September 26 – Read the newsletter below for the latest Mortgage Banking and Consumer Finance industry news, written by Ballard Spahr attorneys. In this issue, we explore the demise of the Chevron doctrine through podcasts, this week’s happenings at the CFPB, FinCEN’s latest Rule, and much more.
- This Week’s Podcast Episode: The Demise of the Chevron Doctrine – Part I
- This Week’s Podcast Episode: The Demise of the Chevron Doctrine – Part II
- DOL Authority to Increase Overtime Compensation Thresholds Affirmed
- Plaintiffs Free to Appeal the CFPB 1071 Rule After Some Plaintiffs Drop Their CFPB Unlawful Funding Claim
- The CFPB to Host ‘First Look’ at Nonbank Enforcement Order Registry
- The CFPB: Most Debt Collection Complaints in 2023 Were Attempts to Collect Debts Not Owed
- FinCEN Finalizes Rule Subjecting Investment Advisers to AML/CFT Regulations
- CFPB’s Frotman: Companies Are Using Technology to Squeeze More Out of Those Who Can Least Afford It
- Looking Ahead
This Week’s Podcast Episode: The Demise of the Chevron Doctrine – Part I
On June 28, in Loper Bright v. Raimondo, et al., the U.S. Supreme Court overturned the Chevron deference doctrine, a long-standing tenet of administrative law established in 1984 in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. This doctrine directed courts to defer to a government agency’s interpretation of a statute if the statute was ambiguous regarding, or simply did not address, the issue before the court, as long as the interpretation was reasonable.
However, legal scholars now express widely divergent views as to the scope and likely effects of Loper Bright’s overruling of the Chevron doctrine on the future course of regulatory agency interpretive and enforcement authority.
In this two-part episode, which repurposes a recent webinar, a panel of experts delves into the Loper Bright decision, and its underpinnings, rationale, and likely fallout.
Our podcast features moderator, Senior Counsel and former practice leader of Ballard Spahr’s Consumer Financial Services Group, Alan S. Kaplinsky; Ballard Spahr Partners Richard J. Andreano, Jr. and John L. Culhane, Jr.; and special guests Craig Green, Charles Klein Professor of Law and Government at Temple University Beasley School of Law, and Kent Barnett, recently appointed Dean of the Moritz College of Law at The Ohio State University.
In Part I, we first review the history of judicial deference to agency interpretations in American courts throughout the nineteenth and twentieth centuries, culminating in the advent of Chevron deference. We then discuss post-Chevron developments, including shifts in judicial and political views of the role courts should play in interpretation of agency action.
Then, we turn to an in-depth discussion of the majority opinion in Loper Bright, authored by Chief Justice Roberts, including its reliance on the Administrative Procedure Act to invalidate Chevron deference and the opinion’s numerous ambiguities that result in a “very, very fuzzy” outcome, leaving regulated industries facing uncertainty as to whether or not courts will uphold agency rules. We then explore other topics including the majority opinion’s endorsement of an approach courts should take to review agency actions as described in a 1940’s case, Skidmore v. Swift & Co.; what deference may or may not be given to agency policy-making and fact-finding in light of Loper Bright; and the divergent views of some legal scholars who suggest that many courts will continue to give broad deference to agency views notwithstanding Loper Bright.
Additional information about the Loper Bright decision and related developments may be found in our blogs, here, here, and here.
To listen to this episode, click here.
This Week’s Podcast Episode: The Demise of the Chevron Doctrine – Part II
On June 28, in Loper Bright v. Raimondo, et al., the Supreme Court overturned the Chevron deference doctrine, a long-standing tenet of administrative law established in 1984 in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. This doctrine directed courts to defer to a government agency’s interpretation of ambiguous statutory language as long as the interpretation was reasonable. However, legal scholars now express widely divergent views as to the scope and likely effects of Loper Bright’s overruling of the Chevron doctrine on the future course of regulatory agency interpretive and enforcement authority.
In this two-part episode, which repurposes a recent webinar, a panel of experts delves into the Loper Bright decision, and its underpinnings, rationale, and likely fallout. Our podcast features moderator, Senior Counsel and former practice leader of Ballard Spahr’s Consumer Financial Services Group, Alan S. Kaplinsky; Ballard Spahr Partners Richard J. Andreano, Jr. and John L. Culhane, Jr.; and special guests Craig Green, Charles Klein Professor of Law and Government at Temple University Beasley School of Law, and Kent Barnett, recently appointed Dean of the Moritz College of Law at The Ohio State University.
