On January 15, the Department of Treasury’s Office of Foreign Assets Control (OFAC) announced a final rule amending its Cuban Assets Control Regulations (CACR) to reflect policy changes previously announced by President Obama on December 17. The amendments (i) allow U.S. financial institutions to maintain correspondent accounts at Cuban financial institutions; (ii) allow U.S. financial institutions to enroll merchants and process credit and debit card transactions for travel-related and other transactions consistent with the CACR; (iii) increase the limit of remittances to $2,000 from $500 per quarter; and (iv) under an expanded license, allow U.S. registered brokers or dealers in securities and registered money transmitters to process authorized remittances without having to apply for a specific license. In addition, OFAC released a FAQ sheet to help explain the new amendments, which are effective January 16.
On May 21, the Office of Inspector General for the U.S. Postal Service (OIG) issued a report titled, “The Road Ahead for Postal Financial Services.” The report follows a January 2014 white paper issued by the OIG, which explored how the U.S. Postal Service could expand its provision of financial products to underserved Americans. The report summarizes five potential approaches for increasing the Postal Service’s financial services offerings, including: (i) expand current product offerings, which include paper money orders, international remittances, gift cards, and limited check cashing, as well as adjacent services (e.g., bill pay, ATMs); (ii) develop one key partner to provide financial services offerings, including possible expansion to general purpose reloadable prepaid cards, small loans, and/or deposit accounts; (iii) develop different partners for each product; (iv) make the Postal Service a “marketplace” for distribution of financial products of an array of providers; and/or (v) license the Postal Service as a financial institution focused on the financially underserved (although the OIG is not recommending this approach). Factors to consider when determining which approach to take, if any, include the legal and regulatory landscape; the effectiveness of cash management systems; dedication of the internal team, and public awareness of existing and potential services offered.
On September 12, the CFPB finalized a rule that allows it to supervise larger participants in the international money transfer market. In particular, this rule, which finalizes the proposed rule the CFPB issued in January 2014, allows the CFPB to supervise nonbank international money transfer providers that provide more than $1 million in international transfers annually, for compliance with the Remittance Rule under the Electronic Fund Transfer Act. The final rule will be effective December 1, 2014.
The CFPB will seek to ensure that these providers comply with a number of specific consumer-protection provisions, including the following:
- Disclosures: The CFPB will examine providers to determine that consumers receive the Remittance Rule-required disclosures in English as well as in any other language the provider uses to advertise, solicit, or market its services, or in any language in which the transaction was conducted. These disclosures inform consumers of the exchange rate, fees, the amount of money that will be delivered abroad, and the date the funds will be available.
- Option to Cancel: The CFPB will examine transfer providers to ensure that consumers receive at least thirty minutes to cancel the transfer if it has not yet been received, and that consumers receive a refund regardless of the reason for the cancellation.
- Correction of Errors: The CFPB will insist that remittance transfer providers properly investigate certain errors, and, if a consumer reports an error within 180 days, the CFPB will examine providers to determine that they have investigated and corrected certain types of errors. The CFPB will also examine providers to ensure that they are held accountable for the actions of any agents they use.
The CFPB used the authority granted to it in the Dodd-Frank Act to supervise “larger participants” in consumer financial markets, and this is the Bureau’s fourth larger participant rule. The CFPB indicates that it will use the same examination procedures for nonbank providers as it does for bank remittance providers, and the CFPB intends to coordinate with state examiners in its supervision.
The CFPB estimates that nonbank international money transfer providers transfer $50 billion each year, and 150 million individual international money transactions occur each year through these institutions, with seven million U.S. households transferring funds abroad each year through a nonbank.
On August 1, the U.S. Senate passed by unanimous consent H.R. 4386, which will permit FinCEN, in fulfilling its responsibility to supervise registered money services businesses (MSBs), to rely on state agency examinations of MSBs. The bill also covers other non-bank financial institutions such as gaming establishments and jewel merchants. The bill passed the House by voice vote in May. The President, who sought this authority for FinCEN in budget requests, is expected to sign the bill.
