Financial Services Weekly News - July 2016 #4

by Goodwin


Editor's Note
What Exactly Is Bitcoin? In a case featuring a sting operation beginning with meetings in a coffee shop, ice cream store and hotel lobby and ending with the sale of bitcoins to an undercover Miami Beach police detective for $30,000 in cash, a Florida circuit court judge dismissed criminal money transmitter and money laundering charges against a defendant on the grounds that bitcoin is not money. Despite facts parodying a Miami Vice episode, the judge’s opinion, which is discussed in more detail below, raises important issues about how virtual currencies fit into the current legal and regulatory landscape. In this instance, the judge took the position that, because the Florida statutes governing money services business and money laundering did not clearly cover the sale of virtual currency, the Florida legislature “must choose to adopt statutes regulating virtual currencies” before the state could criminalize such activities. Whether or not you agree with the judge’s opinion, fitting bitcoin into the existing legal and regulatory regime promises to continue to be a difficult proposition and courts are likely to have much more to say on the issue.

Regulatory Developments

FINRA Publishes Notice Warning Member Firms to Avoid Improper Forum Selection Provisions

On July 22, FINRA published Regulatory Notice 16-25, reminding member firms that customers have a right under FINRA Rule 12200 to request arbitration at FINRA’s arbitration forum at any time and do not forfeit that right by signing an agreement with a contradictory forum selection provision. FINRA is aware that federal appellate courts have held that such forum selection clauses supersede the requirements of the FINRA Rule, but maintains that “FINRA rules are not mere contracts that member firms and associated persons can modify.” If a member firm is using a forum selection provision in a customer agreement that includes forums other than FINRA’s arbitration forum, FINRA recommends that the member firm use a non-exclusive forum selection provision and include the following language in the provision: “This agreement does not prohibit or restrict you from requesting arbitration of a dispute in the FINRA arbitration forum as specified in FINRA rules.” A member firm’s failure to comply may subject the firm to disciplinary action by FINRA.

FinCEN Issues Frequently Asked Questions Regarding Customer Due Diligence Rule

On July 19, the Financial Crimes Enforcement Network (FinCEN) issued Frequently Asked Questions (FAQs) to help covered financial institutions understand the scope of the Customer Due Diligence Requirements for Financial Institutions (the CDD Rule). The FAQs provide interpretive guidance with respect to the CDD Rule. FinCEN intends to issue additional guidance as appropriate.

CFPB Extends Comment Deadline on Small-Dollar Credit Proposal

The Consumer Financial Protection Bureau (CFPB) has extended the comment deadline on its small-dollar lending proposal to October 7, 2016. As discussed in the June 8 edition of the Roundup, the proposed rule is designed to limit payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans by requiring lenders to take steps to make sure consumers have the ability to repay their loans.

CFPB Offers Resources on HMDA Final Rule

The CFPB updated its website last week to include free resources intended to aid compliance with the new final HMDA rule. The resources include a webinar providing an overview of the rule; reference tools for data collection, recording and reporting (including a sample data collection form); institutional coverage charts; a compliance guide; and an executive summary with key compliance dates.

FRB Aligns Policy on Payment System Risk with NACHA’s Same-Day ACH Rules

On July 22, the Board of Governors of the Federal Reserve System (the Board) published revisions to its Policy on Payment System Risk, which are intended to conform the Board’s procedures for measuring institutions’ intraday account balances at Federal Reserve Banks with NACHA’s same-day ACH rules. The phase-in of the Board’s revisions begins September 23, 2016. Under the Board’s revisions, all receiving depository financial institutions will be required to participate in same-day ACH, and originating depository financial institutions will be required to pay a fee to receiving depository financial institutions for each same-day ACH forward transaction. Beginning September 23, 2016, credits and debits for same-day ACH credit transactions will post at 1:00 p.m. or 5:00 p.m. (Eastern time), depending on when the ACH file is received by the appropriate Federal Reserve Bank for processing. Forward ACH debit transactions will be eligible to settle same-day beginning September 15, 2017, and credits and debits for same-day ACH debit transactions will post according to the same posting rules as same-day ACH credit transactions. The posting of future-dated ACH forward transactions will not be affected, and credits and debits for these transactions will continue to post at 8:30 a.m. on the effective settlement date. Additionally, effective September 23, 2016, all ACH return items, regardless of whether the associated forward item was future-dated or same-day, will post at the next available posting time or following the settlement of the associated forward transaction, such that credits and debits for return items will post at 8:30 a.m., 1:00 p.m., 5:00 p.m., or 5:30 p.m., with the specific posting time determined by when the item is received by the appropriate Federal Reserve Bank.