Part II opens with an in-depth discussion of the major questions doctrine (which bars agencies from resolving questions of great economic and political significance without clear statutory authority), how it has evolved, and its interaction with Chevron deference. Our experts offer predictions as to the likely role of the major questions doctrine in post-Chevron jurisprudence, and touch on the non-delegation doctrine (which prevents Congress from delegating legislative power). We also refer to the effects of another recent Supreme Court decision, Corner Post, Inc. v Board of Governors of the Federal Reserve System, which expands the time during which entities new to an industry may challenge longstanding agency rules.
We then consider the practical effects of the Loper Bright and Corner Post decisions on pending and future litigation. Partners Richard Andreano and John Culhane discuss concrete examples of cases currently progressing through the courts that already are evidencing the effects of Loper Bright, and ways in which arguments now are being articulated or might be articulated in litigation challenging a number of regulatory rules and interpretations in the absence of Chevron deference.
We proceed to explore other significant topics including the validity of prior decisions of the Supreme Court and lower courts that were based exclusively on the Chevron doctrine. Our panel then opines on whether Loper Bright, both in its entirety and as to certain of its specific constituent elements, is “good” or “bad” for the consumer financial services industry and for regulated entities in general.
In conclusion, Mr. Andreano cites concerns about how courts may apply alternative deference guidance that remains in place (including Skidmore deference, discussed in Part I of this podcast), and Mr. Culhane expresses hope that the outcome in Loper Bright might move agencies to engage in more thorough, thoughtful, and precise analysis in the rulemaking process.
To listen to this episode, click here.
DOL Authority to Increase Overtime Compensation Thresholds Affirmed
On September 11, 2024, the United States Court of Appeals for the Fifth Circuit issued its opinion in Mayfield v. Department of Labor, upholding the authority of the Department of Labor (DOL) to establish a minimum salary level for the white-collar exemption for overtime eligibility.
The white-collar exemption excludes employees in bona fide executive, administrative, or professional roles from being subject to the overtime requirements of the Fair Labor Standards Act (FLSA). Qualifying workers under the exemption are defined based on their duties and job types, though the DOL has historically issued a minimum salary requirement that prevents employees from qualifying if their salary falls below a specified level. In justifying its use of a salary level test, the DOL takes the position that the terms of the white-collar exemption connote a level of status and prestige for which salary can be a reasonable proxy and that salary can be an effective reflection of an employee’s actual job duties.
Though the DOL recently issued a final rule raising the white-collar exemption minimum salary (see our coverage here), the basis of this litigation was a challenge to the DOL’s increase to the minimum salary in 2019. At that time, the DOL raised the threshold required to qualify under the white-collar exemption from $455 per week to $684 per week. The plaintiff, a small business owner, argued that the DOL lacked the requisite statutory authority to define the terms of the white-collar exemption by salary level rather than solely by job duties.
Turning to the Supreme Court’s recent opinion in Loper Bright Enterprises v. Raimondo, the Fifth Circuit panel stated its duty to “independently interpret the statute and effectuate the will of Congress subject to constitutional limits.” Because Congress provided an “explicit delegation of authority” in the FLSA for the DOL to “define” and “delimit” the terms of the white-collar exemption, the court’s analysis turned on whether the 2019 rule was within the “outer boundaries of that delegation.” The court found that the use of salary level as a proxy for white-collar status is permissible as it has a “strong[] textual foundation” and “the link between the job duties identified and salary is strong.” However, the court clarified that its holding “does not mean . . . that use of a proxy characteristic will always be a permissible exercise of the power to define and delimit,” noting that “[i]f the proxy characteristic frequently yields different results than the characteristic Congress initially chose,” the proxy is inappropriate.
