InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New York DFS Obtains Substantial Settlement In Licensing Enforcement Action
On March 31, in an enforcement action with potential implications for a range of financial service providers, the New York State Department of Financial Services (DFS) announced that an insurance holding company agreed to pay a $50 million civil fine to resolve allegations that two of its subsidiaries conducted unlicensed insurance business in the state, and that one of the subsidiaries made false representations about those activities. The Manhattan District Attorney’s Office (DA) announced that the company agreed to resolve a parallel criminal investigation by entering into a deferred prosecution agreement and disgorging $10 million in profits.
The DFS and the DA claim that their coordinated investigations revealed that the subsidiaries used New York-based sales representatives to solicit insurance business for the companies and their affiliates, and to directly sell insurance products in New York to multinational companies, notwithstanding representations to the contrary from the companies. However, the authorities allege, neither company was licensed to conduct business in the state, and both companies used sales representatives who were not licensed as insurance brokers or agents in New York.
In addition, the DFS and the DA assert that one of the subsidiaries, while operating under the control of a different parent company, intentionally misrepresented to the New York State Insurance Department (one of the DFS’s predecessor agencies) that the subsidiary did not solicit business in New York and that its New York staff did not engage in such activities. At the time, in seeking an opinion as to whether it was required to obtain a license, the company asserted that its New York operations were limited to “back office” operations not subject to licensing requirements.
The civil fine in this action is substantially larger than fines typically imposed with regard to state licensing violations in other financial services industries. Notably, the large fine was imposed even after the companies agreed to cooperate in an ongoing investigation of the two subsidiaries’ former parent company. Also significant, the disgorgement order equates to two years’ worth of profits earned in connection with the alleged unlicensed activity. The holding company also agreed to certain restrictions on its business and that of the two subsidiaries pending full compliance with state law.
The DFS is the principal financial industry regulator in the state of New York, with jurisdiction over banks; mortgage lenders, brokers and servicers; consumer lenders; money transfer businesses; insurance companies; and others.
Virginia Enacts Transitional Mortgage Licensing Bill
On March 24, Virginia Governor Terry McAuliffe signed SB 118, which, effective July 1, 2014, will permit transitional licensing of mortgage loan originators (MLO). The bill grants the State Corporation Commission (SCC) authority to issue temporary MLO licenses to certain MLOs licensed in other states. The SCC will only issue a transitional MLO license to applicants it determines (i) have never had a mortgage loan originator license revoked by any governmental authority; (ii) have not been convicted of, or pled guilty or nolo contendere to a felony during a defined period prior to the date of the application; (iii) have become registered through, and obtained a unique identifier from, the Nationwide Mortgage Licensing System and Registry; and (iv) are employed by a person licensed by the SCC as a mortgage lender or mortgage broker. Further, any transitional MLO license issued by the SCC will expire on the earlier of (i) the date the SCC issues or denies a Virginia MLO license for the applicant; or (ii) 120 days from the date the transitional MLO license was issued. Also notable, is that the bill allows the SCC to issue transitional licenses to MLOs from federally regulated institutions who transition employment to a Virginia mortgage bank, but only after federal law is changed to allow such transitional licenses. The CFPB has interpreted federal law to prohibit such transitional licenses.
California Proposes Rule To Clarify Scope Of Licensing Exemption
Earlier this month, the California Department of Business Oversight (DBO) issued a notice and request for comment on a proposed amendment to regulations that implement the California Finance Lenders Law (CFLL) and the California Residential Mortgage Lending Act (CRMLA). The proposed amendment would clarify that non-depository operating subsidiaries, affiliates, and agents of federal banks and other financial institutions do not fall within the licensure exemption for a bank or savings association under the CFLL and the CRMLA. The DBO views the proposed amendment as required in light of the Dodd-Frank Act’s elimination of federal preemption over such entities by the OCC. Comments on the proposal are due by May 7, 2014.