On July 3, the CFPB published a report on its study of the use of remittance histories in credit scoring, which found that (i) remittance histories have little predictive value for credit scoring purposes, and (ii) remittance histories are unlikely to improve the credit scores of consumers who send remittance transfers. The report follows a 2011 CFPB report on remittance transfers, which was required by the Dodd-Frank Act and assessed, among other things, the feasibility of and impediments to using remittance data in credit scoring. At that time, the CFPB identified a number of potential impediments to incorporating remittance history into credit scoring, and noted the need for further research to better address the potential impact of remittance information on consumer credit scoring. Read more…
On June 23, the ICBA and The Clearing House published a white paper on virtual currency that (i) defines virtual currency and describes the current regulatory environment; (ii) describes key players in the Bitcoin system; (iii) discusses the application of certain functional and prudential payment system regulations that may be applied to the Bitcoin system and other convertible decentralized virtual currencies; and (iv) evaluates potential regulation of virtual currency, virtual currency investment programs, and exchanges. The paper concludes, among other things, that: (i) credentials used to transact in Bitcoin are functionally similar to prepaid cards and arguably fall within the definition of such cards provided in Regulations E and II; and (ii) the CFPB may determine that cross-border transactions in Bitcoin fall within the scope of the CFPB’s Remittance Transfer Rule, which would require entities facilitating such transfers to comply with the rule’s disclosure, reversibility, and error-resolution requirements. The paper discusses potential safety and soundness oversight for entities in the Bitcoin system. It also suggests that existing regulations intended to protect consumers and market participants in the event of the failure of a securities or commodities exchange may be inapplicable to Bitcoin exchanges, and that alternative means of protecting investors and accountholders—such as disclosure requirements and coordinated state-level registration of exchanges—should be explored.
On April 15, the CFPB issued a proposed rule and request for comment to extend a temporary exception to Regulation E’s requirement that remittance transfer providers disclose certain fees and exchange rates to consumers. Pursuant to Regulation E, as amended to implement section 1073 of the Dodd-Frank Act, insured depository institutions are permitted to estimate certain third-party fees and exchange rates in connection with a remittance transfer until July 21, 2015, provided the transfer is sent from the sender’s account with the institution, and the institution is unable to determine the exact amount of the fees and rates due to circumstances outside of the institution’s control. The CFPB is proposing to exercise its statutory authority to extend this exception for an additional five years, until July 21, 2020. The agency explained that, based on its outreach to insured institutions and consumer groups, allowing the initial temporary exception to lapse would negatively affect the ability of insured institutions to send remittance transfers. Comments on the proposed rule are due within 30 days of its publication in the Federal Register. Read more…
On October 31, the Federal Reserve Board released a BSA/AML enforcement action against a Pakistani bank and its New York branch. The Written Agreement addresses examiners’ findings of alleged compliance and risk management deficiencies in the branch’s international remittance services. The agreement requires the bank and branch to, among other things, (i) retain an independent consultant to conduct a compliance review, and (ii) implement enhanced BSA/AML compliance and SAR programs. The agreement also requires interim transaction monitoring procedures and a third-party review of the branch’s international remittance transaction activity over a six-month period.
On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” to: (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds as well as the amount of funds the recipient will receive; and (ii) investigate consumer disputes and remedy errors. The rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.
The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations. Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.
Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.
On August 8, the CFPB released an updated small business guide for the remittance transfer rule it finalized last year and revised in May 2013. The updated guide summarizes the remittance rule and discusses the new requirements, which take effect on October 28, 2013. The CFPB also issued technical corrections to the May 2013 amendments, and released a video that provides an overview of the rule and the recent changes, as well as implementation guidance.
