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CFPB taskforce releases recommendations for modernizing consumer financial marketplace
On January 5, the CFPB Taskforce on Federal Consumer Financial Law released a two volume report with approximately 100 recommendations on ways the CFPB, Congress, and state and federal regulators can improve and modernize the legal and regulatory environment for the consumer financial services market. The report is the end-product of a request for information issued by the taskforce last March (covered by InfoBytes here). The report’s first volume provides a historical and economic overview of the legal and regulatory landscape for consumer finance, and explores issues related to consumer financial protection, competition, innovation, and financial inclusion. The second volume outlines more than 100 proposed recommendations for strengthening consumer protections and maintaining competition in the financial marketplace. Among these are recommendations related to the regulation of non-banks and fintech companies, including:
- Recommending that Congress either (i) “authorize the Bureau to issue licenses to non-depository institutions that provide lending, money transmission, and payments services,” with licenses “provid[ing] that these institutions are governed by the regulations of their home states, even when providing services to consumers located in other states,” or (ii) “clarify that the OCC has the authority to issue charters to non-depositories engaged in lending, money transmissions, or payment services.” Acting Comptroller of the Currency, Brian P. Brooks released a statement the next day endorsing the need for federal charters for fintech companies, but stressed that the OCC, not the Bureau, should be responsible for granting national charters;
- Identifying and addressing competitive barriers and making appropriate recommendations to policymakers and regulators for expanding access to the payments systems by non-bank providers;
- Recommending that the Bureau weigh the costs and benefits of preempting state law where potential conflicts “can impede provision of valuable products and services, such as the regulation of [fintech] companies engaged in money transmission”; and
- Ensuring that fintech companies with multistate operations are subject to a single set of laws to promote consistency, reducing unnecessary regulatory costs, and promoting competition.
The taskforce further recommends that the Bureau establish an independent review of its regulatory cost-benefit analyses, and calls for increased regulatory coordination between the Bureau and other federal and state regulators. Other recommendations address, among other things, the use of alternative data; suggested changes to the Bureau’s internal organization; competition in the consumer financial marketplace, including with respect to the cost of credit, the effect and burden of state licensure requirements, and settlement servicing prices; consumer credit reporting, including clarifying the obligations of credit reporting agencies and furnishers with respect to dispute investigations; consumer empowerment and education; equal access to credit and financial inclusion; disclosure requirements; electronic signatures and document requirements; disparate impact; privacy; small dollar credit; and enforcement and supervision.
SBA releases PPP guidance and expansion rules
On January 8, the Small Business Administration (SBA) announced the Paycheck Protection Program (PPP) will re-open the week of January 11, with only community financial institutions able to make “First Draw” PPP loans on Monday, January 11, and “Second Draw” PPP loans on Wednesday, January 13 (re-opening to all participating lenders “shortly thereafter”). The SBA also released two interim final rules and associated guidance relating to the relaunch of the PPP, as dictated by the Consolidated Appropriations Act, 2021 (HR133). The Act, which was signed by President Trump on December 27, extends certain emergency authorities and temporary regulatory relief contained in the CARES Act, including an extension of the eviction moratorium until January 31. Under a section titled, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act), the legislation also 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 SBA notes that the new issuances satisfy the Economic Aid Act’s requirement that the agency promulgate rules to carry out the PPP provisions within 10 days of enactment:
- SBA Guidance. The guidance covers access to capital for minority, underserved, veteran, and women-owned business concerns and details the set-asides for loans issued by community development financial institutions, minority depository institutions, and certain small depository institutions. Most notably, the guidance states that the SBA will only accept PPP loan applications from community financial institutions for at least the first two days when the PPP loan portal re-opens.
