the U.S. real estate market to money laundering. Those factors include, but are not limited to, lack of transparency, attractiveness of the U.S. real estate market as an investment vehicle, and the lack of industry regulation.” Referring to voluntary guidelines issued by industry trade organizations, including the National Association of Realtors and the American Bar Association, the ANPRM states that although such guidelines are “a positive step and indicative of the commitment of the vast majority of real estate professionals to protecting the U.S. real estate sector from illicit activity,” such guidelines “are not mandatory or subject to oversight or enforcement and may therefore be avoided by illicit actors.”
Commenting upon the commercial real estate industry in particular, the ANPRM states that, “[b]roadly speaking, FinCEN has serious concerns with the money laundering risks associated with the commercial real estate sector.” The ANPRM further observes that “[t]he commercial real estate market is both more diverse and complicated than the residential real estate market and presents unique challenges to applying the same reporting requirements or methods as residential transactions.” FinCEN regards such complexity as a reason to develop and impose regulations:
In part due to such added complexity and opacity, the risks and vulnerabilities associated with the residential real estate sector covered by the [Geographic Targeting Orders] may be compounded in transactions involving commercial real estate, as there are additional types of purchasing options and financing arrangements available for parties seeking to build or acquire property worth up to hundreds of millions of dollars. Lawyers, accountants, and individuals in the private equity fields—all positions with minimal to no AML/CFT obligations under the BSA—often facilitate commercial real estate transactions, working at different stages of the transaction and operating with differing amounts of beneficial ownership and financial information related to buyers and sellers. Commercial real estate transactions also often involve purpose-built legal entities and indirect ownership chains as parties create tailored corporate entities to acquire or invest in a manner that limits their legal liability and financial exposure. The result is an opaque field full of diverse foreign and U.S. domiciled legal entities associated with transactions worth hundreds of millions of dollars that makes up one of the United States’ most lucrative industries.
The ANPRM’s Context: Background on Real Estate and BSA/AML Concerns
The ANPRM did not emerge in a vacuum. In 2012, FinCEN issued a final rule requiring non-bank residential mortgage lenders and originators, or RMLOs, to maintain a BSA/AML compliance program and file SARs. FinCEN extended this requirement in 2014 to Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. To date, that has been the extent of final BSA regulations directly imposed on the real estate industry.
Importantly, however, and as noted above, FinCEN also has authorized since 2016 Geographic Targeting Orders (GTOs), which impose certain requirements on title insurance companies for transactions occurring in particular locations around the U.S. that are not financed by loans from financial institutions. These transactions represent approximately 20 percent of real estate transactions. Since then FinCEN has extended the GTOs every six months. Under the GTOs, U.S. title insurance companies must identify the natural persons behind legal entities used in purchases of residential real estate performed without a bank loan or similar form of external financing. The monetary threshold for these transactions is $300,000 and the GTOs cover purchases involving virtual currency as well as fiat currency, wires, personal or business checks, cashier’s checks, certified checks, traveler’s checks, a money order in any form, or a funds transfer. The current GTO applies to nine districts. The government has been analyzing information obtained through the GTOs and using the data not only for initiating and assisting investigations, but also to build a case for permanent regulations applicable to the real estate industry—as the ANPRM reflects.
In August 2017, FinCEN issued an “Advisory to Financial Institutions and Real Estate Firms and Professionals” (the Advisory), which again indicated FinCEN’s growing concern with money laundering risks in the real estate industry. Although the Advisory created no legal obligations, it did suggest practices of which it expected real estate industry members to be aware. Further, the U.S. Department of Treasury’s 2020 National Strategy for Combating Terrorist and Other Illicit Financing (2020 Strategy), in part, was designed to combat money laundering relating to real estate transactions and gatekeeper professions in general, such as lawyers, real estate professionals and other financial professionals. The document highlighted the money laundering risks of real estate transactions and anonymous companies or straw purchasers, which have the ability to purchase high-value assets that maintain relatively stable value. The risk, according to this document, is both domestic and foreign and is especially significant for all cash purchases.