On April 30, the CFPB issued a revised final rule to amend regulations applicable to consumer remittance transfers of over fifteen dollars originating in the United States and sent internationally. Generally, the rule requires remittance transfer providers to (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds, as well as the amount of funds the recipient will receive, and (ii) investigate consumer disputes and remedy errors. The revised rule makes optional the original requirement to disclose (i) recipient institution fees for transfers to an account, except where the recipient institution is acting as an agent of the provider and (ii) taxes imposed by a person other than the remittance transfer provider. Instead, the revised rule requires providers to include a disclaimer on disclosures that the recipient may receive less than the disclosed total value due to these two categories of fees and taxes. The revised rule exempts from certain error resolution requirements two additional errors: (i) providing an incorrect account number or (ii) providing an incorrect recipient institution identifier. For the exception to apply, a remittance transfer provider must (i) notify the sender prior to the transfer that the transfer amount could be lost, (ii) implement reasonable measures to verify the accuracy of a recipient institution identifier, and (iii) make reasonable efforts to retrieve misdirected funds. In addition, the revised rule provides institutions more time to comply with the new remittance transfer standards. The final regulations, as revised by this rule, take effect on October 28, 2013.
On January 22, the CFPB announced that the effective date for its international remittance transfer rule, originally set for February 7, 2013, is delayed, and that a new effective date will be announced later this year. The CFPB recently proposed making the rule effective 90 days after proposed revisions to the rule are finalized.
On December 21, the CFPB proposed revisions to the remittance transfer rule it finalized earlier this year and already once modified. The proposed revisions follow a November 2012 bulletin from the CFPB in which it stated its intent to pursue a fast-track rulemaking to delay the effective date of the rule while addressing certain industry-raised concerns. The proposed revised rule would (i) provide increased flexibility and guidance with respect to the disclosure of taxes imposed by a foreign country’s central government, as well as fees imposed by a recipient’s institution for receiving a remittance transfer in an account, (ii) require disclosure of foreign taxes imposed by a country’s central government, but would eliminate the requirement to disclose taxes imposed by foreign regional, provincial, state, or other local governments, and (iii) require a provider to attempt to recover funds without bearing the cost of funds that cannot be recovered, when the provider can demonstrate that the consumer provided an incorrect account number and certain other conditions are met. The proposed rule also would push back the effective date of the remittance transfer rule from February 7, 2013, to 90 days after the revised rule is finalized. The CFPB is accepting comments on the delayed effective date for 15 days following publication in the Federal Register, and it is accepting comments on the substantive revisions for 30 days following publication in the Federal Register.
Eleventh Circuit Holds Bank Security Procedure Insufficient to Provide Safe Harbor from Liability for Fraudulent Wire Transfer
On November 27, the U.S. Court of Appeals for the Eleventh Circuit held that a bank may be liable for an allegedly fraudulent in-person wire transfer because it failed to implement a commercially reasonable security procedure to verify the authenticity of the wire transfer order and to detect transmission or content errors. Chavez v. Mercantil Commercebank N.A., No. 11-15804, 2012 WL 5907151 (11th Cir. Nov. 27, 2012). The plaintiff, a Venezuelan resident who opened an account at a Florida bank, elected a security procedure under the account’s Funds Transfer Agreement that provided only that the bank require written authorization by him in order to process any orders for the account. The plaintiff sued the bank for lost funds, claiming that the bank allowed an unauthorized individual to initiate a fraudulent in-person wire transfer of funds out of the account. The district court granted summary judgment in favor of the bank, holding that state law creates a safe harbor that relieves banks of liability for fraudulent payment orders if the bank and the customer agree to a commercially reasonable security procedure and the bank follows that procedure in good faith. The appellate court held that the agreed-upon security procedure was not in fact a security procedure as defined by statute. The court explained that state law disavows security procedures that require only a comparison of a signature on a payment order with an authorized specimen signature of the customer. In this case, the security procedure required written authorization, but was silent as to how the bank was to verify that authorization, i.e., it did not even require that the signature be compared to one on file. The court held that because the bank and the account holder did not agree to a security procedure, the bank could not seek safe harbor protection and reversed the district court’s order. One judge dissented from the majority opinion and argued that the Funds Transfer Agreement encompassed both the required and discretionary security procedures, which, taken together, were commercially reasonable and followed in good faith, therefore affording the bank safe harbor protection.