House Financial Services Committee Passes BSA/AML Overhaul Legislation

On May 9, 2019, the House Financial Services Committee (“HFSC”) unanimously approved an amendment in the nature of a substitute to H.R. 2514, the Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform Act (the “COUNTER Act” or the “Act”).  The COUNTER Act, introduced by Representative Emanuel Cleaver (D-MO) would be the first major reform of the Bank Secrecy Act, 31 U.S.C. §§ 5311 et seq. (“BSA”) and related anti-money laundering (“AML”) regulations since 2001.  The COUNTER Act will now move to the House floor for debate.  The HFSC postponed a vote on a related bill that is aimed at combating illicit financial activity in anonymous shell companies and that would require most corporations and limited liability companies to disclose beneficial ownership information at the time of incorporation.

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OCC Solicits Public Comments on Innovation Pilot Program

On April 30, 2019, the Office of the Comptroller of the Currency (“OCC”) opened a 45-day public comment period on its Innovation Pilot Program (the “Program”).  In accordance with the agency’s objective of providing constructive and proactive supervision, the OCC’s proposed Program is intended to encourage the testing of innovative activities – including products, services, and processes – to benefit consumers and financial institutions.  The Program is another in a series of OCC initiatives aimed at fostering responsible deployment of financial technology , or “fintech,” in the institutions the OCC supervises. [1]  The Program is not limited to fintech activities, however; the OCC does not intend to limit participation based on size, complexity, or business model.  Comments on the Program are due no later than June 14, 2019.

Since 2015, the OCC has developed initiatives and examined regulatory sandbox models with the goal of supporting responsible innovation.  For instance, in 2016, the OCC established an Office of Innovation with offices in New York, San Francisco, and Washington, to serve as a resource for innovation-related matters and facilitate discussions with industry.  The OCC’s latest decision to launch the Innovation Pilot Program builds on existing efforts and provides a framework for small-scale, short-term tests – or pilots – to determine the feasibility of new activities at scale.

Key Program objectives include:

  • Supporting the development and delivery of more effective and efficient activities within the U.S. financial system;
  • Engaging with eligible entities regarding safety and soundness expectations, risk management principles, and compliance requirements;
  • Improving the OCC’s understanding of, and supervisory approaches to, innovative activities and their related risks;
  • Encouraging the development of controls and safeguards commensurate with the type, scale, and risk posed by innovative activities; and
  • Promoting OCC policy objectives, while avoiding those that might unintentionally or unnecessarily inhibit responsible innovation.

To be eligible to participate in the Program, an entity must demonstrate:  (1) that the OCC’s involvement in the pilot is appropriate; specifically, that the proposed activity is within the scope of the OCC’s supervisory authority and involves uncertainty that may be a barrier to its development or implementation; and (2) how the activity has the potential to achieve one or more specific Program goals, including, for example, promoting financial inclusion, fair access, and fair treatment of consumers or small businesses, or improving the efficiency of bank processes, operations, or the provision of financial services.

Third parties are prohibited from submitting proposals independently, but eligible entities can propose a pilot individually, collaborate with multiple banks, or partner with a third party that has been engaged to offer innovative activities.  Pilot programs generally will range from 3 months to not more than 24 months in duration.

Importantly, the OCC is not providing a safe harbor from financial or consumer protection requirements, so all participating entities must comply with applicable laws and regulations.  Entities also are expected to incorporate reasonable controls and safeguards into the design of proposed activities.  The Program may include the use of tailored regulatory tools, however, including the use of interpretive letters (which an applicant could request in order to establish the legal permissibility of a proposed activity), supervisory feedback, and technical assistance.

Eligible entities are encouraged to engage with the OCC in preliminary discussions about proposed pilots to allow for informal feedback before submitting an application, referred to as an expression of interest (“EOI”), to the Office of Innovation.  The EOI “should be tailored to the scope and complexity of the proposed pilot” and include key details, such as the pilot’s objectives, expected outcomes, governance process, and the scope of OCC engagement.

The OCC will consider proposals in various states of development, including proofs of concept and pilots that call for limited beta testing.