Finally, the Combating Russian Money Laundering Act, passed in conjunction with the Anti-Money Laundering Act of 2020, in part, requires the Secretary of the Treasury to submit by the end of 2021 to the U.S. House of Representatives and Senate a report that “shall identify any additional regulations, statutory changes, enhanced due diligence, and reporting requirements that are necessary to better identify, prevent, and combat money laundering linked to Russia,” including steps related to (1) “strengthening current, or enacting new, reporting requirements and customer due diligence requirements for the real estate sector, law firms, and other trust and corporate service providers[,]” and (2) “establishing a permanent solution to collecting information nationwide to track ownership of real estate.” Although this report is nominally targeted to activity linked only with Russia, its findings presumably will be applied to the entire real estate industry.
The ANPRM: Scope of Potential Regulations
The ANPRM explains that FinCEN is contemplating the following potential regulations:
Specific vs. General Recordkeeping and Reporting Requirements
As noted at the outset of this post, FinCEN highlights two alternate, proposed rules, and is seeking comment as to which method most effectively would address money laundering concerns while minimizing burdens on those covered. One proposed option, promulgated under 31 U.S.C § 5318(a)(2), would involve implementing specific reporting requirements, similar to those currently required of title insurance companies in the non-financed real estate market. This rule would require covered persons to collect and report certain prescribed information to guard against illicit finance.
Alternatively, FinCEN is considering implementing more general monitoring and reporting requirements under the BSA, including filing SARs and establishing AML/CFT programs under 31 U.S.C. § 5318(g)(1) and 31 U.S.C. §§ 5318(h)(1)-(2). This option would require covered persons to adopt AML/CFT policies, designate an AML/CFT compliance officer, establish AML/CFT training programs, and implement independent compliance testing.
Who Would the Proposed Rule Cover
At present, and courtesy of the GTOs, title insurance companies are the only group subject to specific data collection and reporting requirements in the non-financed real estate transaction arena. The proposed rule contemplates imposing similar requirements on other key players in these types of real estate purchases, such as real estate brokers and agents, attorneys, closing agents, appraisers, and property inspectors, among others.
FinCEN is seeking comment as to which transaction participants would be best situated to identify and report on the identity of the buyer, other parties to the transaction, and the nature of their involvement. For instance, those directly involved in marketing and structuring the real estate deal, as well as those involved in the transfer of purchase funds, may be more exposed to money laundering and better able to collect and report relevant information. On the other hand, those with non-customer-facing roles, or property-focused roles, may have no knowledge of the financing and therefore be unable to collect requisite data for reporting.
To ensure at least one entity involved in every non-financed real estate transaction is responsible for the relevant reporting, while avoiding duplicative or overly burdensome requirements, FinCEN is considering implementing a hierarchical, cascading reporting system, similar to the IRS’s regulation for Form 1099-S. This approach recognizes that different transactions involve different parties. In the event that the type of entity assigned the primary reporting responsibility is not involved in a given transaction, the reporting responsibility would fall on another party involved. FinCEN is seeking feedback on how the reporting hierarchy should be structured among title insurance companies, title or escrow companies, real estate agents or brokers, real estate attorneys or law firms, and settlement or closing agents, among others.
Geographic Scope and Transaction Threshold
FinCEN’s proposed rule would be national in scope, in order to provide consistency and predictability to businesses with reporting responsibilities. A national rule would also avoid pushing money laundering activities into non-regulated jurisdictions. The rule also would depart from the current GTOs transaction threshold of $300,000, and instead include no minimum transaction amount. According to FinCEN, this would prevent money launderers from structuring deals to avoid reporting requirements.
Purchases by Certain Entities
The proposed rule likely will cover legal entities engaged in real estate purchases for cash because of the well-known use of shell companies in money laundering schemes. Additionally, FinCEN is considering, and seeks comment on, whether the rule also should cover trusts and natural persons, such as nominees or so-called “straw-man” purchasers.
