The New York Department of Financial Services has filed a memorandum of law opposing the OCC’s motion to dismiss the NYDFS’s second lawsuit seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.

In its motion to dismiss, the OCC argued that the court lacks subject matter jurisdiction over the NYDFS’s claims because (1) the NYDFS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could the NYDFS suffer an injury in fact, and (2) the OCC has not yet received an application for an SPNB charter or granted a charter, thus making the matter not ripe for judicial review.  The OCC also argued that the NYDFS’s claims are time-barred because it can no longer challenge the OCC’s regulation (12 C.F.R. section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act and that the NYDFS’s complaint fails to state a claim because the OCC’s regulation is entitled to deference.

In opposing the motion to dismiss, the NYDFS argues:

  • Even if it has not yet suffered actual injury, it has standing because injury to NYDFS is “imminent” as a result of the OCC’s decision to accept applications for SPNB charters.
  • The OCC’s public announcement that it will accept applications for SPNB charters and has taken substantial steps towards issuing such charters makes the matter ripe for judicial review.
  • Because the NYDFS is challenging the OCC’s July 31, 2018 decision to issue SPNB charters and the OCC has admitted that it has never relied on its regulation to issue national bank charters to non-depository institutions, the NYDFS’s action accrued on July 31, 2018 and is not time-barred.
  • The OCC’s interpretation of the business of banking is not entitled to deference because it constitutes “a manifestly unreasonable interpretation of the NBA.”

Based on arguments substantially similar to those it made in moving to dismiss the NYDFS’s lawsuit, the OCC also filed a motion to dismiss the second lawsuit filed by the Conference of State Bank Supervisors (CSBS) to block the OCC from issuing SPNB charters.  In addition to filing a brief opposing the OCC’s motion to dismiss based on arguments substantially similar to those made by the NYDFS, the CSBS filed an alternative motion for leave to conduct jurisdictional discovery.

 

The CFPB has issued proposals to revise its disclosure sandbox and no action letter policy and create a product sandbox.  In this week’s podcast, we review what the CFPB has proposed, assess the criticism advanced by state attorneys general and consumer advocates, and discuss the CFPB’s likely next steps and how the proposals’ critics are apt to respond.

Click here to listen to the podcast.

The CFPB has published notices in the Federal Register announcing that its Consumer Advisory Board, Credit Union Advisory Council, and Community Bank Advisory Council will hold meetings in Washington, D.C. on March 14, 2019.

All of the meetings are scheduled to take place at the same time, thus suggesting that the groups will hold a combined meeting.  The notices indicate that each of the groups “will discuss policy issues related to financial technology and other trends and themes in consumer finance.”

 

As expected, the OCC filed a motion to dismiss the second lawsuit filed by the New York Department of Financial Services (DFS) in a New York federal district court to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.  The OCC also filed a reply brief in support of its motion to dismiss the second lawsuit filed by the Conference of State Bank Supervisors (CSBS) in a D.C. federal district court to stop the OCC from issuing SPNB charters and CSBS filed a reply brief in support of its alternative motion for leave to conduct jurisdictional discovery.

DFS Lawsuit.  The OCC’s motion to dismiss the DFS lawsuit essentially replicates its motion to dismiss the CSBS lawsuit.  In addition to arguing that DFS’s complaint fails to state a claim because the OCC’s interpretation of the term “business of banking” in the National Bank Act is entitled to deference, the OCC argues that the court lacks subject matter jurisdiction over DFS’s claims because:

  • DFS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could DFS suffer an injury in fact.
  • Because the OCC has not “even received [an application for an SPNB charter], let alone granted a charter,” the matter is not ripe for judicial review.

CSBS Lawsuit.  In its reply brief in support of its motion to dismiss CSBS’s lawsuit, the OCC reinforces the arguments made in its motion to dismiss regarding lack of standing and ripeness and the reasonable of its interpretation of “business of banking.”  CSBS, in its reply brief in support of its motion for alternative discovery, renews its arguments that the discovery it seeks will establish future injury under the “impending injury and “substantial risk” tests “by showing exactly where the OCC stands on the path towards issuing a charter (to the extent the Court has any doubts.)”