- First Interim Final Rule. The interim final rule incorporates the Economic Aid Act’s amendments required to be implemented by regulation within 10 days of enactment. It also consolidates and restates SBA’s previous interim final rules and guidance covering the PPP (such as those governing borrower eligibility, lender eligibility, and PPP application and origination, and loan forgiveness). The interim final rule implements the various changes to the PPP made by the Economic Aid Act, including:
- Allowing additional expenses and forgivable uses for PPP funds, including certain operational expenditures, certain costs related to property damage due to public disturbances that occurred during 2020, certain supplier costs, and certain protective equipment expenditures. The expanded forgivable expenses may be utilized by borrowers who obtained PPP loans before the enactment of the Act so long as they have not already had their loans forgiven.
- Provisions stating that lenders (i) may rely on any certification or documentation submitted by applicants for both initial and second PPP loans, and (ii) may not be subject to enforcement action or penalties relating to loan origination or forgiveness, so long as (a) the lender acts in good faith relating to loan origination or forgiveness, and (b) all relevant federal, state, local and other statutory and regulatory requirements are satisfied.
- Certain streamlined conditions for loans of up to $150,000, including simplified loan forgiveness application and simplified certification of revenue for second loans.
- Second Interim Final Rule- PPP Second Draw. The interim final rule implements the key provisions of section 311 of the Economic Aid Act, allowing for a second PPP draw. Specifically, the Economic Aid Act allows for certain businesses to take a second loan under the PPP with a maximum draw amount of $2 million. In order to qualify, businesses must generally: (i) employ no more than 300 employees; (ii) have used or will use the full amount of their first PPP loan; and (iii) demonstrate at least a 25 percent reduction in gross receipts in the first, second, or third quarter of 2020 relative to the same quarter in 2019. Applications submitted after January 1, 2021 can utilize gross receipts from the fourth quarter of 2020. Additionally, the Economic Aid Act includes restrictions on types of eligible businesses, including entities involved in political and lobbying activities. Qualified borrowers may receive a loan amount of up to 2.5X the average monthly payroll costs during the 1-year period prior to the date of the loan or in calendar year 2019.
Additionally, in response to the Consolidated Appropriations Act, the Federal Reserve Board extended the termination date of the Main Street Lending Program facilities to January 8, in order to allow more time to process and fund loans that were submitted to the portal on or before December 14, 2020. The SBA also extended the deadline to apply for the Economic Injury Disaster Loan (EIDL) program to December 31, pending the availability of funds.
Court vacates mandatory disclosures and 30-day credit linking restriction in Prepaid Accounts Rule
On December 30, the U.S. District Court for the District of Columbia granted a payment company’s motion for summary judgment against the CFPB, vacating two provisions of the agency’s Prepaid Account Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the company filed a lawsuit against the Bureau alleging, among other things, that the Bureau’s Prepaid Account Rule exceeds the agency’s statutory authority “because Congress only authorized the Bureau to adopt model, optional disclosure clauses—not mandatory disclosure clauses like the short-form disclosure requirement.” The Bureau countered that it had authority to enforce the mandates under federal regulations, including the Electronic Fund Transfer Act (EFTA), TILA, and Dodd-Frank, arguing that the “EFTA and [Dodd-Frank] authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure.” The Bureau also claimed that its general rulemaking power under either TILA or Dodd-Frank provides authority for the 30-day credit-linking restriction.
With respect to the mandatory disclosure clauses of the short-form requirement in 12 CFR section 1005.18(b), the court concluded, among other things, that the Bureau acted outside of its statutory authority. The court stated that “Congress underscored the need for flexibility by requiring the Bureau to ‘take account of variations in the services and charges under different electronic fund transfer systems’ and ‘issue alternative model clauses’ for different account terms where appropriate” and it could not “presume—as the Bureau does—that Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.”
In striking the mandatory 30-day credit linking restriction under 12 CFR section 1026.61(c)(1)(iii), the court determined that “the Bureau once again reads too much into its general rulemaking authority.” First, the court determined that neither TILA nor Dodd-Frank vest the Bureau with the authority to promulgate substantive regulations on when consumers can access and use credit linked to prepaid accounts. Second, the court deemed the regulatory provision to be a “substantive regulation banning a consumer’s access to and use of credit” under the disguise of a disclosure, and thus invalid.
