Compliance Newshub
State News

National Mortgage News--Matthew Rink, Erie Times-News, Pa.

A year after forming, the Erie County, Pa., land bank is compiling a list of blighted, tax-delinquent properties outside the city that need to be demolished or rehabilitated.

Thirty-five properties now make up that preliminary list. But much work remains, from determining the cost to tear down or renovate the dilapidated structures to prioritizing properties that are far enough along in the legal process that the land bank can easily acquire them.

"There's a lot of low-hanging fruit," said Amy Murdock, director of the Erie County Department of Planning and Community Development, which is managing the land bank.

The nine-member board was formed after state lawmakers in late 2017 earmarked $1 million of the county's gaming revenue from Presque Isle Downs & Casino for a land bank. Land banks take vacant, abandoned, blighted or tax-foreclosed properties and find new uses for them, often with the intention of putting them back onto the tax rolls. Land banks have the power to extinguish liens and clear property titles.

County Council and County Executive Kathy Dahlkemper appointed the board.

One of its first tasks was to reach a cooperative agreement with the city of Erie's land bank, which formed in 2016 but had no money to carry out its mission. The agreement seeded the city's land bank with $414,000 to address 20 distressed properties this year. About 65% of properties in the county that are on a tax-, judicial- or sheriff-sale list are located in the city.

In the meantime, Erie County's land bank has worked methodically to determine its own priorities and goals. With input from the board, Murdock developed a community survey and sent letters to boroughs and townships outside the city of Erie inviting them to participate. Nine communities responded: The city of Corry; the boroughs of Albion, Edinboro, North East and Waterford; and Fairview, Greene, McKean and Springfield townships.

"We've put together a guidance document and we're in a pilot phase," Murdock said. "We've been meeting with municipalities outside the city, all that were interested, doing walking and driving tours of those communities to see their priorities, to see what their issues and challenges are.

"We're trying to understand what they need out of the land bank," she said. "We'll be doing a deep dive into the selection process in the next couple of months. We'll be looking really strongly at shaping the criteria."

The land bank board has asked participating community leaders to identify their unique issues with blight, and the existing procedures and funding sources that they use to address it. The board has also encouraged those communities to work with their local school directors, establish an advisory committee to rate eyesore properties and to consider providing matching funds.

"There's a lot of ifs and a lot of info we need to collect," Jim Cardman, chairman of the land bank, said. "But by spring we hope to be funding these projects."

Blight abatement is difficult for any community, land bank member Brian McGrath said. McGrath served as a Millcreek Township supervisor for 25 years before retiring at the end of 2017.

"It has been an issue in Millcreek and continues to be an issue in Millcreek as it has been all throughout the county," McGrath said. "It's difficult to deal with because of the difficulty in acquiring property or actually taking action to eliminate the blight. The recent legislation that enabled counties to form land banks is a big boost because it helps to eliminate some of that red tape and speed up the process"

In addition to gaming revenue, the land bank is funded by a $15 additional fee on every recorded deed and mortgage. State law allows counties to use the money to address blight. So far, the fee has generated $152,000 for the land bank.

State law also allows land banks to share, for five years, up to half of the real property-tax revenue after a land bank-owned property is conveyed to a new owner. The revenue would help pay for future land bank projects.

Murdock said the nine communities are "all in different places."

Some municipalities have already taken possession of distressed properties, or have developers lined up to redevelop them.

Some have enacted "dangerous structure" ordinances, which enable them to take ownership of a property through the courts after proper code-enforcement steps are followed.

Other municipalities, though, aren't as far along in the process, or just don't have the manpower.

In that regard, the land bank board wants to provide not only funding for acquisition, demolition and rehab, but also to provide the services that will expedite the enforcement process, Murdock said.

She believes the land bank can play a proactive role in blight prevention, and help municipalities carry out their master plans.

"That's really what we're here for," she said, "to help them build a long-term strategy."

Tribune Content Agency

DSNews--Radhika Ojha

New Jersey's Senate Community and Urban Affairs Committee has passed bipartisan legislation consisting of a package of nine bills that are aimed at streamlining pending foreclosure cases in the state.

Based on a May 2017 report by Chief Justice Stuart Rabner and Special Committee on Residential Foreclosures this legislation is likely to make the foreclosure process in New Jersey, "more just and efficient," according to Sen. Steven Oroho, who is one of the sponsors of the bills.

“This will give families the opportunity to start fresh while helping towns reduce the number of vacant houses that create public safety issues in our neighborhoods,” Oroho said in a statement.