The DOL will likely rely on this ruling to defend the several pending legal challenges to the latest increases to the minimum salary exemption, which raise the minimum salary to $844 per week effective July 1, 2024, and to $1,128 per week effective January 1, 2025. A federal district court in Texas granted a limited injunction blocking enforcement of that rule against the state of Texas while another federal court in Texas refused to enjoin the application of the rule to other employers as the lawsuit continues. Any decision on the 2024 rule is sure to be appealed to the Fifth Circuit where the limits of the Mayfield decision, and any subsequent review by the United States Supreme Court, are sure to be tested.
Ballard Spahr’s Labor and Employment Group frequently advises employers on issues related to worker misclassification and the development of wage and hour policies. We also regularly defend employers in wage and hour litigation and DOL investigations. Please contact us if we can assist you with these matters.
On August 26, 2024, Chief Judge Randy Crane in the S.D. Texas granted summary judgment to the CFPB, denied summary judgment to the trade groups and upheld the CFPB’s 1071 Rule (small business loan data collection rule).
On August 2, 2024, the Farm Credit Intervenors (three organizations who long ago intervened as plaintiffs in order to take advantage of a preliminary injunction against the CFPB granted to the original plaintiffs based on the Fifth Circuit’s opinion in CFSA v. CFPB) filed a motion to amend their complaint in intervention. On that same date, the Farm Credit Intervenors filed a motion for judgment on the pleadings. Both the amended complaint and the motion for judgment on the pleadings argued that the 1071 Rule is invalid because the development and promulgation of the Rule was unlawfully funded from the Federal Reserve Board because there was no “combined earnings of the Federal Reserve System” after September 2022, and the CFPB must, under the Dodd-Frank Act, be funded out of such “combined earnings.”
As a result of the fact that these motions were still pending before the district court, none of the plaintiffs had the right to appeal the judgment against them to the United States Court of Appeals for the Fifth Circuit. However, on September 13, the Farm Credit Intervenors dismissed without prejudice their pending motions to amend the complaint and for judgment on the pleadings with respect to the CFPB funding issue. As a result of that development, we can expect that the plaintiffs will very soon file a notice of appeal to the Fifth Circuit with respect to the judgment against them pertaining to the 1071 Rule.
As a result of the Farm Credit Intervenors withdrawing their motions, we are not aware of any instance where a challenge has been made to a CFPB regulation based on the claim that the CFPB has been unlawfully funded after September, 2022. In the meantime, there are five CFPB enforcement matters in which the unlawful funding issue has already been raised, including two cases that have been fully briefed.
Alan S. Kaplinsky, Richard J. Andreano, Jr., Loran Kilson & Kaley N. Schafer
The CFPB to Host ‘First Look’ at Nonbank Enforcement Order Registry
The CFPB has scheduled two sessions to provide a preview of its nonbank enforcement order registry. The virtual-only discussions are scheduled for September 30 and October 9. Both sessions will feature the same content.
The bureau said that the events are intended for compliance staff that will be registering covered orders with the CFPB’s nonbank enforcement order registry.
At the event, the CFPB’s nonbank registry team will provide a demonstration of first-time company registration, give a tour of the features of the registry, and take technical questions.
Those interested in attending a session may register using the links below:
- September 30, 2024, from 11:00am to 12:30pm (Eastern Time)
- October 9, 2024, from 1:30pm to 3:00pm (Eastern Time)
The CFPB stressed that the sessions are intended to be technical readiness events. Agency staff will not take questions about the rule. The bureau said that questions about compliance with the rule may be addressed to the CFPB’s NBR Help email (NBRHelp@cfpb.gov) to receive assistance.
The CFPB issued the rule in June. The rule requires certain nonbank entities to register with the CFPB if they are subject to, or become subject to, various orders from local, state, or federal agencies or courts involving violations of specified consumer protection laws. The registry rule applies to supervised and non-supervised nonbank entities, that engage in offering or providing a consumer financial product or service, and any of their service provider affiliates that are subject to a covered order, unless excluded.
The rule went into effect on September 16, 2024, with registrations available beginning on October 16, 2024 pursuant to a tiered implementation approach.
Richard J. Andreano, Jr., John D. Socknat & Reid F. Herlihy
The CFPB: Most Debt Collection Complaints in 2023 Were Attempts to Collect Debts Not Owed
The most frequent consumer debt collection complaints filed with the CFPB in 2023 were attempts to collect debts that actually were not owed, the bureau said in its annual Fair Debt Collection Practices Act report.
