Money Transmitter Legislative and Regulatory Changes - 2013 Highlights

In the most recent legislative session (2012-2013), there were changes to money transmitter laws in 23 states.  The most widespread trend in the legislation was the transition to the Nationwide Mortgage Licensing System and Registry (“NMLS”). In addition to transitioning to NMLS, several states have revised rules regarding NMLS.

Besides NMLS revisions, several states have revised or redefined money transmission, thereby changing or eliminating exemptions to licensing based on location and/or physical presence in the state. Additional legislative and regulatory highlights for select states are listed below.

Nationwide Mortgage Licensing System and Registry (NMLS)

NMLS is the system of record for non-depository, financial services licensing or registration for participating state agencies, including the District of Columbia and U.S. Territories of Puerto Rico, the U.S. Virgin Islands, and Guam.  In these jurisdictions, NMLS is the official system for companies and individuals seeking to apply for, amend, renew and surrender license authorities managed through NMLS by 58 state or territorial governmental agencies. NMLS itself does not grant or deny license authority.

State agencies expanded their use of NMLS to manage license authorities beyond the mortgage industry. In April 2012, the NMLS expanded its system to accommodate other financial service providers. As a result, state agencies are allowed to use the system to license a wide range “expanded industries” of non-depository, financial services providers, and money services businesses (“MSBs”) including money transmitters, payday lenders, check cashers, consumer finance companies, currency exchangers, and debt collectors.

Some states require legislative authority to join NMLS while others do not need to make any regulatory changes to transition to NMLS. One state is revising its statutes to make previously voluntary NMLS licensing mandatory. Other states are making small changes in regulations to prepare for the agent management process and additional reporting that is now available on NMLS. The following states have NMLS-related legislative changes this year:

In addition to the NMLS changes, other legislative and regulatory highlights include:

Arkansas

Act 531 of 2013, the Act to Amend the Money Services Act, includes new language on prepaid access. The definition of “prepaid access” means access to funds or the value of  funds that have been paid in advance that can be retrieved or transferred in  the future through an electronic device or vehicle, including without  limitation a card, code, electronic serial number, mobile identification number, or personal identification number. The term prepaid access is consistent with the language in 31 C.F.R. 1010.100 ruling from the Financial Crimes Enforcement Network (“FinCEN”).

California

On July 1, 2013, the California Department of Financial Institutions (“DFI”) merged with the Department of Corporations (“DOC”) under the new Department of Business Oversight. The new Department will license and regulate all state-licensed depository and non-depository financial services and institutions.  The Departments were consolidated as part of the Governor’s Government Reorganization Plan No. 2 to increase efficiency and cost effectiveness of state government, (Government Code section 8523).

Connecticut

The changes to the Money Transmission Act, in particular sections 18 and 19, expand requirements; bonding, investment, and net worth requirements; allows licensees to use authorized delegates, rather than agents, to conduct business; changes the information applicants and licensees must provide to the banking commissioner; and alters the exemptions from the Act’s provisions. The legislative changes broaden the definition, scope, and oversight for authorized delegates.

Indiana

Indiana House Bill No. 1081, signed into law and starting January 1, 2014, amended the definition of money transmission, which eliminates the exemption to licensing based on location for companies without a physical presence in Indiana.

This is a very important change because many companies and organizations historically have been exempted from licensure in Indiana because they do not have an office or agent physically located in the state.  In revised Indiana Code 28-8-4-13, the definition of “money transmission” has expanded to where the money transmission is performed, irrespective of location, and to include over the Internet or by any means of transmission.  In addition to the Internet, smart phones, self-service kiosks and other digital platforms offer money transmission, bill payment services, mobile wallets mobile top-up, remote deposit capture of payroll, and a wide range of prepaid access.  All of these new service providers will need to carefully review the following legislative changes in the context of their business models.

Revisions to Indiana Code IC 28-8-4-20 (a)(2) and IC 28-8-4-10 reinforce that a company does not have to be physically located in Indiana to require licensure and that doing business with a consumer who is a resident of Indiana and who enters into the transaction in Indiana are defined as licensed activities.