Residential and Commercial Real Estate
Notably, FinCEN is not limiting the rule to residential real estate transactions. Rather, it seeks to extend reporting requirements to both residential and commercial real estate transactions, to the extent that the risks in non-residential real estate justify the burden of reporting requirements. FinCEN also indicated a willingness to create two separate rules because of the important distinctions between the residential and commercial markets.
Specific Requests for Comment
In light of the above, the ANPRM sets forth 82 specific questions seeking comments and feedback. These questions fall into the following seven general categories:
- General information regarding the real estate market.
- Identification of the money laundering risks in real estate transactions.
- Which real estate transactions FinCEN’s rule should cover.
- Which persons should be required to report information concerning real estate transactions to FinCEN. Here, FinCEN presents the options as: (i) Real estate lawyers and law firms; (ii) real estate agents/brokers/settlement agents; (iii) title insurance companies; (iv) title and escrow agents and companies; (v) real estate investment companies; (vi) real estate development companies; (vii) real estate property management companies; (viii) real estate auctions houses; (ix) investment advisers; (x) private money lenders; and/or (xi) money service businesses.
- What information should FinCEN require regarding covered real estate transactions.
- What are the potential burdens or implementation costs of a potential FinCEN regulation.
- Whether FinCEN should promulgate general AML/CFT recordkeeping and reporting requirements for “persons involved in real estate closings and settlements.” If so, how should that term be defined, and what are the potential benefits and costs to including real estate brokers and agents, title agencies and/or insurance companies, or real estate attorneys in the definition.
These questions, and the entire ANPRM, raise numerous complex issues potentially affecting a broad array of stakeholders. Written comments are due within 60 days of the ANPRM (February 4, 2022).
If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team. Please also check out our detailed chapter on these issues, The Intersection of Money Laundering and Real Estate, in Anti-Money Laundering Laws and Regulations 2020, a publication issued by International Comparative Legal Guides.
- Peter D. Hardy, Richard J. Andreano, Jr., Michael Robotti & Nikki A. Hatza
The CFPB and DOJ announced that they sent joint letters to landlords/property management companies and mortgage servicers regarding the protections given to servicemembers by the Coronavirus Aid, Relief and Economic Security (CARES) Act and the Servicemembers Civil Relief Act (SCRA).
Letter to landlords/property management companies. The letter only addresses SCRA protections for early lease terminations and evictions. The SCRA allows servicemembers to terminate a lease early after entering military service or receiving qualifying military orders. The letter reviews the specific elements of this protection and identifies several aspects that are “sometimes misunderstood.” These aspects include:
- The DOJ’s position that requiring servicemembers to repay rent concessions or discounts is an early termination fee that violates the SCRA.
- Because the SCRA does not contain any requirement regarding minimum mileage between the leased property and the servicemember’s new duty station, any mileage requirements in a lease “are likely unenforceable.”
- The DOJ’s position that waivers of SCRA rights are invalid if they are addenda to a lease and not separate instruments, are signed at the same time as the lease, and are not supported by an additional benefit to the servicemember.
With regard to eviction protections, the letter includes reminders that the SCRA (1) prohibits a landlord from evicting a servicemember or a servicemember’s dependents from a residential home during a period of military service without first obtaining a court order, and (2) requires a landlord or property manager to file an affidavit notifying the court of the tenant’s military status when seeking a court order through a default judgment.
Letter to mortgage servicers. The letter states that it comes in response to complaints from servicemembers and veterans on a range of potential CARES Act violations, including inaccurate credit reporting of mortgages in forbearance, inaccurate or confusing communications to borrowers about hardship forbearances, and required lump sum payments for reinstating mortgage loans. The letter indicates that the CFPB “is currently reviewing these complaints to determine if further investigation is warranted.”
