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DOJ fines company for circumventing North Korean sanctions
On August 31, the DOJ announced that a company operating in South East Asia has pleaded guilty to “conspiring to launder monetary instruments in connection with evading sanctions on North Korea and deceiving correspondent banks into processing U.S. dollar transactions.” The company admitted and accepted responsibility for the criminal conduct and will pay a $673,714 fine. According to the DOJ, from at least February 2017 until at least May 2018, the company’s dual invoicing practices and false statements concealed the purchase of commodities for North Korean customers, leading to U.S. correspondent banks processing U.S. dollar transactions that would otherwise not have been authorized. Among other things, the company and its co-conspirators admitted to using front companies to “conceal the North Korean nexus,” including utilizing financial cutouts and falsifying shipping records. These actions, the DOJ stated, circumvented the U.S. correspondent banks’ sanction and anti-money laundering filters, which are designed to prevent banks from processing wire transfers on behalf of customers located in North Korea. In addition to paying the financial penalty, the company has agreed to “implement rigorous internal controls” and cooperate fully with the DOJ.
Massachusetts AG sues auto lender for deceptive loans
On August 31, the Massachusetts attorney general announced an action against a national auto lender for allegedly making unfair and deceptive auto loans and engaging in unfair debt collection practices. According to the complaint, since 2013, the auto lender allegedly made “high-risk high-interest subprime” loans to Massachusetts borrowers who the lender “knew or should have known were unable to repay their loans,” in violation of the Massachusetts Consumer Protection Act. Additionally, the attorney general asserts that consumers were subject to “hidden finance charges,” which resulted in consumers’ actual interest rates being higher than the state’s usury ceiling of 21 percent. Moreover, the lender’s collection employees allegedly “harassed” consumers in default by calling them “as often as eight times a day,” when state law limits collection calls to no more than two calls per week, sent improper repossession notices, and failed to use the correct fair market value when calculating deficiency amounts. Lastly, the attorney general argues that the lender used “false or misleading statements” concerning the characteristics of the loans packaged and securitized to investors.
The attorney general is seeking a permanent injunction, restitution, and civil penalties.
Trade groups amend Payday Rule complaint
On August 28, two payday loan trade groups (plaintiffs) filed an amended complaint in the U.S. District Court for the Western District of Texas in ongoing litigation challenging the CFPB’s 2017 final rule covering payday loans, vehicle title loans, and certain other installment loans (Rule). As previously covered by InfoBytes, the court granted the parties’ joint motion to lift the stay of litigation, which was on hold pending the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert, holding that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau). In light of the Supreme Court’s decision, the Bureau ratified the Rule’s payments provisions and issued a final rule revoking the Rule’s underwriting provisions (covered by InfoBytes here).
The amended complaint requests the court set aside the Rule and the Bureau’s ratification of the rule as unconstitutional and in violation of the Administrative Procedures Act (APA). Specifically, the amended complaint argues, among other things, that the Bureau’s ratification is “legally insufficient to cure the constitutional defects in the 2017 Rule,” asserting the ratification of the payment provisions should have been subject to a formal rulemaking process, including a notice and comment period. Moreover, the amended complaint asserts that the payment provisions are “fundamentally at odds” with the Bureau’s lack of authority to create usury limits because they “improperly target[] installment loans with a rate higher than 36%.” Finally, the amended complaint argues that the Bureau “arbitrarily and capriciously denied” a petition from a lender seeking to exempt debit-card payments from the payment provisions of the rules.
Court approves settlements in CFPB student debt relief action
On August 26 and 28, the U.S. District Court for the Central District of California entered two final judgments (see here and here) against four of the defendants in an action brought by the CFPB, the Minnesota and North Carolina attorneys general, and the Los Angeles City Attorney alleging a student loan debt relief operation deceived thousands of student-loan borrowers and charged more than $71 million in unlawful advance fees. As previously covered by InfoBytes, the complaint alleged that the defendants violated the Consumer Financial Protection Act, the Telemarketing Sales Rule, and various state laws by charging and collecting improper advance fees from student loan borrowers prior to providing assistance and receiving payments on the adjusted loans. In addition, the complaint asserts the defendants engaged in deceptive practices by misrepresenting (i) the purpose and application of fees they charged; (ii) their ability to obtain loan forgiveness; and (iii) their ability to actually lower borrowers’ monthly payments.
