Alston & Bird Consumer Finance Blog

Licensing

New York Financial Regulator Requires COVID-19 Risk Assessment, Operational Planning

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Last week the New York Department of Financial Services (the “Department”) issued letters to all its licensed financial institutions. Based on these letters (available here and here), all Department licensees must assess and plan for the financial risk of COVID-19 and, separately, develop operational plans for managing their response to the virus. The Department requires written responses “as soon as possible” but within 30 days in any case. As a result, impacted businesses should be actively preparing responses to the Department’s detailed request, if they have not already.

Citing the “potentially significant effects an outbreak of COVID-19 could have on your institutions,” the Department “requires that each regulated institution submit a response to DFS describing the institution’s plan of preparedness to manage the risk of disruption to its services and operations.” The Department’s letter regarding such operational preparedness indicates the topics that the Department expects to see reflected within such plans, including:

  • Impact Minimization Measures – Preventative measures to minimize operational impact on customers and business partners;
  • Scaled Strategies to Outbreak Stages – Documented strategies addressing the impact in stages, so the organizations approach may be scaled in accordance with the effects of the stage of an outbreak (with approximate deployment timeframes);
  • Facilities, Resources and Testing Assessments – Assessment of all facilities (including alternative or back-up sites), systems, policies and procedures necessary to continue critical operations and services if members of the staff are unavailable for long periods (perhaps sick) or are working off-site, including an assessment and testing as to whether large scale off-site working arrangements can be activated and maintained to ensure operational continuity;
  • Cyber and Fraud Are Contemplated in the Assessments – Any assessment should include an assessment of potential increased cyber-attacks and fraud;
  • Employee Health Considerations – An assessment of employee protection strategies, critical to sustaining the entire workforce during the outbreak, including employee awareness and steps employees can take to reduce the likelihood of contracting COVID-19;
  • Service Provider Assessments – Of the preparedness of critical outside-party service providers and suppliers (at a minimum, this anticipates contacting these providers and touching base as to their capabilities);
  • Communications Plans– Development of a communication plan to effectively communicate with customers, counterparties and the public and to deliver important news and instructions to employees, along with establishing forums for questions to be asked and addressed;
  • Testing, Governance and Oversight of the Overall COVID-19 Plan

In addition to operational planning, a separate letter issued by the Department requires institutions to additionally provide a plan “regarding managing the potential financial risk arising from COVID-19.” Such financial risk management plans must assess credit exposure to counterparties impacted by COVID-19 (potentially including stress testing or sensitivity analysis of loan portfolios); assess the valuation of assets impacted by COVID-19; assess overall financial impacts on earnings, profits, capital and liquidity; assess the credit risk ratings of the customers, counterparties and business sectors impacted by COVID-19; and assess “reasonable and prudent steps to assist those adversely impacted by COVID-19.”

The Department has issued a separate letter for institutions engaged in virtual currency activity, and requires operational and financial planning for these businesses as well. Finally, the Department issued a fourth letter on March 10 encouraging banks, credit unions and lenders to “consider all reasonable and prudent steps to assist businesses that have been adversely impacted by COVID-19,” including waiving fees, easing credit terms, and offering payment accommodations.

If you have any questions regarding the development of this alert or crafting responses to the NYDFS, please contact Jim Harvey, Nanci Weissgold, Amy Mushahwar, or Michael Young.

New York Proposes Licensing Consumer Debt Collectors

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A&B ABstract:  On January 21, 2020, New York Governor Andrew Cuomo proposed a measure to license consumer debt collectors as part of his budget bill. If enacted, the measure would require any person acting as a “consumer debt collector” in New York to obtain a license from the New York Banking Superintendent.

Effective October 1, 2020, the measure would require any person acting as a consumer debt collector either directly or indirectly in the State of New York to obtain a license.

Who is a Consumer Debt Collector?

The proposed bill defines a “consumer debt collector” as “any person who engages in a business, a principal purpose of which is the collection of consumer debts or of debt buying, or who regularly collects or attempts to collect, directly or indirectly, consumer debts owed or due to another person.” The definition also includes any creditor that “in the process of collecting its own consumer debts, and uses [sic] any name other than its own, which would reasonably indicate that a third person is collecting or attempting to collect a consumer debt.” The measure would set a one-year license period, with an expiration date of September 1 each year.