While bill S-3411 which requires that notice with the intention to foreclose would note be sent more than 180 days in advance of taking action, S-3412 would require the Department of Community Affairs (DCA) to create a database with an interactive map which would detail the extent of foreclosed properties in New Jersey.

The other bills related to this legislation range from amending the summary action foreclosure process under the "Fair Foreclosure Act" to clarify the method of fast-track sales of foreclosed properties to requiring mortgage servicers to obtain a license from the Commissioner of Banking and Insurance for each main office and each branch office where business is conducted.

The legislation also includes bills that would revise the statute of limitations in residential mortgage foreclosure actions from 20 years to six years from the date on which the debtor defaulted as well as a bill that would clarify that the provisions of the “New Jersey Residential Mortgage Lending Act,” also apply to certain out-of-state persons and entities involved in residential mortgage lending in the State.

“While this issue is not new, the comprehensive approach outlined in this bipartisan bill package is. It seeks to build upon the continued reduction in pending foreclosure cases and shorten the timeline to adjudicate these cases. This is a reflection of the work undertaken by the executive, judicial and legislative branches of government,” said Sen. Troy Singleton, one of the co-sponsors of this legislation.

Click here to read the summary of all the bills introduced under this legislation.

Ballard Sparh, LLP--Barbara S. Mishkin

With the creation of a Consumer Financial Protection Unit as one of his early actions, Pennsylvania  Attorney General Josh Shapiro made clear his intention to pursue an aggressive pro-consumer agenda.  Mr. Shapiro named Nicholas Smyth, a former CFPB enforcement attorney, to serve as Assistant Director of the Attorney General’s Bureau of Consumer Protection.

In what may be confirmation of increased activity by the PA AG,  Mr. Smyth has posted a job listing stating that the Bureau of Consumer Protection is looking to hire two attorneys in Pittsburgh and two more in Philadelphia “to help out with our growing litigation caseload.”

The Widener Law Commonwealth Law and Government Institute and the Business Advising Program recently announced that Mr. Smyth will be giving a lecture on March 19, 2019 in Harrisburg, PA at a program titled “Consumer Financial Protection in Pennsylvania: Student Borrowers and Beyond.”  Mr. Smyth will be joined in the lecture by Seth Frotman, Executive Director of the Student Borrower Protection Center.  Mr. Frotman was formerly the CFPB’s Student Loan Ombudsman.  The Student Borrower Protection Center is a nonprofit organization created by Mr. Frotman to advocate for additional oversight of the student loan industry.

Compliance Monitor--Elizabeth Dailey

The Nevada Secretary of State has adopted a temporary rule concerning electronic notarizations. These provisions are effective immediately.

Definitions

The first section of the adopted rule sets forth pertinent definitions such as “electronic notarial certificate,” “electronic notarization solution,” “identity proofing,” and “solution provider.”

Electronic Notary Requirements

Subsequent sections set forth the requirements for registration as an electronic notary, which include: 1) the notary’s commission number; 2) the name of the solution provider to be used by the notary while performing electronic notarizations; 3) a copy of the notary’s electronic seal and electronic signature; and 4) a statement certifying that the notary will comply with the provisions of the temporary rule.

Other requirements for registration as an electronic notary include: 1) a certificate of completion of a mandatory training course; 2) a nonrefundable fee to be paid to the Secretary of State; and 3) a copy of the notary’s electronic signature in a file format.

Audio-Video Communication

Notaries performing electronic notarizations via audio-video communication must be able to: 1) identify the principal using a multi-factor identification process more fully described in NRS Chapter 240; and 2) identify the document as the same document signed by the principal. The temporary rule does not require notaries or principals to participate in notarial acts using audio-video communication.

Solution Provider Requirement

Solution providers are subject to several requirements, including: 1) maintain a Nevada business license; 2) take reasonable steps to ensure that notaries using its solution have complied with Nevada law; 3) receive approval from the Secretary of State prior to use; 4) provide secure access to the solution by password or other secure means; and 5) provide confirmation that the electronic document presented is the same electronic document notarized.

Identity Proofing and Credential Analysis Standards

This section sets out the requirements of credential analysis to be performed by a reputable third-party vendor, including: 1) making a credential pass an authenticity test, in conformity with sound commercial practices; 2) providing the output of the authenticity test to the notary; and 3) enabling the notary to visually compare the information and photograph on the presented credential image for consistency purposes during audio-video communications with a principal.