The letter reviews the generally applicable CARES Act mortgage protections regarding the right to a forbearance, credit reporting, loss mitigation, and early intervention obligations of servicers. It also reviews the SCRA foreclosure protections for servicemembers and notes the obligation of servicers to comply with the SCRA regardless of whether their state provides for judicial or non-judicial foreclosures. The letter discusses the SCRA provisions that require a court order prior to foreclosing on a mortgage, an affidavit to be filed to obtain a default judgment, and an attorney to be appointed to represent the interests of a defendant servicemember before a court enters a judgment.
In addition to taking steps to ensure compliance with federal law, landlords/property management companies and mortgage servicers should also check with counsel regarding state law protections for servicemembers that can be greater than the protections afforded under federal law.
- John L. Culhane, Jr. & Anthony C. Kaye
Having previously worked closely with CFPB Director Chopra while he served as the CFPB’s Acting Director and its first Deputy Director, Mr. Date provides a unique perspective on Mr. Chopra’s views and likely actions as CFPB Director. We discuss how the CFPB is likely to approach key areas under Mr. Chopra’s leadership, including fair lending and digital redlining, technology/fintech, and mortgage lending and servicing. We also discuss whether Director Chopra will revisit CFPB rulemaking for small-dollar lending, debt collection, or arbitration.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Chris Willis, Co-Chair of the firm’s Consumer Financial Services Group, James Kim, a partner in the Group and co-leader of the firm’s Fintech and Payments Team, and Richard Andreano, co-leader of the firm’s Mortgage Banking Group.
Click here to listen to the podcast.
- Alan Kaplinsky, Chris Willis, James Kim, & Richard J. Andreano
The FTC’s recently updated rule implementing GLB standards for safeguarding customer information replaces the flexibility previously given to financial institutions in developing an information security program with new prescriptive requirements. Our discussion topics include what these new requirements mean for specific aspects of such programs, assigning employee responsibility, conducting risk assessments, installing access controls, using encryption, and who is covered by the rule. We also offer suggestions for what issues financial institutions should consider in preparing to implement the new requirements and our expectations for enforcement.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Kim Phan, a partner in the firm’s Consumer Financial Services Group, and Doris Yuen, an associate in the Group.
- Alan S. Kaplinsky, Kim Phan, Doris Yuen.
OCC Issues Final Rule Rescinding June 2020 CRA Rule and Restoring 1995 Framework.
On December 4, 2022, the OCC issued a final rule that rescinds its June 2020 Consumer Reinvestment Act (CRA) final rule and replaces it with a rule that largely is based on the OCC’s 1995 CRA rule that was adopted jointly with the Federal Reserve Board and FDIC. The final rule is effective January 1, 2022. Except for the provisions dealing with public notice requirements that have an April 1, 2022, compliance date, the remainder of the rule has a January 1, 2022, compliance date.
The June 2020 rule was welcomed by OCC-supervised institutions because it represented a change from a ratings system that primarily was subjective to one that was primarily objective. However, because the June 2020 rule was strongly criticized by consumer advocates, the announcement by Acting Comptroller Hsu in July 2021 that the OCC would propose rescinding the June 2020 rule was not unexpected.
On the same day that the OCC announced its plans to rescind the June 2020 rule, the OCC, FDIC, and Federal Reserve Board announced that they are working together to “strengthen and modernize the rules implementing the CRA.” In its discussion of the new final rule, the OCC calls the rule an “important step” in this interagency process “because it reestablishes generally uniform rules that apply to all [insured depository institutions].” The OCC indicated that its final rule would eventually be replaced by future interagency CRA rules.
With regard to the agencies’ plans to work together on CRA reform, it is unclear whether those plans will be impacted by the current power struggle that has emerged at the FDIC between its three Democratic members and its Republican chair.
In a June 2021 request for information regarding financial institutions’ use of artificial intelligence (AI), including machine learning, the CFPB and federal banking regulators flagged fair lending concerns as one of the risks arising from the growing use of AI by financial institutions.
