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To help you keep abreast of relevant activities, below find a breakdown of some of the biggest events at the federal and state levels to impact the Consumer Finance Services industry this past week:
- On January 27, the Federal Reserve Board (Fed) announced its decision to deny Custodia Bank’s (Custodia) application to become a member of the Federal Reserve System. The Fed denied Custodia’s application because Custodia’s proposed business model involved issuing crypto-assets on blockchain networks — an activity the Fed previously called “inconsistent with safe and sound banking practices.” The Fed also exhibited concern with Custodia’s ability to mitigate money laundering and terrorism financing. For more information, click here.
- On January 27, the Fed issued a policy statement, interpreting Section 9(13) of the Federal Reserve Act as providing the Fed with discretion to rebuttably presume that a state member bank cannot engage in any impermissible activity for a national bank, unless permissible via federal statute or applicable regulations promulgated by the Federal Deposit Insurance Corporation (FDIC). The statement discussed the permissibility of certain crypto-asset-related activities for state member banks and how the Fed would apply the rebuttable presumption to those activities:
- Holding Crypto-Assets as Principal. Since the Fed has not identified any authority that permits national banks or state banks to hold crypto-assets as principal, the Fed would presumptively prohibit state member banks from holding crypto-assets as principal. The Fed noted that this rebuttable presumption is “bolstered by safety and soundness concerns” since the ostensibly opaque nature of the digital asset market “may make it difficult or impossible to assess market and counterparty exposure risks.”
- Issuing Dollar Tokens. In 2021, the Office of Comptroller of Currency (OCC) issued Interpretive Letters 1174 and 1179, governing the permissibility of national banks to issue dollar tokens. Although the Fed reasoned that engaging in this type of activity is “inconsistent with safe and sound banking practices,” the letters’ existence rebuts the presumption in favor of prohibition, and a state member bank that proposes to engage in this activity would be required to adhere to certain conditions set forth by the OCC in the letters. Those conditions include, but are not limited to, obtaining a nonobjection letter from the OCC and demonstrating that the state bank has controls in place to conduct the activity in a safe and sound manner.
For more information, click here.
- On January 26, the Securities and Exchange Commission (SEC) rejected Cboe BZX Exchange’s (BZX) request to list and trade Ark 21Shares, the proposed spot-Bitcoin exchange traded fund (ETF) managed by asset managers ARK Investment Management and 21Shares (collectively hereinafter, the “trust). BZX’s request required the SEC to determine whether permitting approving the ETF would be consistent with Section 6(b)(5) of the Exchange Act, which requires that the rules of a national securities exchange be designed “to prevent fraudulent and manipulative acts and practices” and “to protect investors and the public interest.” With respect to a spot-Bitcoin ETF, a listing exchange may demonstrate compliance with these mandates by proffering evidence that the listing exchange has entered a comprehensive “surveillance-sharing agreement” with a regulated market “of significant size” related to spot-Bitcoin, or the listing exchange has held Intermarket Surveillance Group (ISG) membership in common with such regulated market. Due to common ISG membership of BZX and the Chicago Mercantile Exchange (CME), which lists and trades Bitcoin future contracts, the SEC recognized that BZX has the equivalent of a “comprehensive surveillance-sharing agreement” with CME. However, the SEC concluded that the CME Bitcoin futures market is not a market of significant size related to spot-Bitcoin, which is the underlying assets that would be held by the trust. This marks the second time the SEC rejected a request by BZX to list a spot-Bitcoin ETF on its platform. For more information, click here.
- On January 26, the Office of Science and Technology Policy (OSTP) issued a notice of request for information (RFI) that recommended the U.S. government develop and periodically update a National Digital Assets Research and Development (R&D) Agenda, currently being developed by the OSTP and the Fast Track Action Committee on Digital Assets Research and Development of the Subcommittee on Networking and Information Technology Research and Development (NITRD) of the National Science and Technology Council, the National Science Foundation, and the NITRD National Coordination Office. The RFI requests public comments to help identify priorities for R&D related to designing digital assets — particularly, a central bank digital currency. For more information, click here.
- On January 26, U.S. Senator Elizabeth Warren (D-MA) applauded the SEC’s crypto-related enforcement actions to date, while delivering remarks during a virtual event co-hosted by the American Economic Liberties Project and Americans for Financial Reform. For more information, click here.
- On January 25, U.S. Senators Elizabeth Warren (D-MA) and Ron Wyden (D-OR) delivered a letter to the Public Company Accounting Oversight Board (PCAOB), discussing the role that insufficient accounting could have played in misleading consumers about the financial soundness of crypto-related companies. In the letter, Senators Warren and Wyden criticized “proof-of-reserves” audits, which have become a consumer protection and compliance talking point among digital-asset stakeholders after the implosion of FTX. Senators Warren and Wyden noted that “proof-of reserves examinations fall significantly short of real audits, as proof-of-reserves reports do not follow established standards, are not overseen by the PCAOB, and do not prove that listed assets actually belong to customers.” For more information, click here.