Prohibited Acts

Notaries are prohibited from performing electronic notarial acts using audio-video communications outside of Nevada. A notary performing electronic notarizations without approval by the Secretary of State is subject to suspension or termination of his or her notary commission. For the full text of the temporary regulation, please refer to https://www.nationalnotary.org/file%20library/nna/reference-library/law-updates/nevada-filed-enotary-regulations.pdf.

The New Jersey Department of Banking and Insurance issued a bulletin addressing its annual review regarding the definition of a "high-cost home loan" under the Home Ownership Security Act of 2002.

The amount of $498,610 shall be effective for all completed applications on loans that may be subject to the Act received by the lender on or after January 1, 2019.

HousingWire--Ben Lane

Continuing a fight that stretches all the way back to 2014, the state of New York is set to give its cities millions more in funding to address the glut of “zombie homes” that still blight many communities throughout the state.

Back in 2016, the state of New York enacted “sweeping” new laws aimed at addressing the state’s issues with zombie homes, homes that become vacant and abandoned during the state’s lengthy foreclosure proceedings.

Then, on several different occasions, the state provided cities and state land banks with millions of dollars to address zombie homes.

In each case, the money came from mortgage settlements with some of the nation’s largest financial institutions over their conduct in the run-up to the financial crisis.

In this latest effort, which the state calls “Zombies 2.0,” the state is giving as much as $9 million to cities to address housing vacancy and blight.

According to the office of New York Attorney General Letitia James, the money for these latest grants comes from the state’s $500 million settlement with the Royal Bank of Scotland in 2018 for the bank’s “deceptive practices and misrepresentations to investors in connection with the packaging, marketing, sale, and issuance of residential mortgage-backed securities” leading up to the financial crisis.

James’ office said the new funds will be used to “increase housing code enforcement, track and monitor vacant properties, and bolster legal enforcement capacity to ensure banks and mortgage companies comply with local and state law.”

These grants are a continuation of the state’s Zombie Remediation and Prevention Initiative, which provided nearly $13 million in grants to 76 New York municipalities in 2016.

According to James’ office, through the Zombie Remediation and Prevention Initiative, cities in New York have:

• Improved data collection and analysis to track vacant and abandoned properties
• Invested in new technology to better collect and analyze data to address the collective impact of vacant properties on neighborhoods
• Created “Zombie Coordinators” and Taskforces to coordinate code enforcement activities and resources
• Boosted capacity of code enforcement and legal departments to enforce relevant laws to hold lienholders accountable or seek remedies to improve housing quality
• Connected at-risk homeowners to foreclosure prevention resources

James’ office said that it expects the grants to be announced in April.

“Far too many communities throughout New York continue to be blighted by zombie homes,” James said. “These abandoned houses significantly decrease property values and threaten the safety of surrounding neighborhoods. Zombies 2.0 will be a key resource for cities and town across the state to combat this nuisance, and make communities whole.”

Ballard Sparh, LLP--Glen P. Trudel

On January 23, Delaware Governor John Carney signed the “Delaware Federal Employees Civil Relief Act” into law.  The Act states that its purpose “is to provide for the temporary suspension of judicial and administrative proceedings in Delaware that may adversely affect the civil rights of Federal workers during a shutdown.”  The Act provides for enforcement by the Delaware Attorney General and a civil penalty of up to $10,000 per violation, with that amount to be assessed daily for willful violations.

The Act defines a “Federal worker” as “an employee of a Federal government agency who resides in the State of Delaware and includes an employee of a contractor.”  The term “covered period” is defined as “the period beginning on the date on which a shutdown begins and ending on the date that is 30 days after the date on which that shutdown ends.”

Court-ordered stay.  The Act provides that a Federal worker who is furloughed or required to work without pay during a shutdown “may apply to a court for a temporary stay, postponement, or suspension regarding any payment of rent, mortgage, tax, fine, penalty, insurance premium, judgment, or other civil obligation or liability that the Federal worker owes or would owe during the duration of the shutdown.”  A Delaware “court” (as defined in the Act)  is authorized to grant such relief if it finds “that the ability of the Federal worker to pay such obligation has been materially affected by the shutdown.”  A stay can be ordered for the “covered period and 90 days thereafter, or for any part of that period” and a court “may set the terms and amounts for such installment payments as is considered reasonable by the court.”