In an apparent effort to increase its scrutiny of machine learning models and those that use alternative data, the CFPB published a blog post titled “CFPB Calls Tech Workers to Action,” in which it made a direct appeal to “engineers, data scientists and others who have detailed knowledge of the algorithms and technologies used by companies and who know of potential discrimination or other misconduct within the CFPB’s authority to report it to us.”
The CFPB describes whistleblowing as “a tool to hold industry accountable” and observes that “[t]ech workers may have entered the field to change the world for the better, but then discover their work being misused or abused for unlawful ends.” It states that AI “can help intentional and unintentional discrimination burrow into our decision-making systems, and whistleblowers can help ensure that these technologies are applied in law-abiding ways.” The following scenario is provided as an example:
[W]hile algorithmic mortgage underwriting is sometimes hailed as a method to significantly reduce housing discrimination, and many of those designing the algorithms seek to create a fairer housing market, that’s not always how things work out. In a recent study of over 2 million mortgage applicants, researchers found discriminatory effects of these new technologies, as Black and Hispanic families have been more likely to be denied a mortgage compared to similarly situated white families.
One researcher described the situation as one where loan officers take applicant information, but algorithms make the decisions. Whether such a process removes or embeds discrimination depends on a number of factors, including the types of data collected, how they are weighted, and how decisions are reviewed.
Dodd-Frank Section 1057 protects whistleblowers who report alleged violations of the Consumer Financial Protection Act, any law subject to the jurisdiction of the CFPB, or any CFPB rule, from retaliation by their employers. These protections apply if the employee reports the alleged violations to the employer, the CFPB, or any other federal, state, or local government authority or law enforcement agency. However, Dodd-Frank currently does not provide financial incentives for whistleblowers who report such alleged violations. (In 2020, the Bureau proposed legislative language to amend Dodd-Frank to establish a program for whistleblowers to receive monetary awards.)
Given the lack of financial incentives for whistleblowers, we doubt that this direct appeal will bear much fruit for the Bureau. It does, however, underline the seriousness with which the Bureau has taken up criticisms of newer-technology underwriting methods, and highlights that financial institutions must be in a position to defend their models when they are inevitably scrutinized.
The CFPB, FTC, DOJ, and Federal Reserve Board have filed a joint amicus brief in the U.S. Court of Appeals for the Seventh Circuit urging the court to reverse a district court ruling that an individual who already had received credit from the defendant and who was not currently applying to the defendant for credit was not an “applicant” for purposes of the ECOA’s adverse action notice requirement.
The ECOA defines an “applicant” to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. 1691a(b). As defined by Regulation B, an “applicant” includes “any person who requests or who has received an extension of credit from a creditor.” Both the ECOA and Regulation B require a creditor to provide a statement of the reasons for adverse action to an “applicant.”
In Fralish v. Bank of America One, N.A., the plaintiff had a credit card issued by the defendant bank. The plaintiff filed a lawsuit against the bank alleging that the notice sent to him by the bank that it was closing his card account did not comply with the adverse action notice requirement in ECOA and Regulation B because it did not include a statement of the reasons for the closure or a notice of his right to receive a statement of the reasons. The bank moved for judgment on the pleadings, arguing that plaintiff was not an “applicant” entitled to notice of adverse action under the ECOA because he did not allege that he actively was applying for credit when the bank closed his card account. The district court agreed with the bank’s reading of the ECOA and, construing the bank’s motion as a motion to dismiss, granted the motion and dismissed the complaint.
In their amicus brief, the agencies argue that, despite the wording of the ECOA’s definition of the term “applicant,” the “best reading” of the ECOA is to interpret the statutory language to include “both those currently seeking credit and those who have previously sought and have since received credit.” According to the agencies, the ECOA’s text, history, and purpose make clear that the ECOA’s protections extend to existing borrowers.
The agencies also argue that Regulation B’s definition of “applicant,” which expressly includes an individual “who has received an extension of credit from the creditor” is entitled to substantial deference under Chevron.
