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California proposes changes to Escrow Law
Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed regulations (and accompanying statement of reasons) seeking to amend the state’s Escrow Law to clarify (i) the meanings of personal property and prohibited compensation; (ii) maintenance of books and preservation of records; and (iii) the annual report requirements. Among other things, the proposal adds “gametic material” to the definition of personal property to clarify that escrow agents may conduct transactions that hold and disburse funds under assisted reproduction agreements. Additionally, the update to the escrow books and records provisions are to “ensure that CPAs may participate in engagements to meet the annual audit report requirement for Escrow Law licensees without violating any rule of professional conduct.” Comments on the proposed regulatory amendments are due by February 15.
FDIC codifies appointment of ALJs
On January 12, the FDIC published a final rule amending 12 CFR Part 308 to codify the agency’s “practice of having certain adjudicative functions performed by an inferior officer of the United States appointed by the FDIC’s Board of Directors.” The clarification follows a 2018 U.S. Supreme Court decision in Lucia v. SEC, which held that SEC administrative law judges (ALJs) are “inferior officers” subject to the Appointments Clause (Clause) of the Constitution (covered by InfoBytes here). The FDIC notes that while the Lucia decision did not directly affect the agency or FDIC ALJs, the Board has chosen to “formally appoint the ALJs that preside over FDIC enforcement proceedings.” The final rule, which also makes other technical edits to the agency’s rules of practice and procedure to update outdated references to certain position titles, becomes effective immediately.
Multi-national bank settles FCPA and commodities fraud charges for $130 million
On January 8, the DOJ announced it had entered into a deferred prosecution agreement with a German-based multi-national financial services company (company), in which the company agreed to pay more than $130 million to resolve an investigation into violations of the Foreign Corrupt Practices Act (FCPA) and a separate investigation into a commodities fraud scheme.
According to the DOJ, between 2009 and 2016, the company admitted to knowingly and willfully conspiring to conceal payments to business development consultants (BDC) which were actually bribes to foreign officials in order to obtain business. The company admitted that employees agreed to “misrepresent the purpose of payments to BDCs and falsely characterize[d] payments to others as payments to BDCs” in violation of the FCPA’s books, records, and accounts provisions. Additionally, company employees failed to implement adequate internal accounting controls in violation of the FCPA by, among other things, (i) failing to conduct meaningful due diligence regarding the BDCs; (ii) paying BDCs who were not under contract with the company at the time; and (iii) paying BDCs without adequate documentation of the services purportedly performed.
Additionally, the DOJ stated that between 2008 and 2013, the company’s precious metal traders engaged in a scheme to defraud other traders on the New York Mercantile Exchange Inc. and Commodity Exchange Inc. by placing orders to buy and sell precious metals futures contracts with the intent to cancel those orders before execution. The company previously settled with the CFTC in January 2018 for substantially the same conduct (covered by InfoBytes here).
Of the total $130 million penalty, the company will pay a criminal penalty of nearly $80 million to the DOJ in relation to the FCPA violations, and will pay $43 million in disgorgement and prejudgment interest to the SEC to settle allegations that the company violated the FCPA’s books and records and internal accounting controls provisions. The company will pay over $7.5 million in relation to the commodities scheme, for criminal disgorgement, victim compensation, and a criminal penalty. The DOJ noted that the company received full credit for cooperation with the investigations and for significant remediation.
PPP portal to re-open to all lenders on January 19
On January 13, the Small Business Administration (SBA) announced that the Paycheck Protection Program (PPP) loan portal will open to all eligible lenders with $1 billion or less in assets for First and Second Draw applications on January 15, with the portal fully opening on January 19 to all participating lenders. As previously covered by InfoBytes, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) provides an additional $284 billion for the PPP, extending the authority to make PPP loans through March 31, amending certain aspects of the program, and allowing for certain businesses to take second loans. The PPP portal initially reopened on January 11 to community financial institutions only in order to reach underserved and minority small businesses.
In conjunction with the announcement, SBA also issued Procedural Notice 5000-20076 related to First Draw PPP loan increases following the enactment of the Economic Aid Act.