Protection from eviction, insurance termination. The Act prohibits evictions from residential property during a covered period for nonpayment of rent without a court order.  An eviction can be stayed for a period of 30 days if the court finds the Federal worker’s ability to comply with the lease has been materially affected by the shutdown and the stay can be extended for reasons of justice and equity.  In addition, without a court order, a “covered insurance policy” cannot “lapse, terminate or be forfeited because a Federal worker does not pay a premium or interest or indebtedness on a premium under a policy that is due during a covered period.”

6% interest rate limit. The Act provides that “an obligation or liability bearing interest at a rate in excess of 6 percent per year that is incurred by a Federal worker, or a Federal worker and the Federal worker’s spouse jointly, before the shutdown shall not bear interest in excess of 6 percent.”  If the debt is “a mortgage, trust deed, or other security in the nature of a mortgage,” the 6% rate limit applies “during the covered period and 90 days thereafter,” meaning until 120 days after the shutdown ends.  For any other debts, the 6% limit applies only during the covered period, meaning until 30 days after the date the shutdown ends.  For purposes of the 6% limit, the Act provides that “interest” includes “service charges, renewal charges, fees, or any other charges, except bona fide insurance, with respect to an obligation or liability.”

Any interest in excess of 6% that cannot be charged because of the Act “is forgiven” and the amount of a periodic payment “shall be reduced by the amount of the interest forgiven…that is allocable to the period for which such payment is made.”  A creditor can obtain court relief from the Act’s interest rate limitation if, in the court’s opinion, the Federal worker’s ability to pay more than 6% interest “is not materially affected by reason of the shutdown.”

The Act’s 6% interest rate limit is not self-executing.  To receive the benefit of the limit, the Federal worker must “provide to the creditor written notice that the Federal worker is furloughed or not getting paid as a result of the shutdown not later than 90 days after the date that the shutdown began.”

The most recent federal shutdown began on December 22 and ended on January 25.  Since the Act became effective when it was signed by Governor Carney on January 23, a Federal worker would have until approximately mid-March 2019 to provide notice to a creditor to obtain an interest rate reduction.  For mortgage debts, a Federal worker would be eligible to have his or her interest rate reduced to 6% for the period of December 22 until 120 days after January 25.  For other debts, the period of the reduction would be December 22 until 30 days after January 25.

Issues. We are hopeful that Delaware’s Attorney General or Department of Banking will issue guidance on the Act.  Among the many concerns and issues it raises are:

• Because it requires creditors to forgive contracted for interest, the Act might be vulnerable to a constitutional challenge as a violation of the U.S. Constitution’s provision prohibiting a state from passing any law “impairing the Obligation of Contracts.”
• While the Act does not include a private right of action and provides for enforcement only by the Delaware Attorney General, it appears a Federal worker would be entitled to the rights and remedies provided to borrowers under Delaware’s general usury law.  Under that law, a Federal worker could withhold payment of any “interest” greater than 6% (and assert usury as a defense in an action to collect the excess “interest”) or, if the debt has been fully repaid with interest at rate greater than 6%, bring an action to recover the greater of 3 times the excess interest paid or $500.  (Since a creditor is likely to assert that the fact that a Federal worker who paid off a debt at the full interest rate has demonstrated that the worker’s ability to pay the full amount of interest was not “materially affected by the shutdown,” the effectiveness of a private usury action as a remedy is questionable.)
• The Act’s 6% interest rate limit is not restricted to consumer purpose debts.
• The Act would appear to be preempted as to out-of-state banks that rely on federal preemption to charge Delaware residents an interest rate permitted by their home states that is greater than 6%.
• Since the Act is modeled on the federal Servicemembers Civil Relief Act (SCRA), we would expect that creditors can comply with the interest rate reduction required by the Act by using the same calculation methods that they are using for SCRA compliance.
• The extent to which the Act’s protections extend to Federal workers who are guarantors of debts owed by non-Federal workers is unclear.
• The term “court” is used throughout the statute as the source for redress for the Federal worker or Attorney General, such as to obtain stays and orders of court.  However “Court” is defined in the Act to mean “any court or administrative agency of the State, or a subdivision thereof, whether or not a court or administrative agency of record.”  It is unclear how courts or administrative agencies which do not ordinarily have power to, for example, issue injunctive relief could be included under such definition, given how the term is used in the Act.  Further, the enforcement section provides that a finding of a “court or tribunal of competent jurisdiction” is necessary to recover the fines noted above, but the Act does not clarify what “tribunal” may refer to apart from the already broadly defined “court”.

HousingWire--Ben Lane

In an unprecedented move, the state of California is suing one of its own cities for not building enough affordable housing.