Hawaii Notifies Collection Agencies Of Change In Reciprocal States
On March 18, the Hawaii Department of Commerce and Consumer Affairs published a notice advising collection agencies that due to changes in state licensing laws in Indiana, Nevada, and North Dakota, those states no longer qualify as “reciprocal states” such that licensure in those states can be used to obtain or renew a Hawaii collection agency designation. Hawaii law allows an out-of-state collection agency to obtain a state collection agency designation by demonstrating the company is licensed under the laws of a state (i) whose requirements to be licensed, permitted, or registered as a collection agency are substantially similar to Hawaii’s requirements; and (ii) that allows similar reciprocal arrangements for Hawaii-licensed agencies. The Department advises that any agency currently using one of the three states identified as the basis for its Hawaii collection agency designation must identify a new reciprocal state on its renewal application. Colorado, Illinois, Michigan, Minnesota, Nebraska, New Mexico, and Wisconsin are identified by the Department as states that meet its definition of a reciprocal state. Because the renewal constitutes a change to the current information on file, the Department will not accept an “online” license verification in lieu of a completed original “Verification of License” form.
California Eliminates Passive Investor Self-Certification From Finance Lenders Law License Application
Recently, the California Department of Business Oversight (DBO) made a number of changes to the application for a California Finance Lenders Law (CFLL) license that is completed by persons engaged in non-residential lending or brokering. The changes were made following a 45-day notice and comment period. (Presumably, these changes also apply, where applicable, to persons engaged in residential lending or brokering and who are thus required to submit applications via the Nationwide Mortgage Licensing System.)
One of the most significant changes to the application relates to which individuals associated with the owners of an applicant are required to submit a Statement of Identity and Questionnaire and fingerprints to the DBO for investigative purposes. Since 2007, the application specified as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable, unless the applicant or entity can make the following representation in a separate cover letter that is incorporated by reference into the CFLL application:
1. [(Name of entity)] is a passive investor and is not responsible in any way for the conduct of the applicant’s lending activities in California. Therefore, it is unnecessary to investigate any individuals managing or controlling [(name of entity)].
2. Describe whether the entity has engaged in any act that would constitute a reason for the California Corporations Commissioner to deny a license under Financial Code Section 22109 and if so, fully disclose the acts.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the California Corporations Commissioner under Subdivision (o) of Section 25100 of the California Corporations Code.
But now the application no longer provides an option for the applicant to include a self-certification for passive investors concerning investigations. Instead, the application now specifies as follows:
If an entity owns or controls 10% or more of the applicant, a Statement of Identity and Questionnaire and fingerprints must be submitted for each officer, director, general partner, or managing member, as applicable. The Commissioner may waive this requirement if it is determined that further investigation is not necessary for public protection.
A public company may submit fingerprints only for persons not included on the public company’s Form 10-K, Form 10-Q or other similar document filed with the Securities and Exchange Commission. The applicant must submit a copy of Form 10-K, Form 10-Q, or other similar document that includes the name of the individuals not submitting fingerprints. Statement of Identity and Questionnaires must still be completed for all individuals. For purposes of this paragraph, “public company” means a company whose securities are listed or designated on a national securities exchange certified by the Commissioner of Business Oversight under subdivision (o) of Section 25100 of the California Corporations Code.
In its Final Statement of Reasons for the Adoption of Rules, the DBO acknowledged that not all owners of an applicant may be responsible for the applicant’s lending activities (e.g., pension plans) and that investigating such owners may be burdensome, costly, and unnecessary. But the DBO explained that it chose to remove the self-certification for passive investors because it “has been subject to abuse by some applicants attempting to use it to evade background investigations or to hide the true identity of the owner(s).” At the same time, the DBO emphasized that it still retains authority to forego the investigation of passive investors when doing so is consistent with the CFLL.
As a result of this change, CFLL license applicants (and CFLL licensees whose ownership may change as a result of, for example, an acquisition or internal restructuring) should be prepared for the principal officers, directors, general partners, and managing members, as applicable, of their 10% owners and control affiliates to submit Statements of Identity and Questionnaires and fingerprints, unless they are able to persuade the DBO that investigation of these individuals is not necessary for public protection. It is our understanding from DBO personnel that one way that this may be accomplished is by providing sufficient evidence that these individuals have been investigated and vetted by another governmental or regulatory agency.