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  • District of Columbia moves to dismiss lawsuit alleging city’s student loan servicer regulations are preempted by federal law

    Courts

    On September 7, the District of Columbia filed a memorandum in support of its motion to dismiss a lawsuit claiming that the city’s regulations and requirements for student loan servicers are preempted by federal law. The plaintiff, a D.C.-based trade group whose membership consists of national student loan servicers, argues in its complaint that various provisions of District of Columbia Law 21-214, and rules promulgated thereunder, are preempted by the Federal Higher Education Act (HEA). For example, the complaint alleges that the licensing, examination, and annual reporting requirements are expressly preempted by the HEA, and the requirement to provide records to the D.C. Commissioner of Securities and Banking, upon request, violates the requirement that third party requests for records be made directly to the Department of Education.

    The city countered that the potential harm is “hypothetical” and the plaintiff’s preemption claims are insufficient to establish standing. Several nonprofit groups filed an amicus brief in support of the city, stating that the lawsuit “is part of a strenuous effort by the Department and loan servicers not to protect federal interests, but to reach an outcome whereby no government entity provides meaningful regulation.” Moreover, the amicus brief claims that the lawsuit was filed following the Department’s Interpretation issued last March (as previously covered in InfoBytes here), which took the position that state regulation of Direct Loan servicing is broadly preempted by the HEA because it “impedes uniquely Federal interests,” and state regulation of the servicing of Federal Family Education Program Loans “is preempted to the extent that it undermines uniform administration of the program.”

    Courts Student Lending Student Loan Servicer Higher Education Act Preemption Licensing

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  • OFAC adds North Korea-controlled information technology companies in China and Russia to Specially Designated Nationals List

    Financial Crimes

    On September 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it made additions to the Specially Designated Nationals List pursuant to Executive Order (E.O.) 13722 and E.O. 13810. These additions identify one individual and two entities connected to illicit revenue earned by North Korea from overseas information technology (IT) workers. According to OFAC, the China- and Russia-based front companies were actually managed and controlled by North Koreans, while the designated North Korean individual acted on behalf of the Chinese company. All designees were purported to have (i) “engaged in, facilitated, or been responsible for the exportation of workers from North Korea, including exportation to generate revenue for the Government of North Korea or the Workers’ Party of Korea”; and (ii) operated in the North Korean IT industry. As a result, all assets belonging to the identified individual and entities subject to U.S. jurisdiction are blocked, and U.S. persons are generally prohibited from engaging in transactions with them.

    See here for previous InfoBytes coverage on North Korean sanctions.

    Financial Crimes OFAC Department of Treasury Sanctions North Korea

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  • CFPB files lawsuit against pension advance company citing alleged CFPA and TILA violations

    Courts

    On September 13, the CFPB filed a complaint against a pension advance company, its owner, and related entities (defendants) based upon alleged violations of the Consumer Financial Protection Act (CFPA) and the Truth in Lending Act (TILA). In a complaint filed with the U.S. District Court for the Central District of California, the Bureau charged that the defendants engaged in deceptive practices in violation of the CFPA when they allegedly misrepresented to customers that “lump-sum” pension advances were not loans and carried no applicable interest rate, even though customers were required to pay back advances at amounts equivalent to a 183 percent interest rate and often incurred fees such as one-time $300 set up fees, monthly management fees, and 1.5 percent late fees. According to the Bureau, the defendants allowed customers to take out advance payments ranging from $100 to $60,000. The defendants then allegedly provided the income streams as 60- or 120-month cash flow payments to third-party investors, promising between 6 and 12 percent interest rates. Moreover, the defendants allegedly failed to provide customers with TILA closed-end-credit disclosures. The complaint seeks civil penalties, monetary and injunctive relief.

    As previously covered in InfoBytes, the pension advance company initiated a suit against the CFPB in January 2017 after the Bureau declined to set aside or keep confidential a civil investigative demand served against the company. The suit challenged the Bureau’s constitutionality and argued that the company was likely to suffer irreparable harm from being identified as being under investigation. However, in a split decision, the D.C. Circuit Court ultimately denied the company’s bid for an emergency injunction, citing the now-vacated majority opinion in PHH v. CFPB.