Late last week, California Gov. Gavin Newsom announced that the state is suing the city of Huntington Beach for “standing in the way of affordable housing production and refusing to meet regional housing needs,” actions that “harm California families’ ability to find affordable places to live and drive up housing costs for everyone.”

According to Newsom, the state has long tried to work with Huntington Beach to ensure that the city is in compliance with state housing law, but even after the California Department of Housing and Community Development made “extensive attempts to offer partnership and support” to the city, the city still chose to “willfully refuse” to build more affordable housing.

Under California law, cities and counties are required to draft and adopt housing plans that “meet the needs of the broader region and its economy.”

The law stipulates that a city’s housing plan must accommodate a “fair share of the regional housing needs and provide zoning that encourages development of housing that is affordable to the city’s residents across all income levels, including affordable housing and middle-income housing.”

According to Newsom’s office, in 2015, the California Department of Housing and Community Development, which is tasked with monitoring cities’ compliance with the state’s housing laws, found that Huntington Beach’s housing plan did not conform to state law.

The issue was that the city had previously amended its housing plan to “significantly” reduce the number of affordable housing units that were allowed to be constructed in the city.

According to Newsom’s office, the state tried to work with the city to ensure that more affordable housing was being approved, thereby bringing the city into compliance with state law, but the city council recently voted to reject a proposal to build more affordable housing in the city.

And that led Newsom to take an action that is a first of its kind in the state.

“The state doesn’t take this action lightly,” Newsom said. “The huge housing costs and sky-high rents are eroding quality of life for families across this state. California’s housing crisis is an existential threat to our state’s future and demands an urgent and comprehensive response.”

A 2018 law allows the California state government to revoke a city’s housing plan should it not comply with state law and refer cases to the state attorney general should it feel litigation is warranted, and according to Newsom’s office, the suit against Huntington Beach is the first time the state has taken such action.

The state’s lawsuit against Huntington Beach “seeks to ensure housing equity, requiring the city to amend its housing plan to bring it into compliance with state law by planning for the development of additional housing units that are accessible to residents of all income levels,” Newsom’s office said.

“Cities and counties are important partners in addressing this housing crisis, and many cities are making herculean efforts to meet this crisis head on,” Newsom said. “But some cities are refusing to do their part to address this crisis and willfully stand in violation of California law. Those cities will be held to account.”

Ballard Sparh, LLP--Peter D. Hardy & Marjorie J. Peerce 

The Pennsylvania Department of Banking and Securities (“DoBS”) just released Guidance declaring that virtual currency, “including Bitcoin,” is not considered “money” under the Pennsylvania Money Transmission Business Licensing Law, otherwise known as the Money Transmitter Act (“MTA”).  Therefore, according to the Guidance, the operator of the typical virtual currency exchange platform, kiosk, ATM or vending machine does not represent a money transmitter subject to Pennsylvania licensure.

This Guidance is important because it has implications beyond merely the burdens imposed by Pennsylvania law for obtaining a money transmitter license.  As we previously have blogged (here, here and here), it is a federal crime under 18 U.S.C § 1960 to operate as an unlicensed money transmitter business, which is defined in part as a business “operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable.”  Thus, a state law violation can become a federal violation.  Further, the Financial Crimes Enforcement Network (“FinCEN”) has issued Guidance declaring that administrators or exchangers of digital currency – including popular crypto currencies such as Bitcoin – represent money transmitting businesses which must register with FinCEN under 31 U.S.C. § 5330 as money services businesses (“MSBs”), which in turn are governed by the Bank Secrecy Act (“BSA”) and related reporting and anti-money laundering compliance obligations.  Moreover, a failure to register with FinCEN as a MSB when required also represents a separate violation of Section 1960.  Drawing on the FinCEN guidance, federal courts have upheld the convictions of individuals who ran virtual currency exchanges and consequently were convicted of violating Section 1960 for operating unlicensed or unregistered money transmitter businesses.

The Pennsylvania Guidance

The Guidance is short and direct.  Its application is also potentially very broad.  After concluding that virtual currency does not constitute “money” under Pennsylvania state law, the Guidance then in part explains why many virtual currency exchangers are not subject to licensure in Pennsylvania as money transmitters:

Several of the entities requesting guidance on the applicability of the MTA are web-based virtual currency exchange platforms (“Platforms”).  Typically, these Platforms facilitate the purchase or sale of virtual currencies in exchange for fiat currency or other virtual currencies, and many Platforms permit buyers and sellers of virtual currencies to make offers to buy and/or sell virtual currencies from other users.  These Platforms never directly handle fiat currency; any fiat currency paid by or to a user is maintained in a bank account in the Platform’s name at a depository institution.

