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 5, the Office of Comptroller of Currency (OCC) released its 2022 Annual Report, highlighting various action plans geared toward addressing key themes on the OCC’s ultimate objective of safeguarding trust in the federal banking system: (1) guarding against complacency; (2) addressing inequality; (3) managing climate risks; and (4) adapting to digitization. For more information, click here.
- On January 4, the U.S. Bankruptcy Court for the Southern District of New York ruled that when retail investors deposited their cryptocurrency assets in Celsius’ interest-bearing cryptocurrency deposit product known as “Earn Accounts,” the cryptocurrency assets became Celsius’ property, and the cryptocurrency assets that remained in Earn Accounts on the date Celsius filed for Chapter 11 bankruptcy became property of the bankruptcy estate. At the time Celsius filed for bankruptcy on July 13, 2022, it had approximately 600,000 Earn Accounts, which consisted of $4.2 billion in aggregate investor value. According to the court: “The issue of ownership of the assets in the Earn Accounts is a contract law issue” and under the “unambiguous” provisions of the Earn Account Terms and Use agreement, Celsius held “all right and title to such Eligible Digital Assets, including ownership rights … .” In practice, the court’s ruling relegates Earn Account holders to the class of “unsecured creditors,” and their ability to recover their losses depends on two circumstances: (1) priority of distributions to unsecured creditors under a confirmed Chapter 11 bankruptcy plan and (2) the liquidity of the bankruptcy estate. For more information, click here.
- On January 3, the Board of Governors of the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the OCC released a joint statement on crypto-asset risks to banking organizations. The agencies are concerned that certain uncontrollable risks that plagued the digital assets market in 2022 will migrate to the banking system due to the banking sector’s continued collaboration with crypto-related entities:
- Risk of fraud and scams;
- Legal uncertainties related to custody practices, redemptions, and ownership rights;
- Inaccurate or misleading representations and disclosures regarding federal deposit insurance;
- Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves; and
- The lack of governance mechanisms establishing oversight of open, public, and/or decentralized networks.
The agencies noted that issuing or holding principal as crypto-assets issued, stored, or transferred on an open, public, and/or decentralized network is highly likely to be inconsistent with safe and sound banking practices. Additionally, the agencies concluded that business models highly concentrated in crypto-related activities or have concentrated exposure to the crypto-asset sector are inconsistent with safe and sound business practices. Before engaging in crypto-related activities, the agencies reiterated that banks should ensure those activities comport with applicable laws and regulations, including those designed to protect consumers. For more information, click here.
- On January 3, the Consumer Financial Protection Bureau (CFPB) released its annual report credit and consumer reporting complaints, which is an analytical compendium of consumer complaints transmitted by the CFPB to the three largest nationwide consumer reporting agencies (NCRAs). According to the CFPB, it sent more than 488,000 complaints to the NCRAs from October 2021 through September 2022, and its analysis of those complaints revealed three key points:
- The NCRAs are providing more substantive responses to consumer complaints in their written complaint responses;
- The NCRAs are outlining the outcome of consumers complaints within their written complaint responses; and
- The NCRAs are reporting greater rates of relief in their written complaint responses.
For more information, click here.
- On January 5, New York Attorney General Letitia James filed a lawsuit against Alex Mashinsky, co-founder and former CEO of bankrupt crypto-lending platform Celsius Network LLC (Celsius), for allegedly making false and misleading representations concerning the safety of Celsius’ interest-bearing crypto deposit product known as “Earn” and concealing the company’s deteriorating financial condition from investors. At the time Celsius filed for bankruptcy on July 13, 2022, it had approximately 600,000 Earn Accounts, which consisted of $4.2 billion in aggregate investor value. AG James’ lawsuit seeks to ban Mashinsky from doing business in New York and to require him to pay damages and restitution for investors. For more information, click here.
- On January 4, New York Department of Financial Services (NYDFS) Superintendent Adrienne Harris announced that cryptocurrency exchange Coinbase, Inc. (Coinbase) agreed to resolve alleged legal violations, stemming from deficiencies associated with its BSA/AML and OFAC compliance programs. As a holder of a BitLicense and a money transmitter license, Coinbase is subject to NYDFS regulations applicable to both money transmitters and virtual currency businesses. In 2021, the NYDFS commenced an enforcement investigation to determine whether legal violations occurred because of Coinbase’s alleged compliance deficiencies. According to the NYDFS, the investigation uncovered lapses in Coinbase’s KYC, BSA/AML, and OFAC compliance programs and substantial transaction monitoring backlogs, indicating that Coinbase lacked sufficient personnel and resources to manage transaction monitoring. Under the consent order terms with the NYDFS, Coinbase must pay a $50 million fine to New York state and invest an additional $50 million in its compliance programs over the next two years under an NYDFS-approved plan. For more information, click here.
- On December 27, the New Jersey Division of Consumer Affairs entered a consent order with Yellowstone Capital LLC (Yellowstone) and several related companies to resolve allegations that, in violation of the New Jersey Consumer Fraud Act, the company engaged in abusive lending practices in connection with Merchant Cash Advances (MCAs) to small business owners. Under the settlement, Yellowstone must forgive all outstanding balances for customers who entered MCAs — estimated to be approximately $21.7 million — and pay more than $5.6 million to the state for purposes that may include restitution, attorneys’ fees, costs of investigation and litigation and costs of administering restitution, and penalties up to $250,000. The order also imposes additional requirements regarding Yellowstone’s agreements and collections activity discussed below. For more information, click here.