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FinCEN renews real estate GTOs
On April 17, FinCEN renewed its Geographic Targeting Orders (GTOs) which require title insurance companies to identify the real owners of shell companies involved in cash real estate purchases. This renewal is effective from April 19, through October 15, and applies to specified counties and cities across various states, including California, Florida, New York, and the District of Columbia. The GTOs aim to gather data on potential illicit activities in the housing market and support regulatory initiatives. The minimum property purchase price for reporting remains at $300,000, except in Baltimore, where it is $50,000. FinCEN is also processing feedback from a February proposed rulemaking on anti-money laundering measures for the residential real estate sector.
FinCEN FAQs regarding the GTOs are available here.
FinCEN releases notice on U.S. passport card’s counterfeit use in finance
On April 15, FinCEN, along with the Department of State, released its notice on the apparent rise of counterfeit use of U.S. passport cards at financial institutions. FinCEN urged financial institutions to be “vigilant” in the fight against identity theft and fraud schemes, especially under their BSA practices. Since 2018, the Department of State has identified a “concerning increase” in counterfeit use of U.S. passport cards with apparently over 4,000 victims. FinCEN released this notice to help financial institutions identify and report suspicious activity by promoting three areas: (i) providing an overview of common scenarios and typologies; (ii) highlighting several red flags in areas of concern; and (iii) reminding financial institutions of their BSA obligations.
The notice discussed suspicious behavior, namely how individuals and fraud rings are falsely “making, selling, and using” counterfeit U.S. passport cards to access accounts at financial institutions. FinCEN noted actors prefer using U.S. passport cards since they are a less familiar form of identification and cheaper to counterfeit (compared to passport books). On fraudulent activity, FinCEN stated actors will use counterfeit U.S. passport cards to impersonate the victim at the victim’s “known financial institution branch.” After accessing the account successfully, the Department of State highlighted three types of attempted transactions: (1) asking questions on account balance and withdrawal limits and withdrawing large amounts of cash below the Currency Transaction Reporting (CTR) threshold; (2) cashing stolen or forged checks to obtain funds; and (3) establishing a new joint account with a second illicit actor as a joint owner. FinCEN outlined technical, behavioral, and financial red flags to help financial institutions detect and report suspicious activity. Red flags may include technical issues with a U.S. passport card’s photo, such as lack of raised text, and discrepancies in its holographic seal, among others. Last, FinCEN reminded financial institutions of BSA obligations, including, but not limited to, filing Suspicious Activity Reports (SARs) and CTRs.
Virginia enacts new prohibitions against certain electronic fund transfer fees
On April 17, the Virginia legislature enrolled HB 1519 into law, which amended provisions of the Virginia Code related to fees for electronic fund transfers. The legislation amended the Residential Landlord and Tenant Act to prohibit landlords from charging a tenant a processing fee for using an electronic fund transfer for the payment of either a security deposit, rent, or “any other amounts payable.” The legislation also amended the Virginia Consumer Protection Act to prohibit a supplier from charging a fee to a consumer for using an electronic fund transfer to purchase a good or service. However, this prohibition explicitly does not apply to ATM withdrawals or expedited service on an electronic fund transfer. The Act went into effect immediately upon enactment.
DOJ appeals District Court's ruling on the Corporate Transparency Act’s constitutionality
On April 15, the DOJ submitted a brief to the U.S. Court of Appeals for the Eleventh Circuit in support of an appeal of a summary judgment from the Northern District of Alabama that found the Corporate Transparency Act (CTA) unconstitutional, specifically its reporting provision (covered by InfoBytes here). On appeal, the government emphasized that the District Court misunderstood the scope and purpose of the CTA and made two key errors in invalidating it. The first error, according to the DOJ, is that the court mistakenly viewed the CTA as merely regulating the act of filing the incorporation papers, which generally falls under State domain, as opposed to regulating commerce, which Congress has the power to regulate. As to the second error, the DOJ noted that the District Court mischaracterized the CTA as a “single-subject statute” that is unrelated to the federal government’s broader efforts to combat financial crimes, such as money laundering and terrorism financing. The DOJ pointed out that, ownership records often do not exist, which makes the CTA necessary in order to help investigators trace illicit funds by creating easily accessible ownership records. The DOJ also stressed that the determination by Congress that the CTA’s reporting requirements are necessary to detect and prosecute financial crimes should be subject only to “rational basis” review, a standard that the CTA satisfies.