FTC comments on application of ECOA, Regulation B in response to CFPB RFI
Recently, FTC staff submitted a comment letter in response to the CFPB’s request for information (RFI) seeking input on ways to provide additional clarity under the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. As previously covered by InfoBytes, the CFPB issued the RFI last July requesting comments on ways to create a regulatory environment that expands credit access and ensures consumers and communities are protected from discrimination with respect to any aspect of a credit transaction. Included in the RFI was a request for input on whether “the Bureau should provide additional clarity regarding its approach to disparate impact analysis under ECOA and/or Regulation B.” Citing to legislative history, the FTC noted that Regulation B explicitly incorporates disparate impact, and stressed that “[a]rticulating a single approach to disparate impact analysis that covers diverse sets of present and future facts and circumstances of discrimination could be difficult and could risk being both over and under inclusive.” The FTC suggested that if the Bureau chooses to provide additional detail regarding its approach to disparate impact analysis, a disclaimer should be included that such information is not intended to “bless” any violations of ECOA and Regulation B, but is rather “intended to provide examples of how the agency might approach a fair lending matter.”
In response to the Bureau’s request for information about ways it might support efforts to meet the credit needs of small businesses, the FTC highlighted recent enforcement actions involving small businesses, including actions involving deceptively advertised financial products and unfair billing and collection practices, particularly with respect to merchant cash advances. The FTC also urged the Bureau to remind entities offering credit to small businesses that ECOA and Regulation B apply and that entities cannot avoid application of these statutes based solely on how they characterize a transaction or the benefits they claim to provide. The FTC further stressed that collecting small business lending demographic data could aid in enforcement efforts, as would encouraging small businesses to report misconduct and refer complaints to the FTC and the states. In addition, the FTC highlighted the importance of educating small businesses about different products and terms, as well as potential law violations, which could assist small businesses in comparing products resulting in less expensive financing options.
OFAC issues amended Venezuela-related general license, sanctions Venezuelan officials
On January 4, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued Venezuela-related General License (GL) 31A and an amended related frequently asked question. GL 31A authorizes certain transactions and activities involving the IV Venezuelan National Assembly, the Interim President of Venezuela, and certain other persons that would otherwise be prohibited by Executive Order (E.O.) 13884, as incorporated into the Venezuela Sanctions Regulations. (See previous InfoBytes coverage here.)
Additionally, earlier on December 30, OFAC announced sanctions pursuant to E.O. 13692 against two Venezuelan government officials who presided over the trials of six U.S. persons in Venezuela. According to OFAC, the six executives’ trials “were based on politically motivated charges and marred by a lack of fair trial guarantees.” As a result, all property and interests in property belonging to the identified individuals subject to U.S. jurisdiction are blocked, and “any entities that are owned, directly or indirectly, 50 percent or more by the designated persons are also blocked.” U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons.
OFAC reaches settlement with Saudi Arabian bank to resolve Sudanese and Syrian sanctions violations
On December 28, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a $653,347 settlement with a Saudi Arabian bank to resolve 13 apparent violations of the Sudanese Sanctions Regulations, or section 2(b) of Executive Order (E.O.) 13582, which prohibits certain transactions with respect to Syria. According to OFAC’s web notice, between 2011 and 2014, the bank processed—directly or indirectly—13 U.S. dollar (USD) transactions totaling more than $5.9 million “to or through the United States in circumstances where a benefit of [the bank’s] service was received by Sudanese or Syrian counterparties, or that involved goods originating in or transiting through Sudan or Syria.” OFAC noted that the apparent violations began after the bank had implemented more robust compliance measures, “including those relating to sanctions screening and OFAC sanctions compliance.”
In arriving at the settlement amount, OFAC considered various aggravating factors, including that the bank “conferred substantial economic benefit to U.S.-sanctioned parties,” causing “significant harm to the integrity of U.S. sanctions programs and their associated policy objectives.”
OFAC also considered various mitigating factors, including that the bank (i) did not willfully intend to violate U.S. sanctions law or recklessly disregard its sanctions obligations; (ii) cooperated with the investigation and signed a tolling agreement; and (iii) has undertaken remedial measures and has enhanced its compliance controls and internal policies, including by requiring the screening of all payments against international sanctions lists and prohibiting the opening of USD accounts for any Sudanese customers or financial institutions.