Exemptions

Although the definition of “consumer debt collector” is broad, the proposed bill does carve out exemptions for a variety of entities. Notably, loan servicers are exempt from licensing if they are servicing loans or accounts that are not delinquent. Additionally, the measure exempts from licensure a national bank and any subsidiary or affiliate of a national bank if the entity is not primarily engaged in the business of purchasing and collecting upon delinquent debt, other than debt secured by real property. However, unlike many other states (such as Illinois and Washington), New York would not exempt attorneys from licensure.

License Requirements

The proposed bill would require that consumer debt collectors file and maintain a $25,000 surety bond in connection with the application for, and renewal and maintenance of, a consumer debt collector license. Further, expiration of a debt collector’s bond without a replacement being filed with the New York Department of Financial Services would cause automatic expiration of a license.

Practice Restrictions

The proposed bill also includes substantive restrictions on communications with consumer debtors. Significantly, the measure would prohibit a consumer debt collector from contacting a consumer debtor outside the hours of 8 a.m. to 8 p.m. local time for the consumer debtor. This prohibition deviates from a similar provision in the Fair Debt Collections Practices Act (“FDCPA”). The FDCPA prohibits debt collectors from contacting consumers outside of the hours of 8 a.m. to 9 p.m. local time for the consumer.

Takeaways

If enacted, the proposed bill would expand the scope of licensing for debt collectors in New York, which are currently licensed only by individual municipalities. Further, in its current form, the measure would require attorneys to be licensed to collect on delinquent debt. We will continue to monitor this measure, which has a high likelihood of passage given its inclusion in Governor Cuomo’s budget bill.

California Governor Moves to Strengthen State Consumer Protection Enforcement in 2020

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A&B ABstract:

On January 10, 2020, California Governor Gavin Newsom released his budget summary for 2020 to 2021. Fearing that the Trump administration will further roll back consumer financial protections, Gov. Newsom proposed the California Consumer Financial Protection Law, which would provide the state’s primary financial services regulator with additional authority to enforce consumer protection laws.

Discussion

In his budget summary for 2020 to 2021 (“Budget”), Gov. Newsom expressed concern that “[t]he federal government’s rollback of the [Consumer Financial Protection Bureau (“CFPB”)] leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Seeking to protect Californians from the effects of such rollbacks, Gov. Newsom proposed that state funds be allocated to enact and administer the California Consumer Financial Protection Law (“CCFPL”).

A draft of the CCFPL is not yet available.  However, as described in the Budget, the CCFPL would expand the authority and capacity of the state’s primary financial services regulator, the Department of Business Oversight (“DBO”), “to protect [California] consumers and foster the responsible development of new financial products.”

Change in Regulatory Structure

The DBO, which would be re-named the Department of Financial Protection and Innovation (“DFPI”), would be responsible for:

  • Offering services to empower and educate consumers, especially older Americans, students, military service members, and recent immigrants;
  • Licensing and examining new industries that are currently under-regulated [including, but not limited to, debt collectors, credit reporting agencies, and financial technology companies];
  • Analyzing patterns and developments in the market to inform evidence-based policies and enforcement;
  • Protecting consumers through enforcement against unfair, deceptive, and abusive practices;
  • Establishing a new Financial Technology Innovation Office that will proactively cultivate the responsible development of new consumer financial products;
  • Offering legal support for the administration of the new law; and
  • Expanding existing administrative and information technology staff to support the DFPI’s increased regulatory responsibilities.

The statements on the DFPI indicate that it will be another “mini-CFPB” (i.e. a state version of the CFPB) that will protect California consumers in a way that Gov. Newsom believes the CFPB cannot. Former CFPB Director Richard Cordray is reportedly working with California to develop the DFPI.

DFPI Funding and Staffing

The Budget includes a $10.2 million Financial Protection Fund and the creation of 44 new positions at the DFPI between 2020 and 2021. This will grow to $19.3 million and 90 new positions at the DFPI between 2022 and 2023, to establish and administer the CCFPL. According to the Budget, initial costs for the DFPI and the CCFPL “will be covered by available settlement proceeds in the State Corporations and Financial Institutions Funds, with future costs covered by fees on any newly-covered industries and increased fees on existing licensees.”

