The Conference of State Bank Supervisors (CSBS) announced last week that it has agreed to implement 14 recommendations made by its Fintech Industry Advisory Panel (Advisory Panel).

The Advisory Panel was formed in 2017 to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.  It has 33 fintech company members that engage with the CSBS Emerging Payments and Innovation Task Force and other state regulators.  The Advisory Panel has a subgroup focused on lending and another focused on payments.  Both subgroups submitted reports that formed the basis of the recommendations CSBS has agreed to implement.

Those recommendations primarily address creating uniform definitions and practices, increasing transparency, and expanding the use of common technology among all state regulators.  Among the actions CSBS has agreed to take to implement the recommendations are:

  • Developing a 50-state model law to license money services businesses
  • Creating a standardized call report for consumer finance businesses
  • Building an online database of state licensing and fintech guidance, while encouraging a common standard
  • Developing a new technology offering, a State Examination System, to simplify examinations of nonbanks operating in more than one state
  • Expanding the use of the Nationwide Multistate Licensing System (NMLS) among all state regulators and to all nonbank industries supervised at the state level

At the annual NMLS conference in Orlando, CSBS and the Advisory Panel’s payments subgroup reported that in connection with efforts to harmonize state licensing regimes and ultimately to draft a model state law for licensing money services businesses, CSBS is conducting state surveys relating to existing state definitions and exemptions from licensure and will publish  such surveys when complete.

The CSBS initiative is undoubtedly in part a reaction to the OCC’s decision to grant special purpose national bank charters to fintech companies.  Such charters would eliminate the need for fintech companies to obtain multi-state licenses.  In October 2018, CSBS filed a second lawsuit in D.C. federal district court to stop the OCC from issuing such charters.

 

 

 

 

We have been following closely efforts by state regulators, state legislatures and the courts to restrict, or in some cases prohibit, bank model lending programs, so the recent guidance from the Vermont Department of Financial Regulation (“Department”)  is welcome news.  On September 13, 2018, the Department issued an Order exempting loan solicitation companies from licensure when they partner with FDIC-insured banks to offer commercial loans.

The Order provides that a loan solicitation license is not required provided the following conditions are satisfied: 1) the loan solicitation company has partnered with an FDIC insured bank; 2) the loan solicitation company is soliciting commercial loans; 3) the commercial loan is made by the FDIC-insured bank and the bank is clearly identified as the lender in the loan documents; 4) the loan solicitation company is already subject to ongoing monitoring, training, and compliance programs by the FDIC-insured bank to manage the activities of the loan solicitation company; and 5) the loan solicitation company is subject to supervision, oversight, regulation and examination by the FDIC-insured bank’s state regulator (if any) and federal regulator.

Entities that wish to rely upon this exemption must, upon request, provide the Commissioner of the Department with evidence demonstrating that the company is subject to regulatory supervision, including examinations, by the bank’s regulators in a manner that is at least equivalent to the supervision and examination of a loan solicitation company licensed by the Department.  The Order does not provide details on what level of supervision would be deemed “equivalent” to that imposed upon a licensee.

While the Order is limited to commercial loans, it does represent an acknowledgment by one state regulatory agency that programs involving banks are subject to significant supervision and oversight, and do not necessarily require additional oversight and regulation.

 

 

Significant changes to Connecticut’s licensing laws for consumer financial services providers will take effect on October 1, 2018.  In addition to changes impacting mortgage-related licensees (e.g. mortgage lenders, originators and brokers), Public Act 18-173 revises or creates new licensing requirements for many providers including small loan lenders, sales finance companies, money transmitters, check cashers, debt adjustors, debt negotiators, collection agencies, student loan servicers, and mortgage servicers.

New requirements include requirements (1) for licensees to clearly display their unique identifier, including on internet websites and in all audio solicitations, and (2) for licensees to conduct activities subject to licensure from a U.S. office.

Of particular note is a new requirement (which appears to be unprecedented), for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts.  A licensee will be required to submit the demographic records collected between October 1, 2018 and June 30, 2019 to the Connecticut Banking Department by July 1, 2019.

We understand that representatives of the Banking Department will be meeting with an industry group this week to discuss the Equal Credit Opportunity Act issues presented by this requirement and that the Department hopes to provide guidance soon.  (The new requirement presents an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant.   See 12 C.F.R. § 1002.5(b) (“A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.])

For more information on the provisions of Public Act 18-173, click here.

 

 

The Conference of State Bank Supervisors (CSBS) announced yesterday that seven states have agreed to a multi-state compact that, according to the CSBS, “standardizes key elements of the licensing process for money services businesses (MSB).”

The seven states consist of Georgia, Illinois, Kansas, Massachusetts, Tennessee, Texas and Washington.  The CSBS expects other states to join the compact.  Under the compact, if one participating state has reviewed key elements of a company’s operations in connection with the company’s application for money transmitter license (IT, cybersecurity, business plan, background check, and compliance with the federal Bank Secrecy Act), the other participating states will accept that state’s findings.

The CSBS describes the compact as “the first step among state regulators in moving towards an integrated, 50-state system of licensing and supervision for fintechs.”  It is expected to significantly streamline the MSB licensing process.