Under the MTA, these Platforms are not money transmitters.  The Platforms, while never directly handling fiat currency, transact virtual currency settlements for the users and facilitate the change in ownership of virtual currencies for the users.  There is no transferring money from a user to another user or 3rd party, and the Platform is not engaged in the business of providing payment services or money transfer services.

The Guidance then provides a similar analysis regarding virtual currency kiosks, ATMs and vending machines, focusing again on the concept of whether the business “touches” fiat currency.

The DoBS’s conclusion was not necessarily compelled as a matter of logic.  The MTA prohibits any person from “engag[ing] in the business of transmitting moneyby means of a transmittal instrument for a fee or other consideration with or on behalf of an individual without first having obtained a license from the department.”  The DoBS focused entirely on the definition of “money.”  Arguably, it could have chosen to focus instead on the defined term “transmittal instrument,” which the MTA more broadly defines as “any check, draft, money order, personal money order, debit card, stored value card, electronic transfer or other method for the payment of money or transmittal of credit[.]”  Other States may take a similar approach and focus on a single statutory term with a traditional definition, such as “money,” rather than choosing to focus on broader and more opaque verbiage in their respective statutes that is susceptible to more modern applications.

A Regulatory Patchwork Quilt

The DoBS Guidance is relatively clear, although the devil often lurks in the details.  In contrast, the approach of the various States regarding whether virtual currency exchangers represent “money transmitters” subject to state licensure frequently represents a confusing and fractured regulatory landscape, sometimes made more difficult by vague and old statutes, and/or lack of administrative guidance. We note here just a few examples of the potential conflicting approaches.  Our point here is not to resolve nuances, but rather to emphasize the current state of complexity:

• New Hampshire: The selling, issuing, or transmitting of “convertible virtual currency,” even if the state considers it a “payment instrument” or “stored value,” is exempt from money transmitter regulations.  The New Hampshire Banking Department issued a statement saying it would no longer regulate businesses solely engaged in virtual currency transactions.  However, the statement also declared that “those who transmit money in fiat and cryptocurrency are still required to be licensed.”
• Texas: The Texas Department of Banking issued in January 2019 a revised Supervisory Memorandum, which in part states as follows.  Ultimately, in Texas, “it depends.”

Because factors distinguishing the various centralized virtual currencies are usually complicated and nuanced, to make money transmission licensing determinations the Department must individually analyze centralized virtual currency schemes.  Accordingly, this memorandum does not offer generalized guidance on the treatment of centralized virtual currencies by the Money Services Act’s money transmission provisions.  On the other hand, money transmission licensing determinations regarding transactions with cryptocurrency turn on the single question of whether cryptocurrencies should be considered “money or monetary value” under the Money Services Act.

            . . . .

Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission.  Consequently, absent the involvement of sovereign currency in a transaction, no money transmission can occur.  However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled.  A licensing analysis will be based on the handling of the sovereign currency.

• Washington: Under Washington State law, “[m]oney transmission” is specifically defined to mean “receiving money or its equivalent value (equivalent value includes virtual currency) to transmit, deliver, or instruct to be delivered to another location[.]”  The Washington Department of Financial Institutions has posted its guidance on virtual currency regulation, which states that the transmission of virtual currencies could make a company subject to Washington’s money transmission regulations, regardless of whether the company deals in fiat currency.

(This blog post was also published in Ballard Spahr’s Money Laundering Watch, a blog focused on covering the latest trends and developments in enforcement, compliance, and policy involving money laundering, fraud, and other criminal activity.  Click here to subscribe to Money Laundering Watch.)

Ballard Spahr LLP--Peter D. Hardy & Marjorie J. Peerce

The Pennsylvania Department of Banking and Securities (“DoBS”) just released Guidance declaring that virtual currency, “including Bitcoin,” is not considered “money” under the Pennsylvania Money Transmission Business Licensing Law, otherwise known as the Money Transmitter Act (“MTA”).  Therefore, according to the Guidance, the operator of the typical virtual currency exchange platform, kiosk, ATM or vending machine does not represent a money transmitter subject to Pennsylvania licensure.

