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Consumer Finance State Roundup

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The latest edition of the Consumer Finance State Roundup highlights recently enacted measures of potential interest from two states:

California:

Effective January 1, California Assembly Bill 3108 addresses mortgage fraud.  Previously, California law defined “mortgage fraud” to include, in connection with a mortgage loan transaction, filing with the county recorder any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.

Taking this a step further, the measure prohibits the filing of any document with the recorder of any county that a person knows to contain a material misstatement, misrepresentation, or omission. Further, the measure expressly provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with knowledge that the borrower intends to use the loan proceeds for other uses. For prosecution purposes, the alleged fraud value must be $950 or more (the threshold for grand theft).

A mortgage lender could unintentionally find itself guilty of mortgage fraud if it simply allows a borrower to use a business purpose loan for consumer purposes or makes a bridge loan that it knows will not be used for a dwelling. California’s Penal Code § 532f(b) makes it mortgage fraud for a mortgage broker or lender to allow mortgage-related documents to be formed and filed when the broker or lender has reason to know that the borrower intends on using the loan for purposes other than for what the loan is intended.

Although intent to defraud is an element to this crime, that element can only be determined through rigorous and time-consuming investigation. If a borrower, for example, uses a business loan for consumer purposes or does not apply the funds from a bridge loan towards a dwelling, the lender will be subject to additional scrutiny unless it can prove that all efforts were made to understand the borrower’s plans for the funds.

The measure also prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud. A “covered loan” means a consumer loan in which the original principal balance of the loan does not exceed the most current Fannie Mae conforming loan limit for a single-family first mortgage loan.

The measure also amends Section 4973 of the Financial Code, which imposes certain requirements ad restrictions (e.g., the inclusion of a prepayment fee or penalty after the first 36 months) in connection with covered loans and amends Section 532f of the Penal Code (as discussed above) in connection with the prohibition on committing mortgage fraud.

New York:

  • Effective June 11, Assembly Bill 424 amends Section 35 of the Banking Law, which relates to an information pamphlet that residential mortgage lenders must provide to applicants. In place of making a physical pamphlet available to lenders, the amended section requires the Department of Financial Services to notify mortgage bankers of the posting a digital version of the pamphlet on the Department’s website (and when it makes any changes thereto). The measure also amends the pamphlet contents to reflect that a lender may provide an applicant with a good faith estimate (instead of a loan estimate), depending on the type of loan for which the applicant is applying.
  • Effective May 15, Assembly Bill 2056 amends Section 283 of the Real Property Law, which limits the amount of flood insurance that a mortgagee may require a mortgagor to maintain. Under current law, that section provides that the maximum amount of coverage a mortgagee may require is the mortgage’s outstanding principal amount as of January 1 of the year the policy will be in effect. As amended, that section makes the maximum permitted amount of coverage the lesser of the outstanding principal amount or the residential property’s replacement. Additionally, AB2056 slightly alters the printed notice about flood insurance that a mortgagee must deliver to mortgagors, removing language referring to the fact that required coverage would only protect the interest of the lender or creditor in the property.
  • Effective March 21, New York Senate Bill 804 amends data breach notification requirements. Section 899-aa of the General Business Law requires a person or business to notify New York residents whose data is part of a breach, as well as to provide notice to certain governmental entities (including the Department of Financial Services). As amended, that section will require notification to the Department of Financial Services (in the form mandated by N.Y. Comp. Code R. & Regs. tit. 23, § 500.17) only by “covered entities.” A “covered entity” is any person who requires any type of authorization to operate under the Banking Law, Insurance Law, or Financial Services Law, and thus includes a mortgage banker or mortgage servicer.

DEI in Lending: Are Special Purpose Credit Programs About to DIE?

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For the last several years, federal agencies, including the Consumer Financial Protection Bureau (“CFPB”), have been strongly encouraging financial institutions to implement and offer targeted credit assistance to historically underserved communities as one way to remedy the effects of redlining. Not surprisingly, in accordance with the prior Administration’s Combatting Redlining Initiative, every one of the 16 settlements by the CFPB and the U.S. Department of Justice (“DOJ”) against both bank and non-bank lenders have mandated that these lenders offer targeted credit assistance based on the race or ethnicity of the borrowers or the predominant race or ethnicity of their neighborhoods. To satisfy the terms of these settlements, the lenders often work with state and local agencies to help market and administer their targeted loan subsidies to eligible borrowers based on protected characteristics. And still more redlining cases, brought by fair housing organizations that receive funding through the U.S. Department of Housing and Urban Development (“HUD”) Private Enforcement Initiative (“PEI”), have been resolved via partnerships with federal- and state-funded entities to provide preferential treatment to Black and Hispanic borrowers and neighborhoods. However, given the current Administration’s stated goal of abolishing preferential treatment in favor of “colorblind equality,” it seems that preferential treatment in lending – even where beneficial to underserved and historically redlined communities – is on the chopping block.