In October 2020, the CFPB and FTC filed a joint amicus brief with the Second Circuit in Tewinkle v. Capital One, N.A., in which they made similar arguments on behalf of a plaintiff who had alleged that a notice sent to him by the defendant bank that it was terminating his checking account and overdraft line did not comply with the ECOA/Regulation B adverse action notice requirement. In that case, the district court agreed with the bank that the plaintiff was not an “applicant” for purposes of the adverse action notice requirement. The Second Circuit did not issue a ruling because there was settlement in the case.
The California Department of Financial Protection and Innovation (DFPI) has published a notice on its website concerning delays that debt collectors and buyers seeking to comply with the new licensing requirement in the state’s Debt Collection Licensing Act currently are experiencing.
The new law, passed in September 2020, requires debt collectors and buyers to apply for a DFPI license by December 31, 2021. It allows a debt collector or buyer that submits an application by that date to continue to operate pending the approval or denial of the application. However, if a debt collector or buyer applies for a license after December 31, it cannot operate in California until its license has been issued. Moreover, the DFPI previously has stated that it can take legal action against persons that continue operating without having submitted an application. Applications must be submitted via the Nationwide Multistate Licensing System and Registry (NMLS).
In its notice, the DFPI states that it is aware that there has been a temporary slowdown in obtaining a new NLMS account and that “[w]ith various DFPI year-end deadlines, the NMLS team is experiencing an unprecedented volume of account requests.” The DFPI “acknowledges the predicament this puts entities in who are trying to comply with the new debt collector licensing requirement to apply for a license by Dec. 31, 2021” and states that it “would like to assure you that DFPI is aware of this issue and will not take any action against a debt collector solely on the basis of the temporary slowdown with NMLS.” (emphasis in original).
It is important to note that the DFPI’s no-action assurance is limited to debt buyers and applicants who attempt to apply for a license by December 31 but are unable to obtain a new NMLS account by December 31. The DFPI states in the notice that it is “working cooperatively with the NMLS team to be able to verify those that have attempted to apply.”
Debt collectors and buyers expecting to do business in California, and who have not submitted an NMLS application, can do so here.
CFPB Files Brief With Fifth Circuit in Trade Groups’ Challenge to CFPB Payday Loan Rule
The CFPB has filed its brief with the Fifth Circuit in the appeal filed by the trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule). The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021 (which would have been until June 13, 2022). After the appeal was filed, the Fifth Circuit entered an order staying the compliance date of the payment provisions until 286 days after the trade groups’ appeal is resolved. (The trade groups filed their opening brief last month.)
The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. In its brief, the CFPB argues that:
- The payment provisions reasonably address a narrowly defined unfair and abusive practice that harms ordinary borrowers—namely, the practice of making repeat withdrawal attempts on borrowers’ accounts after multiple attempts have already failed for insufficient funds.
- The U.S. Supreme Court’s decision in Collins v. Yellin forecloses the trade groups’ argument that the 2017 Rule is invalid because it was promulgated by a CFPB Director who unconstitutionally was exercising governmental authority. Under Collins, because the Bureau was headed by a properly appointed Director, the Bureau at all times had the authority to address unfair and abusive practices through rulemaking. The payment provisions represent a valid exercise of that authority by the Bureau.
- While Collins held that it was possible for challengers to obtain relief based on an invalid removal provision, challengers can do so only if they can show that the removal provision actually caused them harm. The trade groups cannot make that showing because, regardless of whether President Trump wanted to fire Director Cordray but felt constrained by the removal provision, President Trump’s appointee, Director Kraninger, ratified the payment provisions after it was clear that she could be removed at will. This approval by an official serving at President Trump’s pleasure conclusively shows that any perceived restriction on his ability to remove Director Cordray had no impact on the payment provisions and provides no basis to invalidate them.