This Guidance is important because it has implications beyond merely the burdens imposed by Pennsylvania law for obtaining a money transmitter license.  As we previously have blogged (here, here and here), it is a federal crime under 18 U.S.C § 1960 to operate as an unlicensed money transmitter business, which is defined in part as a business “operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable.”  Thus, a state law violation can become a federal violation.  Further, the Financial Crimes Enforcement Network (“FinCEN”) has issued Guidance declaring that administrators or exchangers of digital currency – including popular crypto currencies such as Bitcoin – represent money transmitting businesses which must register with FinCEN under 31 U.S.C. § 5330 as money services businesses (“MSBs”), which in turn are governed by the Bank Secrecy Act (“BSA”) and related reporting and anti-money laundering compliance obligations.  Moreover, a failure to register with FinCEN as a MSB when required also represents a separate violation of Section 1960.  Drawing on the FinCEN guidance, federal courts have upheld the convictions of individuals who ran virtual currency exchanges and consequently were convicted of violating Section 1960 for operating unlicensed or unregistered money transmitter businesses.

The Pennsylvania Guidance

The Guidance is short and direct.  Its application is also potentially very broad.  After concluding that virtual currency does not constitute “money” under Pennsylvania state law, the Guidance then in part explains why many virtual currency exchangers are not subject to licensure in Pennsylvania as money transmitters:

Several of the entities requesting guidance on the applicability of the MTA are web-based virtual currency exchange platforms (“Platforms”).  Typically, these Platforms facilitate the purchase or sale of virtual currencies in exchange for fiat currency or other virtual currencies, and many Platforms permit buyers and sellers of virtual currencies to make offers to buy and/or sell virtual currencies from other users.  These Platforms never directly handle fiat currency; any fiat currency paid by or to a user is maintained in a bank account in the Platform’s name at a depository institution.

Under the MTA, these Platforms are not money transmitters.  The Platforms, while never directly handling fiat currency, transact virtual currency settlements for the users and facilitate the change in ownership of virtual currencies for the users.  There is no transferring money from a user to another user or 3rd party, and the Platform is not engaged in the business of providing payment services or money transfer services.

The Guidance then provides a similar analysis regarding virtual currency kiosks, ATMs and vending machines, focusing again on the concept of whether the business “touches” fiat currency.

The DoBS’s conclusion was not necessarily compelled as a matter of logic.  The MTA prohibits any person from “engag[ing] in the business of transmitting moneyby means of a transmittal instrument for a fee or other consideration with or on behalf of an individual without first having obtained a license from the department.”  The DoBS focused entirely on the definition of “money.”  Arguably, it could have chosen to focus instead on the defined term “transmittal instrument,” which the MTA more broadly defines as “any check, draft, money order, personal money order, debit card, stored value card, electronic transfer or other method for the payment of money or transmittal of credit[.]”  Other States may take a similar approach and focus on a single statutory term with a traditional definition, such as “money,” rather than choosing to focus on broader and more opaque verbiage in their respective statutes that is susceptible to more modern applications.

A Regulatory Patchwork Quilt

The DoBS Guidance is relatively clear, although the devil often lurks in the details.  In contrast, the approach of the various States regarding whether virtual currency exchangers represent “money transmitters” subject to state licensure frequently represents a confusing and fractured regulatory landscape, sometimes made more difficult by vague and old statutes, and/or lack of administrative guidance. We note here just a few examples of the potential conflicting approaches.  Our point here is not to resolve nuances, but rather to emphasize the current state of complexity:

• New Hampshire: The selling, issuing, or transmitting of “convertible virtual currency,” even if the state considers it a “payment instrument” or “stored value,” is exempt from money transmitter regulations.  The New Hampshire Banking Department issued a statement saying it would no longer regulate businesses solely engaged in virtual currency transactions.  However, the statement also declared that “those who transmit money in fiat and cryptocurrency are still required to be licensed.”
• Texas: The Texas Department of Banking issued in January 2019 a revised Supervisory Memorandum, which in part states as follows.  Ultimately, in Texas, “it depends.”

Because factors distinguishing the various centralized virtual currencies are usually complicated and nuanced, to make money transmission licensing determinations the Department must individually analyze centralized virtual currency schemes.  Accordingly, this memorandum does not offer generalized guidance on the treatment of centralized virtual currencies by the Money Services Act’s money transmission provisions.  On the other hand, money transmission licensing determinations regarding transactions with cryptocurrency turn on the single question of whether cryptocurrencies should be considered “money or monetary value” under the Money Services Act.

            . . . .

Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission.  Consequently, absent the involvement of sovereign currency in a transaction, no money transmission can occur.  However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled.  A licensing analysis will be based on the handling of the sovereign currency.