[1] For purposes of the Program, the OCC defines financial institutions as national banks, federal savings associations, their subsidiaries, and federal branches and agencies of foreign banking organizations.

English Competition Appeals Tribunal to Reconsider £14 Billion Class Action Against MasterCard

England’s Court of Appeal has decided that the Competition Appeals Tribunal (the “CAT”) erred in rejecting certification of former financial ombudsman Walter Merricks’ class action against MasterCard, for £14 billion.  As a result, the CAT will now reconsider whether to certify the class.  The decision has lowered the bar that will need to be cleared in this and future class actions in order to achieve certification.  In this alert, we consider the decision and its implications for the UK’s fledgling class action regime.

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CFPB Proposes Debt Collection Rule under FDCPA

On May 7, 2019, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) released its long-anticipated proposed rule on debt collection. The proposed rule would amend Regulation F, which implements the Fair Debt Collection Practices Act (“FDCPA”), and would govern the activities of debt collectors, as defined in the FDCPA. Certain provisions also rely on the Bureau’s authority under sections 1031 and 1036 of the Dodd-Frank Act to regulate unfair, deceptive, or abusive acts or practices. CFPB Director Kathleen Kraninger described the Bureau’s action as an effort to “modernize the legal regime for debt collection” and “ensure we have clear rules of the road where consumers know their rights and debt collectors know their limitations.”

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CFPB Proposes Revisions to HMDA to Provide Relief for Smaller Lenders

On May 2, 2019, the Consumer Financial Protection Bureau (“CFPB”) released a notice of proposed rulemaking (the “NPRM”) proposing to raise coverage thresholds for collecting and reporting data under the Home Mortgage Disclosure Act (“HMDA”).  In addition, the Bureau released an advanced notice of proposed rulemaking (the “ANPR”) requesting comment on the costs and benefits of certain HMDA reporting requirements. CFPB Director Kraninger described the proposals as providing “much needed relief to smaller community banks and credit unions while still providing federal regulators and other stakeholders with the information we need.”

The NPRM proposes changes to the HMDA coverage thresholds for both closed-end mortgages and open-end lines of credit:

  • Closed-end mortgage loans: The current coverage threshold is originating 25 or more closed-end mortgage loans in both of the two prior years.  The NPRM proposes two alternatives – raising the threshold to either 50 or 100 closed-end mortgage loan originations.
  • Openend lines of credit: The current coverage threshold is temporarily set at 500 or more open-end lines of credit in each of the two prior years. The proposed rule would extend this temporary threshold until January 1, 2022, and would set the permanent threshold at 200 open-end lines of credit.

The ANPR solicits comment on the costs and benefits of reporting certain data points currently required under HMDA, based on industry’s “concerns about the burden associated with reporting certain of the new or revised data points relative to the value of the information in serving HMDA’s purposes.”  Examples of such data points include whether a borrower owns or leases the land on which a manufactured home is located, disaggregated ethnicity categories, and free-form text fields for certain data fields, including the reason for loan denial.

The NPRM and ANPR are scheduled to be published in the Federal Register on May 8, 2019.  Comments will be due 60 days after publication, on July 7, 2018.

New York DFS Revamps Its Consumer Protection Arm

On April 29, 2019 the New York State Department of Financial Services (“DFS”) announced that it has created a new division, called the Consumer Protection and Financial Enforcement Division, which combines the previously separate Enforcement Division and Financial Frauds and Consumer Protection Division.

The new division will be “responsible for protecting and educating consumers and fighting consumer fraud, as well as ensuring that regulated entities comply with New York and federal law in relation to their activities serving the public.”  DFS further indicated that the division will have a particular focus on “review and response to cybersecurity events and the development of supervisory, regulatory and enforcement policy and direction in the area of financial crimes.”

In January 2018, then-Superintendent of Financial Services Maria Vullo stated that DFS would “lead and take action to fill the increasing number of regulatory voids” that she believed had been created by the Consumer Financial Protection Bureau’s “troublesome policy shift away from consumer protection” under the Trump Administration.  This reorganization of DFS can potentially be seen as part of that effort.