New York AG settles with bank over EIPA violations
On April 17, the New York attorney general (AG) announced a settlement with a bank (respondent) to resolve allegations that respondent improperly froze customer accounts and paid out consumer funds to debt collectors, and failed to properly oversee its service providers engaging in similar activity, in violation of the Exempt Income Protection Act (EIPA). The EIPA requires that banks, among other things, “not restrain consumers’ use of statutorily exempt funds, such as social security benefits, veterans benefits, and disability insurance… in consumers’ bank accounts up to an amount set every three years by New York’s Department of Financial Services.” New York law also bars debt collectors from acquiring funds that include certain government benefits.
According to the settlement, respondent typically employs the assistance of specific third-party servicer providers to market and deliver banking products like debit cards, prepaid cards, payroll cards, or gift cards to consumers while respondent holds the funds loaded onto those cards. Servicer providers administer the program and interact with consumers, including by clearing transactions through a network processor approved by respondent, and generally handling transaction disputes and preparing account statements, while respondent oversees and monitors the program and the service provider while retaining full control of the funds. The AG claimed that respondents failed to ensure its servicer providers complied with the EIPA, and that on numerous occasions, servicer providers allegedly froze accounts holding exempt funds or accounts with balances below legal thresholds, then paid debt collectors with the frozen funds under the instruction of respondent.
According to the AG, respondent’s servicer providers also engaged in deceptive acts and practices by allegedly falsely labeling legal processes as “court orders” instead of documents from debt collectors. Respondents also allegedly provided false information that account freezes could not be lifted even when account balances were below legal thresholds, and falsely claiming only debt collectors could release the freeze. Additionally, servicer providers allegedly directed consumers to debt collectors who often sought deals to release account freezes for a portion of the account balance, despite the freezes being void and subject to the protected wage threshold.
Under the terms of the settlement, respondent will refund $79,664 plus interest to approximately 88 New Yorkers whose funds were wrongfully turned over to debt collectors and amend its policies and procedures. Respondent must also pay a civil money penalty of $627,000, and comply with ongoing monitoring and compliance requirements.
OCC releases enforcement actions for April 2024
On April 18, the OCC released a list of recent enforcement actions against national banks, federal savings associations, and individuals affiliated with such entities (defined as institution-affiliated parties, or IAPs). The actions against banks include two formal agreements and one cease and desist order against three individual banks. In each instance, the OCC alleged that the banks engaged in unsafe or unsound practices related to some combination of board oversight, liquidity management, capital requirements, or credit risk. With respect to IAPs, the announcement included four enforcement actions against IAPs to “deter, encourage correction, or prevent violations, unsafe or unsound practices, or breaches of fiduciary duty,” The OCC issued prohibition orders, which prohibit the IAP from any participation in affairs of a bank or other institution), for all four IAPs and assessed civil money penalties ranging from $40,000 to $400,000 against three of them. The announcement also included two more prohibition orders against two additional IAPs for criminal activities. More information on the OCC’s enforcement action types can be found here.
Fed’s Bowman discusses risk management and bank supervision
On April 18, Fed governor Michelle Bowman delivered opening remarks at the Regional and Community Banking Conference in New York. During her speech, Bowman acknowledged the recent challenges that have impacted the U.S. banking system. She pointed out that recent events, including the pandemic, a rapid rise in inflation and interest rates, market uncertainties, and bank failures, have brought traditional risks, such as liquidity and interest rate risks, to the forefront, while other risks, like cybersecurity and third-party risks, “continue to evolve and pose new challenges.”