The CFPB said that those complaints amounted to 53 percent of the debt collection complaints filed with the bureau in 2023.
Many of the complaints filed by the bureau were similar to those filed in 2022, the bureau noted.
“Complaints about attempts to collect a debt that the consumer reports is not owed has been the predominant issue selected by consumers since the CFPB began accepting debt collection complaints in 2013,” the CFPB said. The bureau warned that debt collectors who pursue consumers for incorrect amounts may be violating the FDCPA and that the CFPB will take action where that is occurring.
The CFPB said that one trend may be contributing to the frequency of complaints–the “financialization” of various consumer markets, that is, the increased offering of financial products or services in the market, as well as the introduction of new financial products or services in the market, particularly in the medical and rental-housing markets.
The CFPB focused much of the report on medical debt and reported that:
- Complaints about consumers failing to receive written notification were the second-most common issue raised by consumers. The bureau said that 69 percent of the people filing complaints about written notifications said they had not receive enough information to verify the debt. Those types of complaints were particularly common in complaints about medical debt, according to the CFPB.
- Consumers also filed complaints with the agency regarding the collection of allegedly owed medical bills that they said already had been paid through the financial assistance programs that nonprofit hospitals must operate under federal law.
- Many consumers reported having problems navigating between healthcare providers, insurance, and debt collectors that fail to communicate with each other.
- Nonprofit hospitals have partnered with financial institutions in offering medical payment products, such as open-end lines of credit, credit cards, and installment loans, that enable the hospitals to get compensated for bills at the time of enrollment and the financial institutions and their debt collectors to engage in collection “practices that would be prohibited by IRS regulations” if engaged in by the hospitals themselves, such as adverse credit reporting.
- Many debt collectors have closed accounts or returned them to their clients without any follow-up. That, the CFPB said, is an indication that those debt collectors lack confidence in the information they have about the debt.
Overall, the CFPB said it received 109,000 debt collection complaints in 2023. Of that total, the bureau sent 63 percent to companies for their review and response, 28 percent to other regulatory agencies and the bureau reported 9 percent to not be actionable. As of March 1, 2024, less than 0.1 percent of the debt collection complaints were pending with the consumer and less than 0.1 percent were pending with the CFPB.
In addition to the extensive discussion of complaints, the report also included a summary of debt collection issues uncovered in CFPB supervisory examinations as well as debt collection enforcement actions brought by the CFPB and the FTC.
John L. Culhane, Jr. & Reid F. Herlihy
FinCEN Finalizes Rule Subjecting Investment Advisers to AML/CFT Regulations
Following up on its Notice of Proposed Rulemaking (NPR), which we discussed back in March, the Financial Crimes Enforcement Network (FinCEN) released on August 28th a final rule extending Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) requirements to certain investment advisers (Final Rule).
The Final Rule adds “investment adviser” to the definition of “financial institution” at 31 C.F.R. 1010.100(t). The Final Rule applies to registered investment advisers (RIAs), and investment advisers (IAs) that report information to the Securities Exchange Commission (SEC) as exempt reporting advisers (ERAs), subject to certain exceptions. IAs generally must register with the SEC if they have over $110 million in assets under management (AUM). ERAs are investment advisers that (1) advise only private funds and have less than $150 million in AUM in the United States or (2) advise only venture capital funds.
The Final Rule requires certain IAs to: (1) develop and maintain an AML/CFT compliance program; (2) file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs); (3) comply with the Recordkeeping and Travel Rules; (4) respond to Section 314(a) requests; and (5) implement special due diligence measures for correspondent and private banking accounts.
FinCEN released a Fact Sheet in conjunction with the Final Rule, which becomes effective January 1, 2026.
Background
Earlier this year, FinCEN issued a separate Notice of Proposed Rulemaking (AML/CFT NPRM) proposing to amend the definition of “financial institution” to include IAs. Separately, FinCEN and the Securities Exchange Commission (SEC) issued a joint notice of proposed rulemaking (CIP NPRM) that would require RIAs and ERAs to establish a CIP program.