The finalized settlements suspend a total judgment of over $95 million due to the defendants’ inability to pay, and requires the two defendants who settled on August 26, to pay a total of $75,000 to Minnesota, North Carolina, and California, and $1 each to the CFPB, in civil money penalties, and the two defendants who settled on August 28, to pay a total of $15,000 to the respective states and $1 to the CFPB in civil money penalties. In addition to the monetary penalties, the defendants are required to relinquish certain assets and submit to certain reporting and recordkeeping requirements. All four defendants neither admit nor deny the allegations, as part of the settlements.
Court backs FTC’s $120 million settlement in Belizean real estate scheme
On August 28, the U.S. District Court for the District of Maryland granted the FTC’s request for four individuals and the remaining corporate defendants who have not yet settled (collectively, “defendants”) to pay over $120 million in redress to resolve allegations the defendants operated an international real estate investment development scheme. As previously covered by InfoBytes, in November 2018, the FTC initiated the action against the individuals, several corporate entities, and a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule (TSR) by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. The FTC contends that consumers who purchased lots in the development purchased the lots outright or made large down payments and sizeable monthly payments, and paid monthly homeowners association fees, and that defendants used the money received from these payments to fund their “high-end lifestyles,” rather than to invest in the development. In September 2019, the FTC settled with the Belizean bank, requiring the bank to pay $23 million in equitable relief, including consumer redress (covered by InfoBytes here).
Following a trial, the district court has now agreed with the FTC, concluding that the remaining defendants violated the FTC Act and the TSR. The court found the defendants jointly and severally liable for over $120 million in restitution and granted the FTC’s request for permanent injunctions—banning the defendants from any telemarketing activity and banning one defendant, described as “nothing less than the mastermind” of the operations, from “engaging in any kind of real estate activity” in the future.
CFPB examines early effects of Covid-19 on consumer credit
On August 31, the CFPB released a report on the early effects of the Covid-19 pandemic on consumer credit outcomes. The report analyzed a “nationally representative sample of approximately five million de-identified credit records maintained by one of the three nationwide consumer reporting agencies,” and examined trends in delinquency rates, payment assistance, credit access, and account balance measures. According to the report, trends showed that there was an overall decrease in delinquency rates since the start of the pandemic among auto loans, first-lien mortgages, student loans, and credit cards; however, the Bureau emphasized that the analysis takes a deeper dive “into measuring how these outcomes differed based on consumer and geographic characteristics compared to earlier work.” Highlights from the report include: (i) new delinquencies fell between March and June of 2020; (ii) borrower assistance appeared to be concentrated in areas that were more severely affected by the pandemic, with sharp increases in the number of accounts reporting zero payment due despite a positive balance; (iii) financial institutions closed existing lines of credit and halted credit limit increases for open accounts primarily for borrowers with high credit scores or for inactive cards; and (iv) credit card balances decreased by roughly 10 percent between March and June, which, according to the report, is consistent with other data that shows a decline in consumer spending.
New York regulator issues guidance to regulated mortgage lenders and servicers regarding fees
On September 1, the New York Department of Financial Services issued industry guidance instructing regulated mortgage lenders and servicers not to charge (or pass through to) consumers for mortgage default registration fees. The press release announcing the guidance notes that certain counties, cities, and municipalities in New York require mortgagees to pay a fee to register mortgages declared to be in default. Noting that consumers are facing financial hardship arising from the Covid-19 pandemic, the DFS guidance provides that these fees may not be passed on to consumers. Moreover, lenders and servicers who have charged consumers such fees must provide refunds, and must create a log of all borrowers who were charged such fees.