• Washington: Under Washington State law, “[m]oney transmission” is specifically defined to mean “receiving money or its equivalent value (equivalent value includes virtual currency) to transmit, deliver, or instruct to be delivered to another location[.]”  The Washington Department of Financial Institutions has posted its guidance on virtual currency regulation, which states that the transmission of virtual currencies could make a company subject to Washington’s money transmission regulations, regardless of whether the company deals in fiat currency.

(This blog post was also published in Ballard Spahr’s Money Laundering Watch, a blog focused on covering the latest trends and developments in enforcement, compliance, and policy involving money laundering, fraud, and other criminal activity.  Click here to subscribe to Money Laundering Watch.)

Compliance Monitor--Zachary Pearlstein

The Rhode Island Department of Business Regulation has recently adopted provisions regarding licensing requirements for mortgage lenders, mortgage brokers, and mortgage loan originators, effective immediately.

The new provisions provide a series of licensing requirements for lenders, loan brokers, third-party loan servicers, and small loan lenders.  For example, regarding applications, the provisions state that all licensees are required to use the Nationwide Multistate Licensing System (NMLS) to apply for licenses, and to report all changes.  Any changes to the information provided must be reported to the Department within thirty days of the change, through an NMLS filing.

Another licensing condition relates to required capital.  Each licensee that applied for and is granted a license after June 30, 1995 must maintain a minimum net worth (defined as the amount by which total assets exceed total liabilities, calculated in accordance with Generally Accepted Accounting Principles), as set out in R.I. Gen. Laws § 19-14-5.  All licensees must also prepare and maintain a financial statement, prepared at a minimum on a quarterly basis, which evidences compliance with these net worth requirements.  All licensees must also upload quarterly and annual financial statements under the Financial Statement Summary Section within the NMLS. 

The provisions also cover bond requirements.  In accordance with R.I. Gen. Laws § 19-14-6, each lender, loan broker, third-party loan servicer, and small loan lender must file bonds in specified amounts, and must keep the bonds current throughout the period of licensure.  The bond amounts for the initial license are: fifty thousand dollars ($50,000) for lenders; twenty thousand dollars ($20,000) for loan brokers; ten thousand dollars ($10,000) for small loan lenders; and fifty thousand dollars ($50,000) for third-party loan servicers.

Another licensing provisions requires mortgage lenders and brokers to appoint a person who holds a valid Rhode Island Mortgage Loan Originator license as the qualified individual or branch manager designated to operate the licensed business.  This qualified individual or branch manager is required to oversee the operations of the licensee and to ensure compliance with all applicable regulations.  This qualified individual or branch manager must be physically present at the licensed location for the majority of operating hours, and must personally oversee the operations of the licensee at that location.

Compliance Monitor--Adam Faria

The District of Columbia has passed D.C. ACT 22-471, now known as D.C. Law 22-189, or; the “Revised Uniform Law on Notarial Acts Act of 2018.”  The act includes new provisions that facilitate notarizations using electronic records, permit the notarization of signatures of parties outside the United States, and prohibits certain fraudulent or deceptive practices.

Of particular note, the act allows an individual who holds a notary public commission to apply to the Mayor for an endorsement as an electronic notary. Electronic records are defined as information that is stored in an electronic or other medium and is retrievable in a perceivable form. Prior to a notary receiving an endorsement as an electronic notary public the notary is required to complete a training course, make the required oath, identify the tamper-evident technology the notary intends to use to complete the notarial act, and provide an exemplar of their electronic signature and official seal. Upon receipt of an endorsement as an electronic notary the notary public may perform notarial acts with respect to electronic records. When performing a notarial act on an electronic record the electronic notary is not required to use a tamper-evident technology that the notary has not selected.

The act also provides for a series of prohibited acts. A notary public commission does not authorize an individual to assist persons in drafting legal records, give legal advice, or otherwise practice law.  Additionally, a commission does not authorize an individual to act as an immigration consultant, or represent a person in a judicial or administrative proceeding. Further, a notary public who is not an attorney licensed to practice law in the District of Columbia may not use the term ‘notario’ or ‘notario publico’. 

The act does not affect the validity or effect of a notarial act performed prior to the effective date of the act, and a notary public who obtained their commission prior to the effective date of this act shall continue in that capacity until the expiration of their commission. However, a notary public who holds a commission that is effective as of the date of this Act is subject to, and is required to comply with the provisions of the act. D.C. Law 22-189 became effective December 4, 2018 and the full text of the act may be found at: https://code.dccouncil.us/dc/council/laws/22-189.html