Prior to this Final Rule, there were no Federal or State regulations requiring IAs to maintain AML/CFT programs, including a CIP program or records under the Bank Secrecy Act (BSA), although some IAs did in specific circumstances such as if they were also licensed as banks (or were bank subsidiaries), registered as broker-dealers, or advised mutual funds. FinCEN highlighted that, although the obligations for banks, broker-dealers and other financial institutions can assist in detecting illicit activity, these entities do not directly interact with the adviser’s customers and may not be in the best position to obtain information such as source of wealth and investment objectives to better understand the financial trail and purpose of a given transaction.
FinCEN reiterated the illicit finance and national security risks posed by the IAs. FinCEN acknowledged the fact that some private fund advisers already perform sanctions and politically exposed person (PEP) screening; however, because advisers are not subject to consistent AML/CFT supervision, these measures are not applied consistently and deficiencies may not be identified or remediated. FinCEN noted the risks associated with venture capital funds and that the threat of misuse is not only related to laundering illicit proceeds but also the illicit technology transfer through investments in portfolio companies.
Definition of “Financial Institution” and “Investment Adviser”
While the BSA includes a list of enumerated “financial institutions,” it also provides FinCEN with the authority to add entities that, in FinCEN’s view, are engaged in “an activity similar to, related to, or a substitute for any activity,” in which any of the BSA enumerated financial institutions are authorized to engage. FinCEN has determined that IAs meet that standard highlighting, for instance, how IAs “work closely with financial institutions when they direct broker-dealers to purchase or sell client securities, and therefore engage in activities that are closely related to the activities of covered financial institutions.” FinCEN notes that custody of or directly holding customers’ funds is not a prerequisite for being included in the definition of “financial institution.”
In response to comments, FinCEN finalized a slightly amended definition of “investment adviser” from that proposed in the IA NPRM to exempt certain types of RIAs. Specifically, RIAs that are registered with the SEC on one or more of the following basis (and that have no other basis for registration) are exempt from the definition of “investment adviser”:
- Mid-Sized Advisers;
- Multi-State Advisers;
- Pension Consultants; and
- RIAs that do not report any AUM on Form ADV.
FinCEN indicates that these RIAs pose lower risks and are less vulnerable to misuse for illicit purposes. The Final Rule provides the following example: an RIA that (1) has an AUM of more than $110 million and registered as a “large advisory firm” on the Form ADV; and (2) is required to register with more than 15 states is not exempt.
The Final Rule notes that State-registered advisors are lower risk for money laundering and illicit finance and are not required to comply with the rule at this time; however, FinCEN cautioned that it will continue to monitor activity of state-registered advisers and will consider “regulatory measures if appropriate.”
The Final Rule includes ERAs in the definition of “investment adviser” as proposed. FinCEN noted that ERAs pose higher risks of illicit finance as they solely advise either private funds or venture capital funds. Moreover, private funds are more likely to be based in jurisdictions with weaker and less effective AML/CFT controls, making it more difficult for the ERA to assess risks and prevent abuse. FinCEN intends to work with the SEC so that examinations of ERAs for compliance with the Final Rule takes into account the risk-based nature of AML/CFT programs.
Lastly, the definition of “investment adviser” applies to foreign-located IAs that are registered or required to register with the SEC or that file reports with the SEC on Form ADV. FinCEN clarified the scope of the Final Rule applies to foreign-located investment advisers only with respect to advisory activities that (1) take place in the U.S., including through involvement of U.S. personnel of the investment adviser, such as involvement of an agency, branch, or office within the United States; or (2) provide advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. In other words, the foreign-located IA’s activities must have a U.S. nexus. The Final Rule adopts SEC definitions and standards for identifying U.S. investors in foreign-located private funds. The Final Rule notes that “de minimis” ties to the U.S. do not automatically make a foreign-located investment adviser subject to the rule.
Recordkeeping and Travel Rule/CTRs
The Recordkeeping and Travel Rule applies to transmittals of funds equal to or in excess of $3,000. RIAs and ERAs must obtain and retain, along with other information, the name and address of the transmittor and the transaction. IAs will be treated in the same manner as other financial institutions subject to the Recordkeeping and Travel Rules. The Final Rule provides additional guidance in connection with the information that must be collected to comply. For example, where an advisor’s customer has a direct account relationship with a qualified custodian that is subject to AML/CFT requirements, such as a bank or broker-dealer, the adviser would generally not be required to comply with the requirements of the Recordkeeping and Travel Rules. In this example, the qualified custodian would have the obligation to comply with the Recordkeeping and Travel Rules as the entity that received the instruction and transmitted the funds.