Takeaway

Gov. Newsom’s comments in the Budget suggest that California will be more active in investigating regulated financial services entities and enforcing California’s existing consumer protection laws. Additional regulations may be passed as part of this initiative. Action by California is consistent with a growing trend among the states to be more active in their oversight of regulated industries in response to a less active CFPB. Industry participants should be mindful of this trend, assessing their compliance programs to manage oversight from multiple entities under multiple regulatory schemes.

New York Proposes Guidance for Regulated Virtual Currency Licensees

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A&B ABstract

Since the New York Department of Financial Services (“NYDFS”) finalized regulations for virtual currency firms in 2015, several regulated virtual currency licensees (“Licensees”) have sought permission to issue new virtual currencies (i.e., coins) in addition to those included in their initial license applications. On December 11, 2019, NYDFS issued Proposed Guidance in response to these requests, and will accept comments until January 27, 2020.

Proposed Model Framework

The Proposed Guidance discusses a proposed model framework for a coin-listing or adoption policy (“Policy”) and a procedure for obtaining NYDFS approval of a Policy.  Specifically, the Proposed Guidance would require each Policy to address, at a minimum, the Licensee’s governance, risk, and monitoring of its coins.

Governance:

The board of directors of the Licensee, or any equivalent governing body, must:

  • Approve the Policy;
  • Independently make decisions to approve or disapprove a new coin;
  • Consider and address any and all conflicts of interest in connection with any review and/or decision-making process for a new coin;
  • Maintain specific minutes for meetings during which a new coin is addressed; and
  • Keep specific records of the application of the Policy to each new coin.
Risk:

The Licensee must conduct and document a full risk assessment of any new coins in a way that is entirely free of conflicts of interest. It must consider operational risks, risks associated with any technology or systems enhancements, cybersecurity risks, risks related to code defects, and legal and regulatory risks. A Licensee also must ensure that an independent audit of all associated risks is conducted.

Monitoring:

A Licensee must maintain policies and procedures to monitor adherence to the Policy.  At a minimum, such policies and procedures must include:

  • Periodic re-evaluation of the coin;
  • Adoption, documentation, and implementation of control measures to manage risks; and
  • A process for de-listing the coin.

Proposed Procedures

A Licensee may submit its Policy to the NYDFS for formal approval.  After receiving approval, the Licensee will be able to self-certify to NYDFS that its proposed adoption or listing of new coins complies with its NYDFS-approved Policy. After self-certification, a Licensee need only provide prior written notice to the NYDFS of its intent to offer and use the new coins. A Licensee with an approved Policy would not be required to obtain the approval of the NYDFS for a new coin, unlike a Licensee that does not maintain an approved Policy.

Significantly, all Licensees, irrespective of whether they maintain a Policy approved by the NYDFS, must inform the NYDFS of all coins used or offered in connection with their business activities no later than at the time of their next quarterly filing.

Comment Deadline

Interested parties should submit their comments to innovation@dfs.ny.gov by January 27, 2020, with the subject line “Proposed Coin Listing Policy Framework.” All such comments may be subject to public inspection.

Takeaway

NYDFS Superintendent Linda Lacewell has indicated that she wants New York to remain at the “jurisdiction of choice” for innovation, and these Proposed Guidelines are indicative of the state’s continued efforts to keep that standing. To that end, we can expect to see the NYDFS provide further regulatory clarity and efficiency for emerging financial services technologies and take steps to ensure that its regulation reflects the industry’s fast-paced, evolving market.

NY DFS unveils Consumer Protection Task Force, adds Former CFPB Deputy Director

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A&B ABstract:

Less than one month into the new year, New York’s Department of Financial Services (DFS) has taken strong measures to make good on its proclamation that  “2020 must be the year of the consumer” by: (1) unveiling a 12-member Consumer Protection Task Force to help implement an extensive consumer protection agenda; and (2) adding former CFPB Deputy Director Leandra English as a special policy advisor to the Superintendent.