Nebraska

On March 20, 2013, Nebraska enacted LB 616, the Nebraska Money Transmitters Act, effective date January 1, 2014. Based on a model legislative outline drafted by a trade group of money transmitter state regulators, the new law repeals and replaces the Sale of Checks and Funds Transmission Act, while incorporating the license and renewal fees, a net worth standard, surety bond requirements, change of control notices, and material changes notices of the prior Act.

The bill covers the receiving of money or monetary value for transmission to another location by any means, prepaid cards, stored value cards, certain bill payment services, payment instruments, money orders, and traveler’s checks. It establishes licensing standards and sets up transition of the state’s licensing process to the NMLS starting July 1, 2014. The law defines and provides a system of conduct for authorized delegates and grants enforcement authority to the Department of Finance over authorized delegates.

Texas

Effective September 1, 2013, key changes to the Title 3 of the Texas Financial Code, Chapter 151, which is referred to as the Money Services Act; include using NMLS for processing MSB applications and channeling background investigations to the Federal Bureau of Investigation (Section 151.2031). In the amendment to Finance Code 151.30, the use of the term “stored value” is renamed to “prepaid access” and closed loop programs are provided an exception for licensing, which is language modeled after the language in FinCEN’s 31 C.F.R. 1010.100 and revisions to Finance Code 151.306(b) increases the permissible extension to process a temporary application from 30 to 90 days.

The amendment to Finance Code 151.402 requires a license holder to report a list of authorized delegates “located in this state or doing business for people located in this state,” in order to include the authorized delegates who conduct business with people in Texas over the Internet. Finance Code 278.053, Language of Disclosure, was repealed, which stated that a currency transmission business make the disclosures required by this chapter in English and, if the currency transmission is to a country where Spanish is widely spoken, in Spanish.  All transactions governed by Section 278.053 are now governed by the Remittance Transfer Rule (Regulation E – Electronic Fund Transfers Act), which provides more extensive disclosure language requirements.

In addition to legislative changes, on May 1, 2013, Texas Department of Banking issued a significant Supervisory Memorandum – 1035 on the Licensing of Foreign-Located Money Transmitters Under Texas Finance Code Chapter 151 (the “Money Services Act”), which stated that when a foreign MSB has no physical presence, employees, or agents within the U.S., but transmits money for persons located in Texas through a Web site, it must obtain a money transmission license under the Money Services Act or cease conducting business for persons located in Texas.  However, Texas was not the first state or regulatory body to issue guidance on physical presence.

On July 21, 2011, the FinCEN final rule, Definitions and Other Regulations Relating to Money Services Businesses, clearly defined that an entity qualifies as an MSB based on its activity within the United States, not the physical presence of one or more of its agents, agencies, branches, or offices in the United States. FinCEN recognized that the Internet and other technological advances make it increasingly possible for persons to offer MSB services in the United States from foreign locations. However, FinCEN was not the first regulatory agency to issue guidance on physical presence.

On March 31, 2011, New York State Department of Financial Services issued Industry Guidance Letter: Money Transmitters with No Physical Presence in New York on March 31, 2011. After review, the Department concluded that there was no basis in law (Article XIII-B) or policy for excluding from the licensing requirements of money transmitters that do business with residents of New York or persons located in New York when the money transmitters themselves have no office or physical location in New York. New York felt that the “physical presence” requirement reflected a time when money transmission was handled by local businesses with a brick and mortar presence and did not address the prevalence of the Internet and the growth of a global economy.

Even before the New York ruling recognizing the trend toward Internet and digitally-based money transmission, California signed into law AB 2789, the California Money Transmission Act on September 30, 2010. The Act mandated that any money transmitter that does business with a person located in California required a license. Previously, Internet-based money transmitters could legally operate without a license in California.

Across the United States and the world, financial services businesses are no longer necessarily locally-based with a physical presence; however, they serve local communities and consumers. The legislation and regulations are catching up with this trend.

Trish Lagodzinski has more than 19 years of experience in regulatory compliance and government contracting. As a Senior Compliance Specialist at Chartwell Compliance and, previously, Ascella Compliance, she has assisted with regulatory compliance matters dealing with state money services business licenses and associated state and federal compliance regulations for non-bank financial services companies.


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