Currently, IAs are required to file Form 8300 for the receipt of $10,000 in cash and certain negotiable instruments in the course of business. IAs are now subject to CTR requirements, which replaces the requirement to file Form 8300.
Minimum Program Requirements
In general, RIAs and ERAs must implement a risk-based, written AML/CFT program, which must include the following at a minimum: the development of internal policies, procedures, and controls; the designation of a compliance officer; an ongoing employee training program; and an independent audit function to test programs. FinCEN reiterates that an AML/CFT program is risk-based and must be reasonably designed to prevent the IA from being used for money laundering, terrorist financing, or other illicit finance activities.
The AML/CFT program must be approved by the IA’s board of directors or trustee. If the IA does not have a board, the AML/CFT program must be approved by its sole proprietor, general partner, trustee, or other persons that have functions similar to a board of directors.
An exception exists for mutual funds, as they have their own AML/CFT program requirements. IAs may choose to include mutual funds it advises in their AML/CFT program. There is no duty on the part of the IA to verify that the mutual fund has implemented an AML/CFT program. The Final Rule also expands this exception to collective investment funds sponsored by a bank or trust company subject to the BSA. The Final Rule adopts the term “collective investment funds” by reference to the Office of the Comptroller of the Currency regulations (see 12 C.F.R. § 9.18). The exclusion may extend to collective investment funds formed pursuant to state law or regulation, so long as those laws incorporate the requirements of 12 C.F.R. § 9.18.
The Final Rule also permits an IA to exclude from their AML/CFT program any “investment adviser that is advised by the adviser and that is subject to this rule.” FinCEN previously requested comments on whether specific services should be included or excluded. Ultimately, FinCEN determined that permitting IAs to exclude certain advisory customers versus advisory services struck the appropriate balance avoiding unnecessary duplication and limiting illicit finance risk. Therefore, an IA may be able to exclude wrap-fee programs, separately managed accounts, or other advisory relationships if the customer is another IA and the adviser does not have a direct contractual relationship with the underlying customer of the IA. Similarly, an IA may be able to exclude subadvisers with a direct contractual relationship with the primary adviser and not the underlying customer of the primary adviser.
However, these exclusions are not available where the advisory customer is a BSA-defined financial institution, such as a bank or broker-dealer. In addition, the Final Rule notes that RIAs that both manage client assets and provide other advisory services that do not involve management of assets may not exclude the “non-management” services.
IAs that are also registered as broker-dealers or banks are subject to the Final Rule and must ensure that a comprehensive AML/CFT program covers all of the IAs relevant activities. IAs that are affiliated with or a subsidiary of, another entity required to establish an AML/CFT program are not required to implement separate compliance programs. A single AML/CFT program may extend to all affiliated entities subject to the BSA.
We note that the Final Rule does not incorporate FinCEN’s proposed changes as set forth in proposed rulemaking aimed at strengthening and modernizing AML/CFT programs (the Modernization NPRM). We blogged on the Modernization NPRM here. The Modernization NPRM would require all “financial institutions” to implement a risk assessment as part of an effective, risk-based, and reasonably designed AML/CFT program. Once the Modernization NPRM is finalized, IAs, as an enumerated “financial institution,” must also implement a risk assessment as part of their overall AML/CFT program.
CDD, CIP, and Ongoing Monitoring
An IA will be included in the definition of “covered financial institution” for purposes of the Customer Due Diligence (CDD) Rule. As indicated in the IA NPRM, FinCEN must implement provisions of the Corporate Transparency Act (CTA) which will revise the current CDD Rule. In addition, FinCEN and the SEC will issue a final CIP rulemaking.
IAs must implement risk-based procedures to conduct ongoing monitoring to identify and report suspicious activity. Thus, IAs must file timely SARs for suspicious activity that involves or aggregates at least $5,000. This includes transactions conducted or attempted by, at, or through an IA. In addition, filing a SAR does not relieve an IA from responsibility for complying with any other reporting requirements that may be imposed by the Advisers Act or other Federal Securities laws. The duty to update customer information will generally be triggered only when the IA becomes aware of relevant information.