DEI in the Current Political Climate

Only a couple of weeks into the new Administration, the message is clear: diversity, equity, and inclusion (“DEI”) initiatives are out. On January 22, 2025, President Trump signed an Executive Order terminating DEI initiatives in the federal workforce and in federal contracting and spending. Specifically, the Executive Order directs all departments and agencies to take strong action to end private sector “DEI discrimination,” including civil compliance investigations, and requires the Attorney General and the Secretary of Education to issue joint guidance regarding the measures and practices required to comply with the U.S. Supreme Court’s June 2023 decision in Students for Fair Admissions v. Harvard. As a reminder, the Supreme Court’s decision in Harvard effectively ended race-conscious admission programs at colleges and universities across the country.

Shortly after the President’s Executive Order, on January 31, 2025, Texas governor Greg Abbott issued his own Executive Order directing all Texas state agencies to eliminate any forms of DEI policies and to treat all people equally regardless of race. In particular, the Executive Oder requires all state agencies to comply with a “color-blind guarantee,” including by ensuring that “all agency rules, policies, employment practices, communications, curricula, use of state funds, awarding of government benefits, and all other official actions treat people equally, regardless of race.” Similarly, West Virginia governor Patrick Morrisey issued his own Executive Order prohibiting DEI efforts by any entity receiving state resources, and there are likely more of such state executive actions to come.

Are SPCPs a form of DEI?

The above federal and state executive actions cast significant doubt on the current legality and permissibility of special purpose credit programs (“SPCPs”), which have been recognized for years as an exception to the Equal Credit Opportunity Act (“ECOA”) prohibition on differential treatment in lending. SPCPs, by definition, provide credit assistance to borrowers via some preferential treatment, often on the basis of borrower race or ethnicity or the predominant race or ethnicity of the residents in the neighborhood. While there may be no agreed-upon definition of DEI, it is safe to say that a SPCP that provides credit assistance, or more favorable credit terms, to borrowers based on race or ethnicity is a form of DEI.

To that end, where the requirement for a lender to implement a SPCP is baked into the terms of a settlement with a federal government agency, and such agency conducts ongoing monitoring of the lender’s activities to ensure the SPCP is being properly carried out, one could argue that the government is effectively mandating differential treatment based on race or ethnicity – in violation of the new DEI prohibition. The same could be said where state agencies and non-profit organizations that receive federal and state funds assist lenders in marketing and administering their SPCPs. Even the HUD-funded Fair Housing Initiatives Program, which includes the PEI program, could be problematic from a White House perspective, given that federal and/or state funds are currently being spent on furthering alleged redlining remediation through differential treatment.

It is even possible that SPCPs offered voluntarily and proactively by lenders may be scrutinized, particularly if the lender receives any government funding or grants. Currently, both Fannie Mae and Freddie Mac offer SPCPs where borrowers receive down payment or closing cost assistance grants from both the government-sponsored enterprise (“GSE”) and the lender. It is unclear whether such GSE programs would fall within the scope of the President’s Executive Order.

Other Uses of DEI in Lending

Setting aside SPCPs, which are often imposed on lenders by the government as a way to remediate alleged redlining, federal and state agencies essentially expect lenders to engage in race-based action and differential treatment in an effort to manage fair lending risk. Indeed, when assessing whether a lender may have engaged in redlining against a particular racial or ethnic group, the CFPB and DOJ, as a matter of course, employ quota-based metrics to evaluate the “rates” or “percentages” of a lender’s activity in majority-minority geographic areas. These federal agencies also consider a lender’s failure to specifically target neighborhoods based on race or ethnicity to be evidence of potential redlining. In other words, the government’s approach to date has not been “colorblind.” It will be interesting to see whether the agencies’ approach to redlining cases will change as a result of this shift away from DEI.

Takeaways for Lenders

Lenders that offer their own SPCPs or participate in GSE SPCPs should ensure that their written plans continue to meet the requirements of Regulation B, which implements ECOA. As always, the justifications for lending decisions that could disproportionately affect consumers based on their race, ethnicity, or other protected characteristic should be well documented and justified by legitimate business needs.