The Consumer Protection Task Force

On January 9, Superintendent Lacewell announced the roll-out of a 12-member Consumer Protection Task Force to “further DFS’ mission to protect consumer as the federal government rolls back important consumer protections.”  In his annual State of the State, Governor Cuomo expressed his belief that with the current Administration’s “rolling back of consumer protections and regulations, Americans are more exposed to predatory and abusive practices than at any time since the 2008 financial crisis.”  The DFS press release noted that one of the task force’s immediate focuses will be to help bring to fruition “the extensive consumer protections proposals included in Governor Cuomo’s 2020 State of the State agenda” which includes such initiatives as: (1) licensing and regulating debt collection companies; (2) the codification of a Federal Trade Commission rule banning confessions of judgment; (3) strengthening the state’s consumer protection laws to protect against unfair, deceptive, and abusive practices; (4) cracking down on elder financial abuse; and (5) increasing access to affordable banking services.

According to the DFS, task force members will “provide formal input on the [DFS’] consumer engagement, policy development and research” in order to “ensure that consumer’s always come first as the [DFS] develops policies and regulates the financial services industry.”  The 12-member committee consists of: (1) Chuck Bell, Programs Director for the advocacy division of Consumer Reports; (2) Elisabeth Benjamin, Esq., Vice President of Health Initiatives at the Community Service Society; (3) Carolyn Coffee, Esq., Director of Litigation for Economic Justice at Mobilization for Justice; (4) Beth Finkel, State Director for the New York State Office of the AARP; (5) Jay Inwald, Esq., Director of Foreclosure Prevention at Legal Services NYC; (6) Paul Kantwill, Esq., Distinguished Professor in Residence and Executive Director, Rule of Law Program at Loyola University Chicago School of Law; (7) Neha Karambelkar, Esq., Staff Attorney at Western New York Law Center; (8) Kristen Keefe, Esq., Senior Staff Attorney with the Consumer Finance and Housing Unit at Empire Justice Center; (9) Peter Kochenburger, Esq., Executive Director of the Insurance LLM Program and Deputy Director of the Insurance Law Center at the University of Connecticut Law School; (10) Sarah Ludwig, Esq., Co-Director of New Economy Project; (11) Frankie Miranda, Executive Director at the Hispanic Federation; and (12) Cy Richardson, Senior Vice President at the National Urban League.

Superintendent Lacewell noted that, as the federal government, in her words, “dismantles consumer protections across the board, New York has intensified its commitment” to “further solidify New York’s reputation as the consumer protection capital of America.” Lacewell added that, “[w]ith the federal government stepping down and refusing to enforce critical consumer protection law, we must make 2020 the Year of the Consumer.”

NY DFS Adds Former CFPB Deputy Director Leandra English

On January 14, 2020 the DFS announced that former CFPB Deputy Director Leandra English would be joining the DFS as a special policy advisor reporting directly to Linda Lacewell.  According to the press release, Ms. English will “help develop policy initiatives and manage DFS’ consumer protection agenda” and her appointment “strengthens the mission of the [DFS] to protect and empower New York consumers as Washington continues to roll back on consumer protections.”  Ms. English is well known for leaving the CFPB after having been appointed acting director by departing director Richard Cordray only to see the President’s administration issue a dual appointment, naming Mick Mulvaney as acting director.  The ensuing legal dispute reached the U.S. Court of Appeals for the D.C. Circuit before Ms. English ultimately resigned.

Ms. English’s most recent work was as Director of Financial Services Advocacy for the Consumer Federation of America (CFA), a “national nonprofit organization dedicated to advancing the consumer interest through research, advocacy, and education.”  One of Ms. English’s initiatives in that role was to support the Forced Arbitration Injustice Repeal Act (H.R. 1423), known as the “FAIR” Act, which would eliminate compulsory arbitration in consumer contracts and was passed by the House of Representatives in the Fall by a 225-186 vote.  Upon the bills passage, Ms. English commented that, “Americans deserve their day in court, but when companies force consumers into signing away their rights, the chances of a fair outcome diminish drastically. We thank the House for taking this important step in eliminating these clauses from contracts for products consumers use every day including credit cards and checking accounts. We now need the Senate to act to protect consumers.”

Takeaway

As the DFS continues its push to strengthen protections for New York consumers in 2020, it will be interesting to watch how such initiatives impact the DFS’ investigative and enforcement priorities.  Moreover, as New York is a bellwether state, it will be interesting to see whether other states follow suit.