Bowman emphasized the importance of banks having robust risk management frameworks to identify and control both existing and emerging risks. She also stressed the need for banks to innovate responsibly and adapt their risk management as new products and services are introduced, while cautioning that regulators must balance supervision and regulation so as not to stifle responsible innovation. In light of the recent bank failures, Bowman also underscored the need for banks to have of contingency funding plans in place, which may include borrowing from the Federal Home Loan Banks or the Fed’s discount window. While regulators can encourage banks to maintain and test these plans, she noted that they should not overstep their role and interfere with management decisions.
Highlighting that these evolving risks can be exacerbated by inadequate bank supervision and acknowledging the need for a review and potential adjustments in supervision following the recent bank failures, Bowman stressed that supervision should remain commensurate to a bank’s size, complexity, and risk profile, and should focus on core and emerging risks so as not to impair the long-term viability of the banking system, including mid-sized and smaller banks.
OCC seeks input on LCR and NSFR reporting and recordkeeping requirements
On April 16, the OCC released a request for comment on proposed revisions to its “Reporting and Recordkeeping Requirements Associated with Liquidity Coverage Ratio: Liquidity Risk Measurement, Standards, and Monitoring” to account for three new recordkeeping requirements to be included in 12 CFR part 50, which applies to large national banks and Federal savings associations. The notice outlined steps that such institutions should take to ensure they properly document compliance with the “liquidity coverage ratio” (LCR), which is designed to “promote the short-term resilience” of a bank’s liquidity risk profile, and the “net stable funding ratio” (NSFR), which is designed to reduce disruptions to a bank’s funding sources. The revised reporting obligations require covered institutions to self-report when LCR falls below the minimum threshold or when there is an NSFR shortfall and, in some cases, to submit a liquidity or remediation plan, including estimated time frame for resuming compliance with LCR or NSFR requirements. The recordkeeping revisions require covered entities to, among other things, establish and maintain written policies and procedures for a number of processes, including monitoring changes in relevant laws related to master netting agreements, determine the composition of its eligible high-quality liquid assets (HQLA), and ensure consistent treatment for determining eligible HQLA. Comments must be received by June 17.
FHFA seeks public input on new closed-end second mortgage product
On April 22, the FHFA sent to the Federal Register a notice of a proposed new product from Freddie Mac to begin purchasing certain single-family closed-end second mortgages. According to the proposal, Freddie Mac would purchase certain closed-end second mortgage loans from approved and active sellers and on properties for which Freddie Mac already owns the first mortgage, subject to additional product and term limitations. FHFA’s stated goal is to offer borrowers a second mortgage at a lower interest rate than other financing alternatives given the higher interest rate environment, and increased competition among second mortgage lenders. FHFA requested comments on nine questions, with comments to be received by May 22.
Republican House Financial Services Committee members seek clarity on 1071 rule implementation timeline
On April 18, Republican members of the House Financial Services Committee sent a letter to CFPB Director Rohit Chopra to express concern over the lack of clarity regarding the implementation timeline of the CFPB’s small business data collection rule, referenced as the 1071 Rule. As previously covered by InfoBytes, in October of last year, a Texas District Court issued a preliminary injunction that required the CFPB to halt implementation of the 1071 Rule, and directed the Bureau to extend the rule’s compliance deadline “to compensate for the period stayed.” In the letter, republican lawmakers stress that the CFPB has been “reluctant” to confirm whether it will comply with the court order, which has led to confusion among regulated financial institutions regarding compliance timeframe with the 1071 Rule. The letter also highlights that some prudential regulators are reportedly advising institutions to prepare for compliance by October 1, despite the court order. Accordingly, Republican members urge the CFPB to provide clear guidance affirming compliance with the court order and extending deadlines accordingly, including with respect to the rule’s transition period for data collection and reporting requirements.