More importantly, lenders that are worried about their fair lending compliance or are subject to a government inquiry for potential redlining should consult with counsel regarding the best approach for presenting evidence of their minority-area lending. These lenders also should strongly consider whether a government-mandated SPCP is the best way forward. While an SPCP, such as loan subsidies or other pricing or underwriting flexibilities may benefit underserved communities and likely expedite settlement of an enforcement matter, the risk of running afoul of DEI prohibitions is not immaterial.

Trump Administration Rescinds Biden Executive Order on Artificial Intelligence

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What Happened?

Last week, President Trump signed an Executive Order that rescinded the Biden Administration’s October 2023 Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence.

Titled “Removing Barriers to American Leadership in Artificial Intelligence,” the new Executive Order “revokes certain existing AI policies and directives that act as barriers to American AI innovation, [and will] clear a path for the United States to act decisively to retain global leadership in artificial intelligence.” The Trump Administration’s Executive Order directs executive departments and agencies to develop and submit to the President an action plan designed to meet that objective.

Why does it Matter?

AI is expected to be a focus for the new Administration, and policy likely will focus on AI development and innovation as a matter of economic competitiveness and national security. In December, (then President-elect) Trump named David Sacks, a prominent Silicon Valley venture capitalist, as the White House “AI and Crypto Czar.” When announcing this appointment, President Trump characterized AI as “critical to the future of American competitiveness…David will focus on making American the clear global leader…” We expect the Administration to focus on national security issues that include export control issues where the technology could be used in military applications by non-US governments.

What’s Next?

In contrast to the deregulatory approach at the federal level, a number of states already have passed legislation relating to the use of AI, particularly in the consumer space, including laws relating to data use, consent, and disclosures. Additionally, state Attorneys General, particularly in “blue states,” have expressed concern about the risk of “high-risk” AI that can negatively impact consumers’ access to financial goods and services and employment opportunities. With growing use of AI, we expect more activity at the state level.

Financial Services Advisory | The (Bay) State of the Model Money Transmission Modernization Act

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Executive Summary
7 Minute Read

Massachusetts has joined the growing list of states that have at least partially adopted the Model Money Transmission Modernization Act. Our Financial Services Group examines the model act, how the Bay State has adopted it, and the implications for money transmitters.

  • The Massachusetts act applies to any entity that transfers money within the United States
  • The act only applies to consumer transactions, a major difference from the national model
  • Requirements of the act take effect January 1, 2026

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Massachusetts is the first state of 2025 to sign its version of the Model Money Transmission Modernization Act into law. The model act is a set of nationwide standards for the supervision and regulation of money transmitters created by state and industry experts and approved by the Conference of State Bank Supervisors (CSBS) in 2021. Since then, 25 states have enacted legislation to adopt, in whole or in part, a version of the model act.

Both the governor and state commissioner of banks emphasized the need to protect consumers and pointed to the widespread use of peer-to-peer payment applications as an important reason for adopting the new law. While regulation of businesses offering peer-to-peer payment services may have been a goal, the new law is far more comprehensive than the current framework, which addresses cross-border money transmissions and the sale of checks or money orders.

Scope of the New Massachusetts Act

Historically, Massachusetts has only required entities engaging in the business of selling, issuing, or registering checks or engaging in foreign money transmission activities, such as facilitating cross-border transactions, to obtain licenses. The new law repeals the prior law and replaces it with a statutory framework influenced by the model act. The new law applies to any entity that provides transfers of money between individuals or entities within the United States if it does not otherwise qualify for an exemption.

Specifically, the new law regulates the following activities as “money transmission”: (1) the sale or issuance of payment instruments to a person in Massachusetts; (2) the sale or issuance of stored value to a person in Massachusetts; or (3) the receipt of money for transmission from a person in Massachusetts.

In addition to expanding the scope, the new law incorporates key provisions from the model act, including express exemptions for operators of payment systems providing processing, clearing, or settlement services and for entities acting as agents of payees in accordance with statutory requirements.

Comparison to Model Act

While closely modeled on the model act, the new law does differ from the model act in a few notable ways.

Expressly for consumer purposes only

The definition of “money transmission” in the new law refers to the provision of such services to individuals and corporate entities. At the same time, the definition is expressly limited to “transactions engaged in by a person for personal, family or household purposes.” This addition limits the scope of the new law to consumer purposes. In contrast, the model act does not specify the purpose of the transactions, implying that it applies to both consumer and commercial transactions.

Silent on payroll processing services

The new law did not adopt the model act’s explicit inclusion of “payroll processing services” in its definition of money transmission. However, it did not expressly exempt payroll services, as is the case in other states, such as California.

The Division of Banks has posted select opinions interpreting the current law, including one as recently as November 2024, providing guidance on the licensing requirements for payroll and employee benefit services. The division concluded the services provided by the payroll service provider were not licensable under the state’s laws on cross-border money transmissions because none of the services involved the “transfer of money to foreign countries,” although certain other check services were licensable under the state’s laws on the sale of checks or money orders.