NY bill requires licensing for all commercial financing under $500K
On January 6, a member of the New York Senate introduced S1061, which would update the New York Banking Law (the “Law”) to require a license for persons or entities engaging in the business of making or soliciting a “commercial financing product” in New York. The legislation defines a commercial financing product as “any advance of funds to a commercial or business enterprise made for the purpose of assisting the business with its capital needs,” including (i) loans made to a commercial enterprise of $500,000 or less; (ii) asset-based financing in the amount of $500,000 or less; and (iii) leasing transactions in the amount of $500,000 or less.
“Making or soliciting” includes:
- Providing commercial financing products to small businesses;
- Marketing commercial financing products for providers of commercial financing products;
- Receiving compensation from a provider of a commercial financing product in exchange for a referral; and
- An entity that partners with a federal or state banking organization originator and the entity: (i) acquires a participation interest in the commercial financing product, if the entity either (a) receives compensation from the originator or (b) services the commercial financing product; or (ii) provides indemnity or loss protection to the originator for losses the originator may incur based on the performance of the commercial financing product.
The legislation would exempt banking organizations as defined by the Law (all banks, trust companies, private bankers, savings banks, safe deposit companies, savings and loan associations, credit unions and investment companies), any lender who makes or solicits five or fewer commercial financing products within a 12-month period, and check casher licensees, among others. Notably, the legislation does not currently contemplate any changes to existing Section 340, Article 9 of the Law, which generally requires licensure to originate commercial-purpose loans in New York of $50,000 or less with a rate above 16 percent.
New York enacts commercial lending disclosure requirements
On December 23, the New York governor signed S5470, which establishes consumer-style disclosure requirements for certain commercial transactions. For open and closed-end commercial financing transactions, the legislation requires that the disclosures include, among other things, (i) the amount financed or the maximum credit line; (ii) the total cost of the financing; (iii) the annual percentage rate; (iv) payment amounts; (v) a description of all other potential fees and charges; and (vi) prepayment charges. Violations are subject to a civil penalty no greater than $2,000 per violation. Notably, the legislation exempts (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) technology service providers; (v) lenders who make no more than five applicable transactions in New York in a 12-month period; and (vi) any individual commercial financing transaction over $500,000. The legislation is effective 180 days after enactment.
As previously covered by InfoBytes, California is currently finalizing proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018), which was enacted in September 2018. The California Department of Financial Protection and Innovation previously signaled its intent to finalize the regulations by January 2021.
CFPB denies guaranty agency’s petition to set aside CID
On December 16, the CFPB denied a petition by a non-profit guaranty agency that serves as a guarantor of federal student loans to set aside a civil investigative demand (CID) issued by the Bureau last September. The CID requested information from the company to determine, among other things, whether “debt collectors, guaranty agencies, or associated persons” violated the CFPA’s UDAAP provisions by improperly causing borrowers to incur costs or fees in connection with the collection of student loans. The company petitioned the Bureau to set aside the CID. Among other things, the company argued that the Bureau lacked jurisdiction, because it does not provide a consumer financial product or service, but rather a commercial service to the Department of Education (Department). The company also argued that the Bureau lacked jurisdiction due to the company’s fiduciary relationship with the Department, citing a Memorandum of Understanding (MOU) between the Bureau and the Department related to their respective responsibilities for handling student borrower complaints. Additionally, the company claimed that any potential allegations are time-barred, and that, in the alternative, the CID should be stayed until the U.S. District Court for the District of Columbia issues a decision in a pending lawsuit challenging the validity of the Department’s Guaranty Agency Collections Fee Rule.
The Bureau rejected the company’s request to set aside or modify the CID, finding that (i) it has a “reasonable basis to investigate” whether guaranty agencies, like the company, fall within its jurisdiction; (ii) the CID is proper because it seeks information “relevant to a violation” of consumer financial protection laws, as well as information related to the company’s relationships with private collection agencies and loan servicers; (iii) the Bureau’s MOU with the Department has “no relevance” to the Bureau’s exercise of its investigative or enforcement authority; (iv) its investigation is not time-barred because the CFPA’s statute of limitations begins to run upon the Bureau’s discovery of the violation, and, moreover, the Bureau is not limited to gathering information from only within the limitations period; and (v) the company “fail[ed] to establish any basis for an indefinite stay of the CID.”