 

The New York Department of Financial Services (DFS) announced last week that it is migrating the administration of its non-mortgage related licenses to the Nationwide Multistate Licensing System (NMLS), joining more than 60 other state financial services regulatory agencies that already administer their non-mortgage licenses via the NMLS.  Effective July 1, new applicants for a money transmitter license will be able to apply via the NMLS, and existing licensees will be able to transition their licenses to the NMLS.  DFS has indicated that ultimately it will manage all non-depository licenses via the NMLS.

The announcement also expressed support for Vision 2020, the Conference of State Bank Supervisors’ recently launched initiative to modernize state regulation for non-banks.

It is no secret that the DFS is not reluctant to launch its own initiatives if it believes that there is a gap in regulation, examination or oversight – their cybersecurity regulations – so the DFS embracing the NMLS is a positive for the industry as it relates to uniformity of the licensing application process.

 

 

On May 10, the Conference of State Bank Supervisors (CSBS) announced a series of initiatives (branded as Vision 2020) designed to modernize state regulation of non-banks.  The announcement specifically calls out financial technology firms and appears to be an attempt by state regulators to provide an alternative to the special purpose national bank charter the OCC has proposed to make available to financial technology companies (“fintech charter”).

The CSBS claims that by 2020 state regulators will have adopted “an integrated, 50-state licensing and supervisory system, leveraging technology and smart regulatory policy to transform the interaction between industry, regulators and consumers.”  The CSBS further claims that the Vision 2020 initiatives “will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties.”  Lofty goals to say the least, and ones that the financial services industry most certainly will support.  It remains to be seen, however, whether Vision 2020, which actually includes initiatives that are already in use or have been underway for some time, will move us further towards these goals by 2020, or even later.

Among others, Vision 2020 purports to include the following: 1) a redesign of the Nationwide Multistate Licensing System (NMLS); 2) harmonization of multi-state supervision; 3) formation of a fintech industry advisory panel focused on lending and money transmission, with the goal of identifying challenges related to licensing and multi-state regulation and providing feedback on state efforts to modernize the regulatory structure; 4) enhancing the CSBS regulatory agency accreditation program; 5) facilitate banks providing services to non-banks; 6) increasing efforts to address de-risking; and 7) supporting federal legislation facilitating coordinated supervision of bank third party service providers by state and federal regulators.

It bears noting that the redesign of the NMLS (called NMLS 2.0) has been underway (even if not formally) for some time, and long before the OCC first proposed offering a fintech charter.  Moreover, 62 (and counting) state agencies over more than 40 states and territories already use the NMLS for the administration of non-mortgage licenses. While migration by states to the NMLS for administration of its non-mortgage licenses will no doubt continue, the driver for that was not the need to find a way to regulate fintech companies, but rather the need for significant improvements to NMLS’s functionality and utility.

The CSBS has also been focusing on the harmonization of multi-state supervision for many years.  In the mortgage industry, for example, these efforts have included formation of the Multi-State Mortgage Committee, publication of a model mortgage exam manual, publication of model examinations guidelines, and promotion of model state laws.  Despite these efforts, those in the mortgage industry can attest to the fact that harmonization and uniformity is still more aspirational than a reality.

Some have suggested that Vision 2020 is intended to entice fintech companies to elect state regulation over seeking a fintech charter.  Whether or not that is the case, Vision 2020 certainly is an attempt by the CSBS to make the case that state regulators are in the best position to regulate fintech companies and that they are prepared to modernize and harmonize their laws and regulations.  Given the significant harmonization and modernization work that still remains to be done in the mortgage industry after many years of effort, I have significant reservations about the likelihood of “an integrated, 50-state licensing and supervisory system” by 2020.

 

 

The Conference of State Bank Supervisors issued a press release this week in which it announced the April 1 release of a new tool within the Nationwide Multistate Licensing System (NMLS) to streamline reporting by money services businesses.  The new tool is called the “Money Services Businesses (MSB) Call Report.”

The press release quotes a Vermont regulator who stated that the call report information “will provide complete and meaningful information on MSBs, including fintech companies licensed to do business as money transmitters, and assist state regulators to better analyze risk, monitor compliance, and make more informed and timely decisions when it comes to MSB supervision.”  The press release also indicated that the new reports “will also provide a unique, detailed snapshot of fintech companies as they mature and evolve.”

Licensees are required to file the new report within 45 days of the end of the first quarter (May 15).   According to the press release, 18 states (covering 25 money transmitter, money service, check casher/seller and currency exchange licenses) have adopted the report for the first quarter of 2017 and seven more states are expected to adopt it in the near future.

The reports include national and state specific MSB activity that is submitted on a quarterly and annual basis.  The MSB Call Report is the first comprehensive report to consolidate state MSB reporting requirements and provide a database of nationwide MSB transaction activity.  More detailed information regarding the MSB Call Report is available on the MSBCR webpage.