In reaching this conclusion, the deputy commissioner of banks and general counsel cautioned that “legislation has been filed that would overhaul the licensing and regulation of money transmission and would include domestic money transmission within the licensure requirement.”

Although Massachusetts may interpret payroll processing services as falling under the category of commercial services exempted by the limitations on money transmission set forth in the new law, recent guidance has focused on the presence of foreign transmission activity as the determining factor in resolving the question of whether licensure is required.

Does not adopt virtual currency provisions

The new law did not adopt the virtual currency provisions of the model act. Opinions posted on the division’s website clarify that entities involved in virtual currency transactions, such as exchanges or kiosks, may not require a foreign transmittal agency license if their activities do not involve transmitting funds to foreign countries.

The division often concluded that these entities’ activities did not involve transmitting funds to foreign countries, which was the primary driver for requiring such a license. The division’s conclusions are based on the specific facts presented in each case, and different facts may lead to different outcomes. As Massachusetts begins regulating domestic transactions, it remains unclear whether the new law will be interpreted to apply to virtual currency transactions.

Impact on Current Licensees

Licenses obtained under the current law will remain in effect, but renewals for the year 2026 and after will need to be filed in accordance with the new law.

Existing licensees will need to comply with the requirements in the new law, including maintaining a surety bond, permissible investments, and meeting the tangible net worth requirements.

Effective Date

New laws take effect in Massachusetts 90 days after the governor signs the law, unless the new law is an emergency law or pertains to certain matters excluded under the Massachusetts Constitution, making the effective date of the new law April 1, 2025. The new law states that the majority of its requirements will take effect January 1, 2026. Persons engaged in money transmission in Massachusetts that are required under the new law to obtain licensure must file an application for licensure by June 1, 2026 and may continue their activities while their application is pending until the application has been approved, withdrawn, or denied.

Model Act Adoption Landscape

Many states have adopted the model act either wholly or in part since the CSBS approved the model act in 2021. These states include:

  • Arizona
  • Arkansas
  • California
  • Connecticut
  • Georgia
  • Hawaii
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Maine
  • Maryland
  • Massachusetts
  • Minnesota
  • Missouri
  • Nevada
  • New Hampshire
  • North Dakota
  • South Carolina
  • South Dakota
  • Tennessee
  • Texas
  • Vermont
  • West Virginia
  • Wisconsin

States’ Partial Adoptions of the Model Act

The model act regulates money transmission by establishing licensing, financial security, and reporting requirements and includes exemptions for certain entity types. While the goal of the model act was harmonization in the money transmission industry, states have not uniformly adopted the model act, with some choosing to adopt only certain provisions and others choosing to exempt activities the model act defines as licensable.

One exemption that has seen inconsistent adoption is that of payroll processing services, with some states expressly exempting payroll processors, other states choosing to be silent on whether payroll processing services constitute money transmission, and a third approach, such as that taken in Iowa, where the state adopted an “agent of the payor” exemption that applies to payroll processing.

Additionally, the model act provides an option for states to impose uniform licensing and disclosure requirements on virtual currency business activity. Only a few states, including Maine and Minnesota, have opted to include the model act’s virtual currency provisions. Other states are continuing to regulate virtual currency activity either through new licensing regimes or through regulatory interpretations of their money transmission laws.

Despite improved alignment between the states, companies engaging or seeking to engage in money transmission activities must continue managing compliance individually for each state.

2025 Adoptions of the Model Act

Massachusetts is the latest state to regulate domestic money transmission. Nearly half the states that have adopted at least part of the model act did so in 2024. We anticipate momentum in adoption of the model act will continue this year. Some states, including Alaska, Idaho, and Virginia, have pending legislation to address whether the state will also adopt a form of the model act later in the year.

We further note that while states are continuing to consider adopting the model act, Kansas, South Carolina, and Wisconsin each have new money transmission laws based on the model act that went into effect January 1, 2025.

Originally published January 22, 2025.

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If you have any questions, or would like additional information, please contact one of the attorneys on our Financial Services team.

New York Passes New Removal Procedures for Officers, Directors, Trustees, and Partners of Any Entity Regulated by Department of Financial Services

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What Happened?

On December 21, 2024, New York Governor Kathy Hochul, signed into law, S7532, which repealed the existing section of the Banking Law addressing the removal of officers, directors, and trustees of banking organizations, bank holding companies and foreign banks (“covered individuals”), and enacted a new section providing a clearer process for removing such individuals and expanding the scope of the removal authority to apply to all entities regulated by the New York Department of Financial Services (“the Department”).