    Courts CFPB Consumer Finance Interest Rate CFPA TILA PHH v. CFPB Single-Director Structure

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  • NYDFS files lawsuit over OCC’s fintech charter decision

    Fintech

    On September 14, New York Department of Financial Services (NYDFS) Superintendent, Maria T. Vullo, filed a lawsuit against the OCC arguing that the agency’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB) is a “lawless” and “ill-conceived” move that will destabilize financial markets more effectively regulated by the state. As previously covered in InfoBytes, last December the U.S. District Court for the Southern District of New York dismissed NYDFS’ previous challenge because the court lacked subject matter jurisdiction over NYDFS’ claims since the OCC had yet to finalize its plans to actually issue SPNBs. However, in light of the OCC’s July announcement welcoming nondepository fintech companies engaged in one or more core banking functions to apply for a SPNB (previously covered by Buckley Sandler Special Alert here), Superintendent Vullo once again issued a challenge to the OCC’s decision, arguing that it is unlawful and grants federal preemptive powers over state law. Among other things, NYDFS requests the court to (i) declare that the OCC’s decision to grant SPNBs exceeds its statutory authority under the National Bank Act, and specifically that the decision improperly defines the “‘business of banking’ to include non-depository institutions,” and (ii) enjoin the OCC “from taking further actions to implement its provisions.”

    Fintech Courts NYDFS OCC State Issues Fintech Charter

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  • Court dismisses NYAG’s claims under CFPA after determining Title X is invalid

    Courts

    On September 12, the U.S. District Court for the Southern District of New York issued an order dismissing the New York Attorney General’s (NYAG) claims against a New Jersey-based finance company and its affiliates (defendants) under the Consumer Financial Protection Act (CFPA).  In doing so, the court reversed its June ruling that the NYAG could proceed with its CFPA claims despite the court’s conclusion that the CFPB’s organizational structure, as defined by Title X of the Dodd-Frank Act, is unconstitutional and therefore, the CFPB lacks authority to bring claims against the defendants, as previously covered by InfoBytes

    According to the new order, the remedy for Title X’s constitutional defect is to invalidate Title X in its entirety, which therefore invalidates the NYAG’s statutory basis for bringing claims under the CFPA.  The court concluded that it lacked jurisdiction over NYAG’s remaining state law claims and dismissed the NYAG’s action against the defendants in its entirety.

    The amended order is the culmination of a process that began with an August request by the CFPB for the court to enter a final judgment with respect to its dismissal of the CFPB’s claims, which would allow the Bureau to appeal to the U.S. Court of Appeals for the 2nd Circuit. (Previously covered by InfoBytes here.) After numerous letters were submitted by all the parties, the court granted the CFPB’s request for entry of final judgment and granted the defendant’s request to stay the NYAG claims during the pendency of the CFPB’s appeal. The NYAG subsequently responded with a letter requesting clarity on the court’s jurisdiction over the claims, which resulted in the new order dismissing the NYAG claims in their entirety.

    Courts CFPB Succession CFPA Dodd-Frank State Attorney General Single-Director Structure

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  • Federal Reserve Board approves final amendments to Regulation CC

    Agency Rule-Making & Guidance

    On September 12, the Federal Reserve Board (Board) announced the final amendments to the liability provisions of Regulation CC. The final amendments, which were proposed in June 2017, update Regulation CC’s existing liability provisions to include a presumption that a substitute or electronic check was altered in the event of disputes over whether a check has been altered or was issued with an unauthorized signature when the original check is not available. The presumption is only applicable to disputes between banks when one bank has transferred an electronic or substitute check to the other bank. The amendments are effective January 1, 2019.

    Agency Rule-Making & Guidance Federal Issues Federal Reserve Regulation CC Electronic Check

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  • District court rules U.S. securities law may cover initial coin offering in criminal case