- If the Court thought that the removal provision harmed the trade groups, it should hold that any such harm was remedied by ratification. Every court of appeals to have considered the issue has concluded that ratification can provide a proper remedy where a separation of powers issue calls into question the validity of an agency action. As in those cases, Director Kraninger’s ratification provided the trade groups with a full remedy (to the extent any remedy was needed) for any harm they could have suffered from the removal provision. Having occurred when she was removable at will, the ratification confirms that the trade groups have no basis for concern that their members will be subject to a rule that might contradict the President’s view.
- Even if an Appropriations Clause violation could justify setting aside an agency rule, the CFPA provisions establishing the Bureau’s funding satisfy the Appropriations Clause because the Bureau’s receipt and use of funds are authorized by statute.
- Congress did not violate the non-delegation doctrine by authorizing the Bureau to spend up to a capped amount and to prevent unfair and abusive practices. The CFPA’s funding provision authorizes the Bureau to draw an amount, up to a specified limit, that the Director determines is “reasonably necessary to carry out [the Bureau’s authorities taking into account amounts made available to the Bureau in the preceding year].” This provision (together with the entire CFPA) provides an intelligible principle to guide the Director’s decision making. Similarly, because the CFPA’s provisions defining unfairness and abusiveness describe with specificity the findings the Bureau must make before it can determine that a practice is unfair or abusive, they provide a sufficient intelligible principle.
The California Department of Financial Protection and Innovation (DFPI) announced that it had entered into a consent order with Wheels Financial Group, LLC d/b/a LoanMart, a California-based company that markets and services automobile title loans. LoanMart was the subject of an investigation launched in September 2020 in which the DFPI (then still named the Department of Business Oversight) was investigating whether LoanMart, through its partnership with a Utah bank, was evading the interest rate cap in the Fair Access to Credit Act (FACA). Effective January 1, 2020, the FACA limited the interest rate that could be charged on loans of $2,500 to $10,000 by lenders licensed under the California Financing Law (CFL) to 36% plus the federal funds rate. LoanMart holds a CFL license.
The consent order recites that on November 17, 2020, (Cessation Date), LoanMart stopped marketing loans made by the bank to California borrowers in an amount less than $10,000. It also recites that when LoanMart notified the DFPI of this development, the parties “engaged in discussions to resolve the inquiry without the necessity of a hearing or other litigation.” The consent order includes the statement that LoanMart, by entering into the consent order, “neither admits nor denies that it has violated any California law or regulation.” It provides that, “absent any change in law or regulation or any court ruling,” LoanMart will not market vehicle-secured installment consumer loans intended primary for personal, family, or household purposes with loan amounts less than $10,000 to California consumers at an interest rate greater than 36% plus the federal funds rate in a program involving a state-chartered bank (Subject Loans) and will not service any Subject Loans originated after the Cessation Date for a period of 21 months from the effective date of the consent order.
Because LoanMart’s bank partner in the program that was the target of the DFPI’s investigation is a state-chartered FDIC-insured bank located in Utah, it is authorized by Section 27(a) of the Federal Deposit Insurance Act to charge interest on its loans, including loans to California residents, at a rate allowed by Utah law regardless of any California law imposing a lower interest rate limit. The DFPI’s focus in the investigation appeared to be whether LoanMart, rather than the bank, should be considered the “true lender” on the auto title loans marketed and serviced by LoanMart, and as a result, whether the bank’s federal authority to charge interest as allowed by Utah law should be disregarded and the FACA rate cap should apply to such loans.
When the investigation was launched, we commented that it seemed likely that LoanMart was targeted because it was licensed as a lender under the CFL. We noted, however, that the DFPI’s investigation of LoanMart also raised the specter of “true lender” scrutiny by the DFPI of other bank/nonbank partnerships where the nonbank entity was not licensed as a lender or broker, especially where the rates charged exceed those permitted under the FACA. Under AB-1864, which became effective on January 1, 2021, it appears nonbank entities that market and service loans in partnerships with banks would be considered “covered persons” subject to the DFPI’s oversight.