South Dakota extends work from home guidance
On September 1, South Dakota’s Division of Banking updated Memorandum 11-003 (previously covered here and here) to extend the time period in which licensed mortgage loan originators can work from home until December 31, 2021, so long as certain conditions relating to data and records security are met.
Nutrition company settles DOJ, SEC FCPA charges for over $123 million
On August 28, the DOJ and the U.S. Attorney’s Office for the Southern District of New York announced (see here and here) they had entered into a deferred prosecution agreement with a multinational nutrition company headquartered in Los Angeles, in which the company agreed to pay a criminal fine of over $55.7 million related to violations of the FCPA’s books and records provisions. According to the DOJ, the company “knowingly and willfully conspired with others in a scheme to falsify its books and records and provide corrupt payments and benefits to Chinese government officials.” Between 2007 and 2016, the company’s books showed that its Chinese subsidiary reimbursed its employees “more than $25 million for entertaining and giving gifts to Chinese government officials and Chinese media personnel. . ., some of which was used for improper purposes,” which the DOJ said was part of a scheme to obtain, retain, and increase business in China and remove negative media reports about the subsidiary. The payments were used to obtain and retain “certain direct selling licenses for its wholly-owned subsidiaries in China” and to “improperly influenc[e] certain Chinese governmental investigations into [the subsidiary’s] compliance with Chinese laws,” as well as to influence state-owned or controlled media.
As part of the deferred prosecution agreement, the company agreed to cooperate with the DOJ’s ongoing or future criminal investigations and to enhance its compliance program. The company received credit for cooperating with the investigation and taking remedial measures such as “terminating and disciplining individuals who orchestrated the misconduct, adopting heightened controls and anti-corruption protocols, and significantly increasing the resources devoted to compliance.”
The SEC simultaneously announced a resolution in which the company agreed to pay over $58.6 million in disgorgement and more than $8.6 million in prejudgment interest to settle allegations that the company violated the FCPA’s books and records and internal accounting controls provisions.
California DBO addresses MTA licensing exemptions
Last month the California Department of Business Oversight (CDBO) released two new opinion letters covering aspects of the California Money Transmission Act (MTA) related to the sale of foreign currency and the agent of the payee exemption.
- Sale of Foreign Currency. The redacted opinion letter concludes that the company’s banknote replenishment service does not trigger the licensing requirements of the MTA because the company does not engage in “selling or receiving payment instruments, selling or receiving stored value, or receiving money for transmission.” Moreover, the CDBO determined that the company “does not issue anything to the business except for the foreign currency that was ordered, and does not receive money from the business for purpose of transmission.”
- Agent of Payee Exemption - Payment Processing Service. The redacted opinion letter concludes that neither the company’s pay-in services nor pay-out services are exempt from the MTA. According to the letter, the company provides payment processing services to online gaming operators (merchants), which allow the merchants’ customers to submit payments to engage in online gaming, such as sports betting and daily fantasy sports betting. The CDBO determined that the pay-in and pay-out services provided by the company “constitute ‘receiving money for transmission,’” as required for the MTA to apply, because the company “receives money from the [c]ustomers for transfer to the [m]erchants” for the pay-in service and “receives money from the [m]erchants for transfer to the [c]ustomers” for the pay-out service. However, the agent of the payee exemption does not apply to the pay-in services, despite an agreement that establishes the company as the merchant’s agent, because the funds received by the company are not owed to the merchant when they are received by the company. Instead, such funds are retained in an account for the benefit of the merchant until a gambling debt is owed to the merchant. For the pay-out services, the exemption does not apply because the merchant’s customer does not provide any goods or services to the merchant for which the merchant’s payment to the customer is owed. The CDBO also advised that some of the proposed payments described in the company’s request may involve sports betting, which is an illegal activity in the state, and cautioned that the opinion “applies only to activities that are currently legal in California and does not relieve [the company] from its obligation to comply with other applicable state and federal laws.” Furthermore, the CDBO stated that MTA licenses cannot be issued to companies engaged in the transmission of money to facilitate unlawful activities.