    Securities

    On September 11, the U.S. District Court for the Eastern District of New York issued a ruling that the U.S. government can proceed with a case for purposes of federal criminal law against a New York-based businessman who allegedly made “materially false and fraudulent representations and omissions” connected to virtual currencies/digital tokens backed by investments in real estate and diamonds sold through associated initial coin offerings (ICOs). The defendant—who was charged with conspiracy and two counts of securities fraud for his role in allegedly defrauding investors in two ICOs—claimed that the ICOs at issue were not securities but rather currencies, and that U.S. securities law was unconstitutionally vague as applied to ICOs. However, the U.S. government asserted that the investments made in the tokens were “investment contracts” and thereby “securities” as defined by the Securities Exchange Act. The U.S. government further argued that the jury should apply the central test used by the U.S. Supreme Court in SEC v. W.J. Howey Co. to determine if a financial instrument “constitutes an ‘investment contract’ under the federal securities laws.” The judge commented that “simply labeling an investment opportunity as ‘virtual currency’ or ‘cryptocurrency’ does not transform an investment contract—a security—into a currency.” Moreover, while the judge cautioned that it was too early to determine whether the virtual currencies sold in the ICOs were covered by U.S. securities law, he concluded that a “reasonable jury” may find that the allegations in the indictment support such a finding.

    Securities Courts Initial Coin Offerings Virtual Currency Fraud Securities Exchange Act Fintech

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  • FinCEN issues Spanish language version of its advisory on politically exposed persons and their financial facilitators

    Financial Crimes

    On September 11, FinCEN released a Spanish version of its advisory for U.S. financial institutions to increase awareness of the connection between high-level political corruption and human rights abuses. As previously covered in InfoBytes, FinCEN issued regulatory guidance in June to remind financial institutions of their risk-based, due diligence obligations, which include (i) identifying legal entities owned or controlled by “politically exposed persons” (as required by FinCEN’s Customer Due Diligence Rule); (ii) complying with anti-money laundering program obligations; and (iii) filing Suspicious Activity Reports related to illegal activity undertaken by senior foreign political figures.

    Financial Crimes FinCEN CDD Rule Anti-Money Laundering SARs

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  • District Court holds Department of Education stay of student loan regulations is procedurally invalid

    Courts

    On September 12, the U.S. District Court for the District of Columbia granted a motion for summary judgment in favor of a consolidated action brought by a coalition of 19 state Attorneys General and the District of Columbia as well as two student borrowers (collectively, the plaintiffs), holding that the Department of Education’s (Department) decision to delay the enactment of Final Regulations (81 FR 75926) (also known as the “Borrower Defense Regulations” or “regulations”) was “procedurally invalid.” The Borrower Defense Regulations, published November 2016, afford students protections against misleading and predatory practices by postsecondary institutions (see previous InfoBytes coverage here), and were set to take effect July 1, 2017. However, the Department delayed the effective date pending the resolution of a lawsuit challenging certain portions of the regulations filed by the California Association of Private Postsecondary Schools; delayed the effective date further through an interim rule issued in October 2017; and last February, issued a final rule further delaying the effective date until July 1, 2019.

    The Department argued it was entitled to a stay under Section 705 of the Administrative Procedure Act because the lawsuit “raised serious questions concerning the validity of certain provisions of the final regulations and ha[d] identified substantial injuries that could result if the final regulations [went] into effect before those questions [were] resolved.” The court disagreed with the Department’s argument, finding that in order to justify a Section 705 stay, “an agency must, in short, do more than simply assert—without elaboration—that the litigation raises unspecified ‘serious questions’ for resolution and that a stay will save regulated parties the cost of compliance.” Moreover, the court concluded that (i) plaintiffs have standing to challenge the Department’s delay actions; (ii) the Department’s 2017 interim final rule “is based on an unlawful construction of the Higher Education Act”; (iii) the February final rule is “procedurally invalid”; and (iv) the Section 705 stay is “judicially reviewable” and “arbitrary and capricious.”

    Courts Department of Education Student Lending State Attorney General Higher Education Act

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  • DOJ settles with apartment owner for alleged SCRA violations

    Consumer Finance

    On September 11, the Department of Justice announced a settlement with a Nebraska apartment complex owner resolving allegations that it violated the Servicemembers Civil Relief Act (SCRA) by unlawfully charging lease termination fees for 65 servicemembers. The complaint, which was filed on the same day as the settlement, alleges that between January 2012 and June 2017, the apartment complex owner imposed early lease termination fees, ranging from $78 to almost $1,500, on servicemembers who sought termination due to qualifying military orders under the SCRA. The settlement requires the apartment complex owner, among other things, to (i) pay more than $76,000 in damages to the 65 identified servicemembers; (ii) pay a $20,000 civil money penalty, and (iii) develop policies and procedures related to SCRA lease terminations.

    Consumer Finance DOJ SCRA Settlement Servicemembers

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