- On January 25, the Consumer Financial Protection Bureau (CFPB) released a blog post on consumer credit score transitions during the COVID-19 pandemic. The CFPB examined the transition of consumers across five credit score tiers: (1) deep subprime (300-579); subprime (580-619), near-prime (620-659); prime (660-719), and superprime (720-850). Trends in the CFPB-analyzed data demonstrated that transitions from the deep subprime credit tier became more common during the pandemic. Additionally, the data showed that transitions out of the subprime credit tier were also more common during the pandemic. The CFPB also found that consumers with near-prime, prime, or superprime credit scores were less likely during the pandemic to transition to a lower credit score tier and that a larger percentage of consumers with near-prime credit scores transitioned into a higher credit score tier during the pandemic compared to pre-pandemic. The CFPB noted that the improvement in consumer credit scores during the pandemic were largely driven by consumers with deep subprime and subprime scores, but consumers across all tiers were more likely to transition to a higher tier and less likely to transition to a lower tier than before the pandemic. For more information, click here.
- On January 25, the Biden administration announced new actions to increase fairness in the rental market and further principles of fair housing. The actions aligned with the new Blueprint for a Renters Bill of Rights also released by the administration on the same date. Some of the actions include:
- An announcement by the Federal Trade Commission (FTC) and the CFPB that they will collect information to identify practices that unfairly prevent applicants from accessing or staying in housing;
- An announcement by the Federal Housing Finance Agency (FHFA) that it will launch a new public process to examine proposed actions promoting renter protections and limits on egregious rent increases for future investments; and
- An announcement that the U.S. Department of Housing and Urban Development will publish notice of proposed rulemaking that would require certain public housing authorities and certain property owners to publish at least 30 days’ notice of intent to terminate a lease for nonpayment.
For more information, click here.
- On January 24, the CFPB issued a request for information, seeking public input on how the consumer credit market is functioning. The request intends to obtain information necessary for the CFPB’s biennial review of the credit card market as mandated by the Credit Card Accountability Responsibility Disclosure Act (CARD Act) enacted by Congress in 2009. Specifically, the CFPB seeks more and current information about various aspects of consumers’ experience with credit cards, including, among other things: (1) the terms of credit card agreements, (2) the effectiveness of disclosures, (3) the adequacy of protections against unfair and deceptive acts or practices, (4) the cost and availability of consumer credit cards, (5) the safety and soundness of credit card issuers, (6) the use of risk-based pricing for consumer credit cards, and (7) consumer credit card product innovation. The comment period for this request will end on April 24. For more information, click here.
- On January 24, the Federal Communications Commission’s (FCC) Robocall Response Team took action to shut down an apparent robocall scam campaign targeting homeowners. The FCC’s Enforcement Bureau ordered telecommunications companies to mitigate suspected illegal traffic from a particular dialing platform believed to have been used to facilitate the calls. The bureau also required a particular voice service provider to cease and desist from carrying the suspected illegal robocall traffic. According to the FCC, at least three state attorneys general sued the real estate brokerage firm accused of originated the robocall traffic. For more information, click here.
- On January 23, the FCC released a public notice, mandating compliance with its Telephone Consumer Protection Act (TCPA) amendments as of July 20. In late December 2020, the FCC released the TCPA exemptions order to implement Section 8 of the Pallone-Thune Telephone Robocall Abuse Criminal Enforcement and Deterrence Act. In that rulemaking, the FCC amended several provisions of the TCPA related to exemptions for noncommercial calls to residential numbers, commercial calls to residential numbers that do not include an advertisement or constitute telemarketing, tax exempt nonprofit organization calls to residential numbers, and Health Insurance Portability and Accountability Act-related calls to residential numbers. The amendments limited the number and frequency of calls to residential numbers, and also required the callers placing such calls to allow consumers to opt out of any future calls. For more information, click here.
- On January 23, the Federal Bureau of Investigation (FBI) announced that an investigation confirmed that the Lazarus Group was responsible for the theft of $100 million virtual currency from blockchain Harmony One’s cross-chain bridge, Horizon Bridge. On January 13, the Lazarus Group utilized RAILGUN, a zero-knowledge, proof-based blockchain that enables users to send or receive transactions without revealing either assets or identities, to launder over $60 million Ethereum stolen during the heist. Harmony One originally reported the heist to the FBI in June 2022. For more information, click here.