Repealed Section:

The former provisions regarding the removal of covered individuals were limited to banking organizations, bank holding companies, and foreign banks.

The Superintendent of the Department (“the Superintendent”) was authorized to bring an action to the Banking Board (“the Board”) to remove an officer, director, or trustee whenever it found that such individual:

  • violated any law or regulation of the Superintendent of financial services, or
  • “continued unauthorized or unsafe practices . . . after having been ordered or warned to discontinue such practices.”

Note that the Banking Board has not existed since the Department of Financial Services was created in 2011.

The Board would then serve notice of the action to the covered individual to appear before the Board to show why they should not be removed from office. A copy of this notice would be sent to each director or trustee of the banking organization and to each person in charge of and each officer of a branch of a foreign banking corporation.

If after a three-fifths vote by the Board members the Board found that the individual committed such violations, an order would be issued to remove the individual from office.

The removal became effective upon service of the order. The order and findings were not made public, and were only disclosed to the removed individual and the directors or trustees of the banking organization involved. Any such removed individual that participated in the management of such banking organization without permission from the Superintendent would be guilty of a misdemeanor.

Newly Enacted Section:

The new provision expands the removal authority of the Superintendent to apply to all entities regulated by the Department (“covered entities”), including: banks, trust companies, limited purpose trust companies, private banks, savings banks, safe deposit companies, savings and loan associations, credit unions, investment companies, bank holding companies, foreign banking corporations, licensed lenders, licensed cashers of checks, budget planners, mortgage bankers, mortgage loan servicers, mortgage brokers, licensed transmitters of money, and student loan servicers.

The Superintendent is authorized to bring an action to remove such individuals whenever it finds reason to believe that they:

  • caused, facilitated, permitted, or participated in any violation by a covered entity of a law or regulation, order issued by the Superintendent or any written agreement between such covered entity or covered individual and the Superintendent;
  • engaged or participated in any unsafe or unsound practice in connection with any covered entity; or
  • engaged or participated in any willful material act or omitted to take any material act that directly contributed to the failure of a covered entity.

The notice and hearing provisions were changed to allow the Superintendent to serve a statement of charges against the covered individual and a notice of an opportunity to appear before the Superintendent to show cause why they should not be removed from office. A copy of such notice must now be sent to the affected covered entity, instead of the directors or trustees of the covered entity and persons in charge of foreign bank branches.

Additionally, the threshold for removal was changed. Instead of being removed by a three-fifths vote of a board that no longer exists, the covered individual may be removed if, after notice and hearing: (1) the Superintendent finds that the covered individual has engaged in the unlawful conduct, or (2) if the individual waives a hearing or fails to appear in person or by authorized representative.

The order of removal is effective upon service to the individual. The order must also be served to any affected covered entity along with the statement of charges. The order remains in effect until amended, replaced, or rescinded by the Superintendent or a court of competent jurisdiction. Such removed individual is prohibited from participating in the “conduct of the affairs” of any covered entity unless they receive written permission from the Superintendent. If the individual violates such prohibition, they are guilty of a misdemeanor.

Furthermore, the Superintendent is now authorized to suspend the covered individual from office for a period of 180 days pending the determination of the charges if the Superintendent has reason to believe that:

  • a covered entity has suffered or will probably suffer financial loss that impacts its ability to operate in a safe and sound manner;
  • the interests of the depositors at a covered entity have been or could be prejudiced; or
  • the covered individual demonstrates willful disregard for the safety and soundness of a covered entity.

The suspension may be extended for additional periods of 180 days if the hearing is not completed within the previous period due to the request of the covered individual.

Why Does it Matter?

Prior to the update, the Superintendent only had the power to remove individual officers, directors, or trustees from office in various bank organizations. The new law expands this removal power to all entities regulated by the Department.

The amended statute creates an additional penalty for individuals who caused, facilitated, permitted, or participated in the violation of the Banking Law in their positions of power of a regulated entity. Such individuals may be removed from their positions and prohibited from participating in the management of any regulated entity, until they receive written permission from the Superintendent. If they violate the prohibition, they are guilty of a misdemeanor, which can be punished by imprisonment for up to 364 days or by a fine set by the Superintendent.

What Do I Need To Do?

Entities regulated by the Department that are now covered under this section should be aware that violations of law by a licensee may also lead to the removal of certain high-level individuals within the organization. If removed, such individuals would also be prohibited from managing any regulated entity until the Superintendent provides written permission to do so. Affected entities and individuals should take care to ensure compliance with the law to avoid these new penalties.