FinCEN will delegate examination authority to the SEC and will not publish an examination manual.
Compliance Dates
The Final Rule provides a longer implementation period than proposed. The Final Rule becomes effective January 1, 2026. Thus, IAs must have an AML/CFT program in place on or before January 1, 2026, and be able to comply with CTR and SAR filing requirements upon the effective date. IAs subject to the Final Rule should keep an eye out for the forthcoming joint final rulemaking regarding CIP.
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Terence M. Grugan & Kaley N. Schafer
CFPB’s Frotman: Companies Are Using Technology to Squeeze More Out of Those Who Can Least Afford It
Innovation and technology are not the magic wands that will help low-income Americans climb out of debt; they often are tools used to prey on the neediest people, Seth Frotman, the CFPB’s general counsel told the Poverty Law Conference earlier this month.
“We hear a lot about ‘innovation’ and ‘financial technology’ in the consumer financial marketplace,” Frotman said, adding that it is not uncommon for such businesses to boast about how they serve an underprivileged population.
“I’ll be totally frank, from what I have seen, there is reason to be skeptical about whether many of these supposedly novel products and services are doing much that is really new or to the benefit of consumers,” he added.
Frotman’s speech seems contrary to the CFPB’s Office of Competition and Innovation whose mission, is “to promote competition and innovation that benefits consumers in the financial products and services market,” furthers a specific objective of the CFPB as set forth in the Consumer Financial Protection Act, namely, “to facilitate access and innovation” in the markets for consumer financial products and services.
Frotman said that a new generation of entrepreneurs has devised ways to “squeeze” more out of people who can least afford it. As for the technology, he added “it’s a shiny veneer on top of an age-old practice.” He singled out several programs for criticism—echoing the CFPB’s issues with each:
- Buy Now, Pay Later programs, which he said leave people overextended and trapped in loans that result in such problems as overdrafts and late fees.
- Earned Wage Access programs. Frotman said these programs resemble payday loans and have extremely high interest rates.
- Medical installment loans, credit cards and payment plans, which Frotman said may have deferred interest features that may leave consumers paying surprise, retroactively applied interest charges. Frotman said that CFPB officials are concerned that the promotion of these programs is cutting off the financial assistance that nonprofit hospitals are required to make available under the Affordable Care Act.
- Lease-to-own financing companies. These companies, Frotman said rent home appliances to cash-strapped people, with the promise that they eventually will own them, after making expensive payments.
- Public benefit distribution programs, which Frotman said may have high fees and other obstacles to people trying to access and use their benefits. He said that under the Electronic Funds Transfer Act, people cannot be required to establish an account with a specific financial institution in order to receive government benefits. The CFPB is working with the Department of Labor to ensure that people have a choice in obtaining benefits, such as unemployment payments, according to Frotman. He added that the Equal Credit Opportunity Act prohibits lenders from discriminating against borrowers because they receive public assistance income.
Frotman’s remarks underscore the concerns of many Fintech and other companies that the CFPB is biased against companies that have used technological innovation to develop new consumer financial products and services. Instead of delivering a balanced presentation which should have discussed how innovative some of these products are and their enormous popularity with consumers, he instead talks only about things that the CFPB dislikes.
He equates earned wage access products to payday loans even though, if properly used by consumers, they are cost-free while payday loans often involve consumers paying triple-digit APRs. He mentions that buy-now, pay-later products can involve the payment of late fees without mentioning that buyers who pay on time don’t pay any interest or other fees. And, we could go on and on. The CFPB’s negative attitude toward technological innovation is stifling the Fintech industry. Instead of painting with such a broad brush by saying that the Fintech industry is “preying” on lower income consumers, the CFPB should be fostering innovation by responsible Fintech companies who understand that they must comply with all applicable laws.
Alan S. Kaplinsky, John L. Culhane, Jr. & Kristen E. Larson
October 7-8, 2024 | AC Hotel, Washington, D.C.
October 7, 2024 – 3:30 PM ET
Speaker: Richard J. Andreano, Jr.
RESPA Compliance Conclave: Mastering Section 8 with Legal Experts
October 8, 2024 – 3:45 PM ET
Speaker: Richard J. Andreano, Jr.
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