- On January 20, the CFPB urged mortgage servicers to remind homeowners with sufficient home equity that a traditional sale could provide a better alternative to foreclosure. The CFPB also noted that servicers can refer homeowners to HUD-approved housing counselors and may consider suggesting that interested homeowners contact a real estate agent. The CFPB noted that although foreclosure starts are relatively low when compared to pre-pandemic levels, an increase (by 23,400) of foreclosure starts occurred in November 2022. The CFPB also noted that the foreclosure process can be expensive for homeowners and can impact wealth accumulation. The CFPB pointed out that rising rents may mean it is best for homeowners to remain in their homes, if possible, and to consider other options, such as payment deferral, allowing them to do so. However, for those without such home-retention strategies, the CFPB highlighted a traditional sale as one alternative to foreclosure. For more information, click here.
- On January 20, the SEC filed a civil complaint against Avraham Eisenberg for allegedly orchestrating an attack on a crypto-asset trading platform known as Mango Markets (MNGO) in violation of anti-fraud and market manipulation provisions of federal securities laws. The SEC alleged that Eisenberg stole $116 million in crypto assets from Mango Markets’ platform by selling many perpetual futures for MNGO tokens and then subsequently purchasing those same perpetual futures using a separate account maintained on MNGO. The SEC further alleged that these actions enabled Eisenberg to artificially raise the price of his MNGO perpetual futures position to borrow and withdraw approximately $116 million in various crypto-assets from MNGO, which effectively drained all the available assets on MNGO’s platform. Eisenberg also faces parallel criminal charges brought by the Department of Justice and the Commodities Futures Trading Commission. For more information, click here.
- On January 17, the Monetary and Economic Department of the Bank for International Settlements (BIS) issued a white paper titled, The Technology of Decentralized Finance. According to the white paper, BIS considers decentralized finance (DeFi) “a relevant development because it harnesses innovative technology that might shape the future of the financial ecosystem” through its “algorithmic automation of financial activity.” Nevertheless, the white paper also notes that a “deep understanding of DeFi is still lacking in many circles,” as evidenced by the rapid collapse of Terra Labs’ algorithmic stablecoin protocol and its associated crypto-assets LUNA and UST. For more information, click here.
- On January 27, California Attorney General Rob Bonta announced an investigative sweep, targeting businesses with mobile apps that do not comply with the state’s Consumer Privacy Act (CCPA). The sweep focuses on retail, travel, and food service industries that have not complied with consumer opt-out requests or do not offer a way for consumers to opt out of the sale of their data. The sweep also seeks out those businesses that have failed to process consumer requests as required by the CCPA. For more information, click here.
- On January 26, New York Assembly member Clyde Vanel (D) introduced A 2532, a bill permitting New York state agencies to accept “cryptocurrency” as a method of payment of fines, civil penalties, rent, rates, taxes, fees, charges, revenue, or other financial obligations owed to state agencies. If enacted, the bill would enable New York state agencies to enter agreements with “cryptocurrency issuers” to facilitate acceptance of cryptocurrency by the state of New York. Notably, A 2532 is substantively identical to Arizona Senator Wendy Rogers’ bill SB 1239 discussed below. For more information about A 2532, click here.
- On January 25, Arizona Senator Wendy Rogers (R) introduced SB 1235 and SB 1239, which propose to include Bitcoin as a form of legal tender and enable Arizona state agencies to accept “cryptocurrency” as a method of payment for any financial obligations and special assessments due to the state agency, respectively. Notably, SB 1239 defines “cryptocurrency” as any form of digital currency using encryption techniques to regulate the generation of units of currency and verify the transfer of monies, operating independently of a central bank, including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. For more information regarding SB 1235, click here. For more information regarding SB 1239, click here.
- On January 23, Colorado Attorney General Phil Weiser sent a consumer lending study that examines the availability and safety of “small-dollar” loans (up to $1,000) and larger installment loans (exceeding $1,000) to the Colorado General Assembly. This study comes on the heels of voter approval of Proposition 111, an initiative designed to cap rates on deferred deposit loans at 36%, which led several lenders to offer alternative loans available under Colorado law that permit rates that exceed this cap. According to the study, it appears consumers who qualify can obtain alternative charge loans, despite a drop in the number of retail outlets, due to the growth of online lending. Additionally, the study’s authors note that affordability of alternative charge borrowers is mixed. For example, some measures indicate that one in five borrowers experience substantial difficulty making the required payments, while other measures suggest a lower percentage. As for large loans, the study indicates that the share of Coloradans obtaining an unsecured installment loan is well below the share in comparable states, including some without a usury limit, for consumers in the subprime and deep subprime credit tiers and consumers without a credit score. When compared to states without usury limit, the study notes that on most measures, the borrowers in the comparison states generally experience greater levels of repayment difficulty than Colorado borrowers. For more information, click here.
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