Katherine Lemire, formerly an Assistant United States Attorney in the Southern District of New York and a partner at an international compliance and investigative consulting firm, will lead the new division.

CFPB Mulling Changes to Remittance Rule

On April 25, 2019, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) published a Request for Information (the “RFI”) related to the Remittance Rule, the Bureau’s existing regulation that implements the Electronic Funds Transfer Act (“EFTA”) as amended by the Dodd-Frank Act.  The Remittance Rule requires certain disclosures in the case of remittance payments (electronic funds transfers from the United States to recipients in foreign countries) but only if the transfer is initiated by a financial institution, money transmitter, or other person that provides remittance transfers in the “normal course of business” (each, a “remittance transfer provider”).

The Remittance Rule generally requires that a remittance transfer provider disclose the actual exchange rate and the amount that will be received by the recipient at the time the consumer pays for the remittance transfer.  The EFTA contains a temporary exception to that requirement that allows certain insured depository institutions to provide estimated exchange rates and amounts.  The temporary exception reflects the fact that banks and credit unions that make remittance transfers using the correspondent banking system cannot always know all of the fees that will be charged by other banks, including fees charged as a result of foreign laws that prevent institutions from knowing the currency exchange rate in advance.

The CFPB exercised its authority to extend the temporary exception until July 2020.  The temporary exception expires in July 2020, and the CFPB lacks the statutory authority to extend the exception a second time.  The RFI seeks input on how to mitigate the impact of the expiration of the temporary exception.  The RFI includes twelve questions related to the expiration of the temporary exception and its expected impact; the Bureau will use input from stakeholders to determine its next steps.

A safe harbor within the Remittance Rule exempts remittance transfer providers that initiate 100 or fewer remittance transfers per year.  The RFI asks whether the number of remittance transfers permitted under this “normal course of business” safe harbor should be increased, and also whether an exception for small financial institutions is warranted.

The deadline for submitting comments on the RFI is June 28, 2019.

FinCEN Penalizes Peer-to-Peer Virtual Currency Exchanger for Violating BSA

On April 18, 2019, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced an enforcement action against Eric Powers, a California-based peer-to-peer (P2P) virtual currency exchanger, for violating the Bank Secrecy Act (BSA).  This marks the first time FinCEN has taken action against a P2P virtual currency exchanger and the first time it has penalized a virtual currency exchanger for failing to file Currency Transaction Reports (CTRs).

Virtual currency exchangers have been subject to money transmitter requirements since FinCEN issued interpretive guidance in 2013 clarifying the application of BSA implementing regulations to transactions in convertible virtual currencies.  The guidance states, among other things, that an “exchanger” of convertible virtual currencies is considered a money transmitter under FinCEN’s regulations, subject to certain limits and exemptions, and is required to register as a money services business (MSB).

In its first enforcement action against a P2P virtual currency exchanger since issuing the March 2013 guidance, FinCEN assessed a Civil Money Penalty against Powers for failing to: (1) register with FinCEN as a MSB, (2) establish and implement an effective anti-money laundering (AML) program, (3) file Suspicious Activity Reports (SARs), and (4) file CTRs.

According to FinCEN, from December 2012 through September 2014, Powers operated as a money transmitter by advertising his intent to purchase and sell Bitcoin for others, coordinating transactions at virtual currency exchangers (such as Mt. Gox, which filed for bankruptcy in 2014), and conducting 1,700 Bitcoin transactions.

During the same period, investigators found indicators of suspicious activity, including evidence that Powers serviced customers through The Onion Router (TOR), an anonymizing torrent service designed to conceal a user’s identity and location, and over 100 transactions linking Powers’ Bitcoin wallet addresses to customers who operated on “Silk Road,” a dark web black market shut down by U.S. authorities in 2013.

Further, Powers executed over 200 transactions that each exceeded $10,000 in currency, without filing a single CTR.  This includes 160 purchases of Bitcoin totaling approximately $5 million through in-person cash transactions.  FinCEN found that Powers did not file over 240 CTRs as required under the BSA.