Congress overrides veto of NDAA with significant BSA/AML provisions
On January 1, the U.S. Senate voted to override President Trump’s veto of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, following a similar vote in the House a few days prior. As previously covered by InfoBytes, the NDAA includes significant changes to the Bank Secrecy Act (BSA) and anti-money laundering (AML) laws under the Anti-Money Laundering Act of 2020, such as:
- Establishing federal disclosure requirements of beneficial ownership information, including a requirement that reporting companies submit, at the time of formation and within a year of any change, their beneficial owner(s) to a “secure, nonpublic database at FinCEN”;
- Expanding the declaration of purpose of the BSA and establishing national examinations and supervision priorities;
- Requiring streamlined, real-time reporting of Suspicious Activity Reports;
- Establishing a Subcommittee on Innovation and Technology within the Bank Secrecy Act Advisory Group to encourage and support technological innovation in the area of AML and countering the financing of terrorism and proliferation (CFT);
- Expanding the definition of financial institution under the BSA to include dealers in antiquities;
- Requiring federal agencies to study the facilitation of money laundering and the financing of terrorism through the trade of works of art; and
- Including digital currency in AML-CFT enforcement by, among other things, expanding the definition of financial institution under the BSA to include businesses engaged in the transmission of “currency, funds or value that substitutes for currency or funds.”
OFAC amends Venezuela and Ukraine-related general licenses
On December 23, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued General License (GL) 5F, “Authorizing Certain Transactions Related to the Petróleos de Venezuela, S.A. 2020 8.5 Percent Bond on or After July 21, 2021,” which replaces and supersedes GL 5E. OFAC also amended related FAQ 595, which reminds parties that, until July 21, 2021, transactions related to the sale or transfer of CITGO shares in connection with the PdVSA 2020 8.5 percent bond are prohibited, unless specifically authorized by OFAC.
Additionally, OFAC concurrently announced the issuance of Ukraine-related GLs 13P and 15J. GL 13P, “Authorizing Certain Transactions Necessary to Divest or Transfer Debt, Equity, or Other Holdings in GAZ Group,” is effective December 23 and replaces and supersedes GL 13O. Additionally, GL 15J, “Authorizing Certain Activities Involving GAZ Group,” is also effective on December 23 and replaces and supersedes GL 15I.
OFAC issues FAQs on E.O. prohibiting investments supporting Chinese military companies
On December 28, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published FAQs covering Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.” As previously covered by InfoBytes, the E.O. generally prohibits “any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Chinese military company. . .by any US person.” The E.O. establishes the deadlines for divestment of investments in companies currently listed as Chinese military companies as well as companies that later may be added to the list of Chinese military companies pursuant to Section 1237, or those that the Secretary of the Treasury publicly lists as meeting the criteria set forth in Section 1237(b). In addition to the FAQs, OFAC published a list of the entities identified pursuant to the E.O. as Communist Chinese military companies, along with additional identifying information.
OFAC sanctions additional actors in Iranian steel sector
On January 5, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against a Chinese supplier of graphite electrodes, 12 Iranian producers of steel and other metal products, and a major Iranian metals and mining holding company’s three foreign-based sales agents. OFAC’s actions are taken pursuant to Executive Order 13871 (covered by InfoBytes here), which authorizes the imposition of sanctions on persons determined to operate in Iran’s iron, steel, aluminum, and copper sectors, which OFAC identified as providing “funding and support for the proliferation of weapons of mass destruction, terrorist groups and networks, campaigns of regional aggression, and military expansion.” As a result of the sanctions, “all property and interests in property of these persons that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.” OFAC further noted that its regulations “generally prohibit all dealings by U.S. persons or within (or transiting) the United States that involve any property or interests in property of blocked or designated persons,” and warned foreign financial institutions that knowingly conducting or facilitating significant transactions for or on behalf of the designated persons could subject them to U.S. correspondent account or payable-through sanctions.
