In traditional banking: (1) A final rule implementing the LIBOR Act became effective; (2) the CFPB noted that there has been an increase in identity theft by military consumers; and (3) DOJ entered into its largest redlining settlement
Final rule implementing the LIBOR Act takes effect
On December 16, 2022, a final rule implementing the LIBOR Act was published by the Federal Reserve. This rule became effective 30 days after publication in the Federal Register. The purpose of the final rule addressing “legacy contracts” was to avert problems related to potential violations of trillions of dollars in contracts for which there is no substitute for terms based on LIBOR. The legacy contracts reference LIBOR, mature after the final LIBOR settings expire at the end of June 2023 and lack LIBOR replacement provisions.
Among other things, the last rule:
- Identifies benchmarks based on SOFR to replace LIBOR settings in legacy contracts;
- Specifies benchmark compliance changes related to calculation, administration and other implementing actions for SOFR benchmarks to replace LIBOR; and
- Prevents state and local laws or standards related to LIBOR benchmark substitution in older contracts.
Lenders should review their old contracts and determine the loans to which the final rule may apply.
Service member reports of identity theft are on the rise
The CFPB released a report that identified an increase in identity theft reported by military consumers (defined as active duty service members, veterans and military family members). The report emphasized that the burden is on financial institutions and creditors as the first line of defence. Financial institutions and certain creditors are required to have procedures in place to identify suspicious activity or red flags that may indicate a larger fraud or identity theft problem. These procedures must be able to identify possible signs of identity theft in day-to-day operations, have a process to detect red flags of identity theft when they occur, include courses of action to use when red flags are detected and provide a plan to stay abreast of emerging threats. Financial service providers should review policies and procedures to verify compliance with CFPB guidance.
Justice Department reaches largest redlining settlement ever with California bank
Redlining is a discriminatory practice that puts financial services out of reach for residents of certain areas based on race or ethnicity.
As part of its “Combating Redlining Initiative,” the DOJ reached a settlement with a California bank in which the bank agreed to pay more than $31 million to resolve allegations that it engaged in a pattern or practice of redlining in violation of Fair Housing Act. and the Equality Act. The DOJ alleged that from 2017 to 2020, the bank “avoided” providing mortgage services to majority black and Hispanic neighborhoods in Los Angeles County.
Note that the complaint alleged:
- The bank maintained only three of its 37 branches in majority black and Hispanic neighborhoods;
- It opened only one branch in a majority black and Hispanic neighborhood in the past 20 years despite opening or acquiring 11 branches in other neighborhoods during the same period and assigned no staff to generate mortgage applications at the one branch in conflict with practice at branches in majority-white areas; and
- The bank made only 7% of its mortgages to residents in majority black and Hispanic neighborhoods compared to its peer average of 44%.
Given the “Combating Redlining Initiative,” mortgage lenders should review their Home Mortgage Disclosure Act data and compare it to their peers and examine the type of data cited in the DOJ’s complaint to avoid regulatory issues.
In Fintech & Crypto: (1) A proposed rule may require fintech companies to register with the CFPB; (2) the Federal Reserve, the FDIC, and the OCC issue a joint statement regarding the risks associated with cryptoassets; and (3) the SEC continues to regulate cryptocurrency through enforcement actions.
Proposed Rule May Require Fintech Companies to Register with the CFPB
The CFPB proposed a rule to establish a public registry of supervised nonbanks’ terms and conditions in the form of contracts that purport to waive or limit consumer rights and protections.
Under the proposed rule, non-banks subject to the CFPB’s supervisory jurisdiction would have to submit information about terms and conditions in the form of contracts that seek to waive or limit individuals’ rights and other legal protections.
The rule will require registration of form contracts such as:
- Waiver of claims a consumer may raise in a lawsuit;
- Limit the company’s liability to a consumer;
- Limit a consumer’s ability to bring legal action by limiting the time frame or venue for a case;
- Limit the consumer’s ability to participate in a class action;
- Limit the ability of a consumer to complain or post a review of services
- Contains an arbitration agreement; and
- Waiver of consumer protections, including defenses available under statute, regulation or common law.
If your non-bank financial institution uses form contracts with the above provisions, you may want to comment on this proposed rule and follow developments closely.
Federal Reserve, FDIC and OCC Issue Joint Statement on Crypto Asset Risks to Banking Organizations
In a joint statement, the Federal Reserve, the FDIC and the OCC stated that “the issuance or holding of crypto-assets that are issued, stored or transmitted on an open, public and/or decentralized network or similar system is highly likely to be inconsistent with safe and sound banking practices” while acknowledging that “banking organizations are neither prohibited nor discouraged from offering banking services to customers of a particular class or type.”
Without announcing any new rules or regulations, these agencies identified a number of key risks associated with cryptoassets that banking organizations should be aware of, including:
- Risk of fraud and fraud among participants in cryptoassets;
- Legal uncertainty related to custody practices, redemptions and ownership rights;
- Inaccurate or misleading representations and disclosures by crypto asset companies;
- Significant volatility in cryptoasset markets affecting deposit flows;
- Stablecoin’s susceptibility to creating potential deposit outflows;
- Contagion risk within the crypto-asset sector due to interconnections that may pose concentration risk; and
- Risk management and management practices that lack maturity and robustness and therefore create increased risk due to a lack of established roles, responsibilities and obligations.
Crypto-asset market participants should take note of the areas of concern identified by the agencies, as they are likely to provide insight into future regulatory developments.
The SEC continues its efforts to regulate cryptocurrency through securities laws
On January 12, the Securities and Exchange Commission charged Genesis Global Capital, LLC and Gemini Trust Company, LLC with the unregistered offering and sale of securities to retail investors alleging that they raised billions of dollars worth of crypto assets from hundreds of thousands of investors. . According to the complaint, in December 2020, Genesis entered into an agreement with Gemini to provide retail investors with an opportunity to lend their crypto assets to Genesis in exchange for Genesis’ promise to pay interest. The SEC argues that under the Reves test, the lending of crypto assets for a promise of a return on the assets plus interest constituted notes, i.e. securities. The offer of certificates was made to the public and should therefore have been registered in accordance with the Securities Act. The SEC also argues that the program constituted the offer and sale of investment contracts under the Howey test because it involved the investment of money in a joint venture with the expectation of profit from the efforts of promoters of the program. The SEC’s position is consistent with arguments made in other cases and signals continued efforts to regulate cryptoassets within the framework of existing securities laws.
The content of this article is intended to provide a general guide to the subject. You should seek specialist advice about your specific circumstances.