Powers also did not comply with FinCEN’s requests to produce written AML policies and procedures, and he publicly stated online that he would assist customers to circumvent AML regulations.

FinCEN fined Powers $35,000 and barred him from providing money transmission services or operating as a MSB.  In determining the penalties to impose against Powers, FinCEN considered the “severity and duration” of his violations, his “extensive cooperation” with FinCEN’s investigation, and the likely impact of its action on compliance measures within the virtual currency industry.

FinCEN’s first enforcement action against a P2P virtual currency exchanger, while novel, is not surprising.  It signals the bureau’s growing focus on targeting illicit financiers in the virtual currency industry, while providing some regulatory stability to promote financial innovation.

CFPB to Provide More Information in Civil Investigative Demands

The Consumer Financial Protection Bureau (“CFPB”) announced Tuesday that going forward the agency will provide more information in its Civil Investigative Demands (“CIDs”).  The American Bankers Association and others had voiced concerns about the often vague and expansive scope of such demands in response to the Bureau’s 2018 Request for Information (“RFI”) seeking feedback on the CID process.  The CFPB indicated that it will include more detail regarding the potentially wrongful conduct under investigation and the potentially applicable provisions of law that may have been violated in its CIDs.  The Bureau says that it “typically” will specify the business activities subject to its authority.  In cases where determining its authority over the relevant activity is one of the purposes of the investigation, it may disclose that fact in the interests of transparency.

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CFPB Director Kraninger Outlines Approach in First Major Speech

On April 17, 2019, CFPB Director Kathleen Kraninger outlined her approach in executing the Bureau’s statutory mission in a speech to the Bipartisan Policy Center. This was Director Kraninger’s first major speech since taking the helm at the Bureau. Kraninger’s remarks were organized around the tools that the Bureau will utilize to advance its core mission of preventing consumer harm. The speech was consistent with the Director’s recent testimony to House and Senate Committees but also provided a number of clues as to the priorities of the Bureau in the near future.

Director Kraninger began by stating the Bureau’s focus, under her leadership, will be the prevention of harm to consumers. She went on to say the Bureau would deploy four tools—education, rulemaking, supervision and enforcement—to realize this overarching mission.

    • Education. Director Kraninger stated that the Bureau will provide education programming intended to empower consumers to make optimal financial decisions. The programming will outline approaches to consumer savings, especially as they pertain to emergency needs.
    • Rulemakings. The Bureau will pursue rulemaking “deliberately and transparently.” Director Kraninger indicated that rulemaking would provide “clear rules of the road” to regulated or supervised entities. The Director noted the Bureau must recognize imposing additional compliance costs on financial service providers can impact consumer access to credit. She indicated that a proposed rule pertaining to debt collection practices are forthcoming and, among other things, would limit the number of calls collectors can make on a weekly basis, address the use of email and text communications in debt collection, and require certain disclosures at the beginning of the collection process.
    • Supervision. Director Kraninger stated an intent to review the Bureau’s approach to examinations, while emphasizing that CFPB examinations will assess whether supervised entities are meeting their obligations by promoting “a culture of compliance” that prevents harm in the first instance. The Director also set forth a commitment to enhance the Bureau’s coordination and collaboration with other federal regulators.
    • Enforcement. The Director stated that enforcement is an essential tool for the Bureau because education, rulemaking and supervision will not address every consumer protection issue. Following an evaluation of the Bureau’s approach to investigations, the Director intends to implement an enforcement regime that will “foster compliance, help prevent consumer harm, and right wrongs.” The Bureau is also committed to partnerships with state attorneys general and bank supervisors.

Finally Director Kraninger announced the Bureau will launch a “symposia series” on topics related to the CFPB’s mission. The first symposium will focus on clarifying the meaning of “abusive acts or practices” in the Dodd-Frank Act.

The Director’s speech was closely watched by stakeholders. Members of the financial services industry viewed the speech favorably, with the CEO of the Consumer Bankers Association issuing a statement applauding the director for a “common-sense, principled approach.” Consumer advocates, on the other hand, expressed concerns about the Director’s promised modernization of debt collection rules.