OFAC settles with digital asset company over multiple sanctions violations
On December 30, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a nearly $100,000 settlement with a California-based digital asset security company for 183 apparent violations of multiple sanctions programs. According to OFAC, between March 2015 and December 2019, the company processed 183 digital currency transactions, totaling over $9,000, on behalf of individuals who were located in sanctioned jurisdictions, such as the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria. OFAC notes that, prior to April 2018, the company allowed users to open accounts by providing only a name and email address, and while it then amended its policies to require all new accountholders to verify the country in which they were located, it did not perform additional verification or diligence on their actual location.
In arriving at the settlement amount, OFAC considered various aggravating factors, including that the company (i) failed to implement appropriate, risk-based sanctions compliance controls; and (ii) had reason to know that some of its users were located in sanctioned jurisdictions based on users’ IP address data.
OFAC also considered various mitigating factors, such as (i) the company not having received a penalty notice from OFAC in the proceeding five years; (ii) the company cooperating with the investigation; and (iii) the company having undertaken remedial measures, including hiring a Chief Compliance Officer and implementing a new OFAC policy.
SBA issues notice detailing remittance of EIDL advances
On January 8, the Small Business Administration (SBA) issued a procedural notice discussing the repeal of Section 1110(e)(6) of the CARES Act, which required the SBA to deduct the amount of any Economic Injury Disaster Loan (EIDL) advance received by a Paycheck Protection Program (PPP) borrower from the PPP forgiveness payment from the SBA to the PPP lender. According to the notice, effective immediately, the SBA will no longer deduct EIDL advances from PPP forgiveness payments and will apply this change to any SBA forgiveness payments that were confirmed by December 29, 2020 or later.
Additionally, for any forgiveness payments that were already reduced by an EIDL advance, the SBA will automatically remit a reconciliation payment to the PPP lender that will include the advance amount, plus interest through the remittance date. The SBA notes that the PPP lender does not need to request the reconciliation payment, but must notify the borrower of the payment, re-amortize the loan, and notify the borrower of the next payment amount or whether the loan has been paid in full.
SEC issues whistleblower awards totaling over $5.2 million
On December 22, the SEC announced a more than $1.6 million award to a whistleblower whose critical information and assistance led to a successful SEC enforcement action. According to the redacted order, the whistleblower provided ongoing assistance to SEC staff as well as “original information that solidified their suspicions about certain defendants’ fraudulent” actions despite concerns about personal safety.
Earlier, on December 18, the SEC announced whistleblower awards totaling over $3.6 million in three separate enforcement actions. According to the first redacted order, the SEC awarded a whistleblower more than $1.8 million for voluntarily providing significant information and substantial assistance to SEC staff in a successful enforcement action. The whistleblower provided information—which “revealed a hard to detect fraudulent scheme” leading to the return of millions of dollars to harmed investors—and also “took immediate steps to mitigate the harm to investors and suffered hardships for doing so.”
In the second redacted order, the SEC awarded a whistleblower over $1.2 million for providing information leading to a successful enforcement action, although the Commission noted that the award amount was impacted after it determined the whistleblower “was culpable for actively participating in and financially benefiting from the fraudulent scheme” and “unreasonably delayed reporting” the scheme to the SEC.
In the third redacted order, a whistleblower was awarded more than $500,000 for providing significant information and ongoing assistance to SEC staff in a successful enforcement action. However, the SEC rejected the whistleblower’s claim that a higher award amount was warranted after it determined, among other things, that the whistleblower “unreasonably delayed reporting the misconduct for several years while investors were being harmed.”
The SEC has now paid approximately $736 million to 128 individuals since the inception of the program.