In a Request for Information (RFI) posted on the Federal Business Opportunity website last month, the CFPB solicited information from vendors so the CFPB can “better understand current, state-of-the-art capabilities and strategies to aid its consideration on whether to propose a registration system for nonbank financial institutions.”  Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”  The CFPB stated in its Fall 2015 and Spring 2016 rulemaking agendas that in addition to considering  “larger participant” rules for consumer installment loans and vehicle title loans, it was “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision.”  In the RFI, the CFPB stated that should it propose a registration rule, “it would provide notice and an opportunity for comment pursuant to the Administrative Procedure Act” and “would issue a final rule only after giving careful consideration to all comments.”

In the RFI, the CFPB stated that it is considering “whether to procure a comprehensive and interactive online web based Registration System that would allow nonbank financial institutions supervised or regulated by the CFPB to apply for, amend, update, or renew registration online using a single set of uniform applications and would allow the CFPB to process these registration applications and amendments through automated workflows.”  The CFPB further stated that such a system “might also be used to collect financial and operational data as well as organizational structure data.  The registration information collected might include business register data such as the name, address, aliases, industry, and ownership information.  The system might also be used to integrate data with other regulatory data.”

To “determine the availability and cost associated with” an automated online registration system that would meet the CFPB’s potential requirements (which are described in the RFI), the CFPB asked vendors interested in providing related services to provide information regarding their capabilities, past performance, and costs for a system and system support.  The CFPB also asked vendors to provide any comments or suggestions related to the CFPB’s potential requirements.  Responses to the RFI were due by July 29, 2016.

At the American Association of Residential Mortgage Regulators Annual Conference last week in Tampa, Bill Mathews, President of State Regulatory Registry LLC (SRR), announced that SRR had responded to the RFI.  (SRR is the entity that owns and operates the Nationwide Multistate Licensing System & Registry (NMLS).)  The NMLS (which uses a uniform application and allows licensees to amend, update and renew licenses on-line) is the system of record for non-depository, financial services licensing or registration for more than 60 state or territorial governmental agencies.  It is the sole system of record for mortgage companies for 58 state agencies, the sole system of record for individual mortgage loan originators for 59 state and territorial agencies, and the sole system of record for the registration of depositories, subsidiaries of depositories, and mortgage loan originators under Regulation G.  Currently, more than half of the states manage additional license types in the money services business, debt and consumer finance industries, with new states and new license types being added fairly regularly.

Given that NMLS is already the system of record for so many state agencies, it would be very surprising if the CFPB elected to use a different vendor, particularly as SRR is in the midst of designing and then launching NMLS 2.0, which will purportedly address some of the limitations under the current version of NMLS and provide for even more automation and  functionality.

 

 

 

 

The CFPB has issued a report that discusses the results of a focus group study it conducted on reverse mortgage advertisements and a consumer advisory about such advertisements.

The report is entitled “A close look at reverse mortgage advertisements and consumer risks.”  In conducting its study, the CFPB interviewed 59 homeowners age 62 and older in focus groups and in one-on-one interviews in Chicago, Los Angeles, and Washington, D.C.  The consumers were shown reverse mortgage advertisements selected from 97 unique ads collected by the CFPB.

The CFPB found that after viewing the advertisements, consumers often misunderstood important loan features and the loans’ potential risks.  The issues of greatest concern to the CFPB are:

  • Many consumers did not understand that reverse mortgages are loans with fees, compounding interest and repayment terms unless an interest rate was explicitly stated in the advertisement.
  • Advertisements may create the false impression that reverse mortgages are a risk-free government benefit, and not a loan.
  • Consumers were confused by advertisement messages stating that they could remain in their homes indefinitely.
  • Advertisements contributed to consumers not understanding that taking out a reverse mortgage too early can jeopardize financial security.

The CFPB’s consumer advisory, entitled “Don’t be misled by reverse mortgage advertising,” is intended to address these concerns by warning consumers about the false impressions that might result from reverse mortgage advertisements and highlighting  facts consumers should consider when viewing such advertisements.  The facts highlighted by the CFPB are that reverse mortgages are loans and not government benefits, can result in loss of a home if mortgage requirements are not met, and do not guarantee financial security no matter how long a consumer lives.

Advertisements targeting older Americans have been a continuing CFPB focus.  In 2012, the CFPB sent warning letters to mortgage advertisers urging them to review their marketing materials to ensure that they complied with applicable law.  Examples of the types of problems the CFPB identified in the ads included potential misleading statements about the costs of reverse mortgages.

Please join us in offering well wishes to Karen Morgan, a Mortgage Banking Group associate in the Washington, D.C., office who is leaving Ballard Spahr for a new opportunity at the Consumer Financial Protection Bureau. Karen will be Attorney-Advisor in the CFPB’s Office of Supervision Policy under its Division of Supervision, Enforcement, and Fair Lending.

Karen has been a highly valued member of the Group. She counsels national mortgage servicers and financial institutions on compliance issues and legal risks under state and federal financial services laws and regulations. In this regard, she has a very keen understanding of how the CFPB’s regulatory and enforcement actions affect the mortgage banking industry.

Karen has been a wonderful part of the team, and we will miss her considerable legal talents. But we know that those same talents will make her a tremendous asset to the CFPB.