Department of Education Outlines New Protections for Student Loan Borrowers

On July 20, Under Secretary Ted Mitchell of the U.S. Department of Education sent a memo to the Federal Student Aid Chief Operating Officer containing policy directives intended to “strengthen student loan servicing.” Developed in consultation with the CFPB and the Department of the Treasury, the memo provides direction in the following five areas: (i) economic incentives, directing the FSA to use “incentives that encourage servicers to help borrowers stay on top of their loans and avoid default while avoiding fixed-fee structures that create a disincentive to help struggling borrowers”; (ii) accurate and actionable information about account features, borrower protections, and loan terms; (iii) consistency in communications; (iv) accountability, directing the FSA to “step up monitoring of servicing vendors and to integrate complaint resolution into the oversight of those vendors”; and (v) loan data transparency. Commenting on the policy directives outlined in the memo, CFPB Director Richard Cordray noted that the joint servicing standards are intended to increase consistency, transparency, actionability, and accountability in the student lending marketplace.

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Treasury Adopts Methodology for Monitoring the Affordability of Auto Insurance

On July 13, the Treasury Department announced that the Federal Insurance Office (FIO) adopted a methodology for monitoring the affordability of auto insurance. Under the Dodd-Frank Act, the FIO is authorized to monitor the extent to which affordable personal automobile insurance is made available to traditionally underserved communities and consumers, minorities, and low- and moderate-income (LMI) persons. Pursuant to the new methodology, FIO will calculate affordability by using an affordability index that divides the average annual personal automobile liability premium by the median household income for identified majority-minority or majority-LMI ZIP codes. If the Affordability Index does not exceed to 2%, then FIO will consider personal automobile liability insurance affordable. Finally, to monitor the availability of auto insurance, FIO will obtain and analyze aggregated premium data in addition to using publicly available data through the U.S. Census Bureau.

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FinCEN Director Calvery Opines on Agency Efforts to Increase Financial Transparency

On May 24, FinCEN Director Calvery delivered remarks before the House Committee on Financial Services at a hearing entitled “Stopping Terror Finance: A Coordinated Government Effort.” Calvery noted FinCEN’s commitment to fostering an environment of financial transparency, and provided insight on the recent issuance of a final rule, issued on May 6, which clarified customer due diligence (CDD) requirements for financial institutions: “[w]e are confident that the CDD final rule will increase financial transparency and augment the ability of financial institutions and law enforcement to identify the assets and accounts of criminals and national security threats. We anticipate that the CDD rule will also facilitate compliance with sanctions programs and other measures that cut off financial flows to these actors.” Calvery further emphasized the significance of recently proposed beneficial ownership legislation, noting that it and the CDD rule “dovetail together.” Calvery opined that the level of transparency that the proposed legislation and the CDD rule offer would assist law enforcement in identifying who the “real people are that are involved in a transaction,” furthering its efforts to combat money laundering and terrorism, enforce sanctions, and prevent other unlawful abuses of the U.S. financial system. Finally, she noted that the beneficial ownership legislation, if enacted, would provide FinCEN with the ability to collect information on all funds transfers (instead of only monetary instruments, as currently authorized) through the use of geographic targeting orders.

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Treasury Announces Beneficial Ownership Legislation; Proposes Foreign-Owned Single-Member LLC Regulations

Recently, the Treasury Department announced that it is sending Congress legislation that would require companies formed within the United States, or “that [use] the mail, wire, or any facility in interstate or foreign commerce in its formation, transfer of ownership, or business activity,” to file beneficial ownership information with the Department, and would impose a $5,000 penalty for failure to comply. The proposed legislation defers to the Department of the Treasury to define beneficial ownership. The new draft legislation also proposes technical amendments to FinCEN’s Geographic Targeting Order (GTO) authority to provide FinCEN the authority to collect information on funds transfers in general, including regarding bank wire transfers, instead of transactions using “monetary instruments.”

Treasury simultaneously announced proposed regulations to require foreign-owned “disregarded entities” to obtain an employer identification number with the IRS. The proposed regulations are intended to address “a narrow class of foreign-owned U.S. entities – typically single member LLCs – that have no obligation to report information to the IRS or to get a tax identification number.” These “disregarded entities” (which include foreign-owned-single-member LLCs) can, according to Treasury, be used to shield non-U.S. assets’ or non-U.S. bank accounts’ foreign owners. If finalized, the regulations would assist the IRS in determining whether a tax liability exists, and if so, how much. Finally, the regulations would allow the IRS to share information with other tax authorities.

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Treasury Department Issues Marketplace Lending Report

On May 10, the U.S. Department of the Treasury (hereafter, Department or Treasury) released a report on “Opportunities and Challenges in Online Marketplace Lending.” The result of Treasury’s July 20, 2015 Request for Information (RFI) on Expanding Access to Credit through Online Marketplace Lending, the report summarizes the Department’s understanding of the online marketplace lending industry, including the potential benefits and risks of the growing industry in relation to consumers’ financial needs. Treasury’s key observations and findings are discussed in sections three through six of the report – Background and Definitions; Treasury Research Efforts and Themes from (RFI) Responses; Recommendations; Looking Forward.

Background and Definitions

The report provides a high-level overview of the two primary business models in online marketplace lending: (i) direct lenders originating loans to hold in their own portfolios (or balance sheet lenders); and (ii) platform lenders that partner with an issuing depository institution to originate loans, subsequently purchasing the loans and reselling them to whole-loan investors or issuing securities tied to the performance of the loans. Commenting on the various types of consumer loans offered through marketplace lending, the report identifies the unsecured consumer credit market (debt consolidation, credit card repayment, and home improvement), small business credit market, and student loan market as constituting the majority of the industry’s business. The report also notes that the industry is moving into the mortgage lending and auto loan markets. According to the report, while both direct lenders and platform lenders have altered their frameworks to allow for “flexibility in varying economic environments,” neither has demonstrated an ability to perform well in a less than favorable economic environment: “[o]nline marketplace lenders have demonstrated their ability to improve operational efficiencies, but neither the durability of technology-driven operations and credit underwriting, nor the sustainability of investor demand for loans, have yet been tested during a downturn in the credit cycle.” Read more…

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