Enforcement & Litigation

Florida Judge Rules Bitcoin Is Not Money

On July 25, a Florida Circuit Court judge dismissed state criminal charges against a defendant who attempted to sell bitcoins for $30,000 in cash on the ground that bitcoins are not money. Defendant Michell Abner Espinoza allegedly had agreed to sell bitcoins to an undercover Miami Beach police detective who had indicated that he would use the bitcoins to purchase stolen Russian credit-card numbers. Espinoza was charged with one count of unlawfully engaging in business as a money transmitter and two counts of money laundering. Espinoza argued that he had not committed any crime as bitcoin was not money and the purchaser’s intended use for the bitcoins was not his concern. In her opinion, the judge dismissed all charges on the grounds that “bitcoin has a long way to go before it is the equivalent of money,” stating that “Bitcoin may have some attributes in common with what we commonly refer to as money, but differ in many important aspects. While bitcoin can be exchanged for items of value, they are not a commonly used means of exchange. They are accepted by some but not by all merchants or service providers. The value of bitcoin fluctuates wildly and has been estimated to be eighteen times greater than the U.S. dollar. Their high volatility is explained by scholars as due to their insufficient liquidity, the uncertainty of future value, and the lack of a stabilization mechanism. With such volatility they have a limited ability to act as a store of value, another important attribute to money.”

FTC Settles with Fraudulent Debt Collectors for Millions as Operation Collection Protection Continues

On July 14, the FTC announced that, as part of an ongoing crackdown on deceptive collection practices, it reached a settlement with two debt collectors and three companies charged with using illegal collection tactics. As Goodwin’s Enforcement Watch previously covered here, the FTC initially brought the action against the companies in October of 2015 for allegedly taking payments from consumers by “intimidation, lies and other unlawful debt collection tactics,” in violation of the Federal Trade Commission Act (FTCA) and the Fair Debt Collection Practices Act (FDCPA). As part of the settlement, the companies are required to pay a judgment of $4,802,646, and the two individual defendants must pay amounts of $59,207 and $50,562. It also bans the defendants from the debt collection business, prohibits them from misrepresenting material facts about financial-related products and services, and prohibits them from profiting from personal information of consumers without properly disclosing its actions. The U.S. District Court for the Central District of California entered the settlement order on July 11, 2016.

Goodwin Files Supreme Court Amicus Brief on Behalf of the Mortgage Industry

On July 25, Goodwin filed a certiorari-stage amicus brief on behalf of the Mortgage Bankers Association, Consumer Mortgage Coalition, and several other mortgage industry groups. The case involves a Connecticut law that tripled recording charges for mortgages and mortgage assignments when Mortgage Electronic Registration Systems, Inc. (MERS) is a party to a mortgage. On February 8, 2016, the Connecticut Supreme Court held that the law did not discriminate against interstate commerce in violation of the dormant Commerce Clause. The industry’s amicus brief detailed the history of how federal government and industry partnered to create MERS to address significant recording backlogs, errors, costs, and fraud that occurred in county recording offices as securitization increased in the 1980s and 1990s. Instead of having to draft, execute, ship, record and track mortgage assignments in paper format every time a loan was transferred from one party to another, MERS allowed lenders to track loan transfers electronically on the MERS® System’s national electronic database. Two decades later, the vast majority of new home loans are made using the MERS® System. National, regional and online lenders, as well as federal law enforcement agencies and state governments, now rely on the MERS® System to facilitate lending and detect fraud. The brief argued that Connecticut’s law, which imposes three-fold recording fees if a national electronic database like MERS is a party, facially discriminates against interstate commerce in direct violation of the dormant Commerce Clause. The brief went on to describe how Connecticut’s law, if allowed to stand and if followed by other states, could not only significantly impair lenders’ use of the MERS® System, but could also adversely affect other aspects of the mortgage lending industry and interstate commerce generally.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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