CSBS had asked the court to allow it “to conduct jurisdictional discovery because it will allow CSBS to supplement its jurisdictional allegations to establish standing and ripeness—specifically, to resolve factual disputes concerning the status of OCC’s implementation of the [SBNB charter] Program (to the extent the Court finds the current allegations insufficient.)”  In opposing the motion, the OCC argued that such discovery was unnecessary because CSBS cannot establish that any of its members have suffered an injury until an SPNB charter is finally approved and whether a charter application has been filed or a charter has been granted is a matter of public record.  In its reply brief, CSBS calls the OCC’s position “entirely wrong,” asserting that “to the extent that the Court has any reservations about CSBS’s showing, discovery will reveal exactly how close OCC is to [the point of deciding to grant a charter to a particular fintech company], if it has not already reached it.”

The OCC had also argued that the discovery sought by CSBS would chill companies interested in an SPNB charter from pursuing discussions with the OCC.  CSBS calls these concerns “wild speculation” and asserts that even if they deserve attention, “they would only be enough to support a protective order or alternative procedure, not outright denial of discovery.”  CSBS further states that “it certainly would be willing to work with the OCC (like any party to a discovery dispute) to identity methods to address any of OCC’s more precisely articulated and justified concerns—for example by potentially accepting anonymized data, redacted versions of documents, summary data or, in extreme cases, information marked attorneys’ eyes only.”

 

Earlier this month, the Conference of State Bank Supervisors (CSBS) filed a brief opposing the OCC’s motion to dismiss the second lawsuit filed by CSBS to stop the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.  That brief was accompanied by an “Alternative Motion for Leave to Conduct Discovery” filed by CSBS.

The OCC argued in its motion to dismiss that CSBS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could a CSBS member suffer an injury in fact.  According to the OCC, since it is still several stages away from actually granting an SPNB charter, the matter continues to be both constitutionally and prudentially unripe for judicial review.

In opposing the motion to dismiss, CSBS argues that even if it has not yet established actual injury because no charter has been granted, it has standing because the current facts show that injury is “certainly impending.”  Such facts are the “OCC’s unequivocal decision to issue charters, its public statements stressing the imminence of an actual charter, and the extensive steps it has taken toward vetting and chartering applicants.”

Similarly, in support of its alternative motion, CSBS states that while the OCC “depicts the eventual granting of a nonbank charter as far off, speculative, and contingent…the facts belie OCC’s assertions.”  It contends that since announcing its decision to grant SPNB charters, the OCC “has stated that it has held ‘hundreds of meetings’ with interested companies, a number of which are finalizing applications, and further, that the OCC expects to approve a charter by mid-2019.”  CSBS asks the court to allow it “to conduct jurisdictional discovery because it will allow CSBS to supplement its jurisdictional allegations to establish standing and ripeness—specifically, to resolve factual disputes concerning the status of OCC’s implementation of the [SBNB charter] Program (to the extent the Court finds the current allegations insufficient.)”  Among other things, CSBS asks for discovery to determine the nature and number of companies the OCC has met with concerning the SBNB charter and the status of any draft applications, including which companies are preparing or have submitted draft applications and the content of such applications.

In opposing CSBS’s alternative motion, the OCC asserts that because CSBS cannot establish that any of its members have suffered an injury until an SPNB charter is finally approved and whether a charter application has been filed or a charter has been granted is a matter of public record (e.g. disclosed on the OCC website), the discovery sought by CSBS is “entirely unnecessary.”  In addition, the OCC agrees that it “voluntarily will undertake to immediately inform the Court and CSBS when an SBNB Charter applicant makes public notice required by [OCC regulations.”]

The OCC also asserts that “granting CSBS (and presumably its members) access to OCC’s licensing materials on the terms proposed by CSBS…would have a chilling effect on the interest of fintech companies in pursuing an SPNB Charter.  Knowing that discussion materials-however informal-reflecting an entity’s potential business plans may be made available to the state regulators that make up CSBS and who view the SPNB Charter as a threat to their own jurisdiction and initiatives in the fintech area would intimidate anyone seeking to open a discussion with the OCC.  And this may be the primary purpose behind CSBS’s request….”

The other pending lawsuit seeking to block the OCC’s issuance of SPNB charters to fintech companies is the second lawsuit filed in September 2018 by the New York Department of Financial Services (DFS).  Like the first CSBS lawsuit, the first DFS lawsuit was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.

In December 2018, the OCC submitted a letter to the court indicating that it intends to file a motion to dismiss the DFS lawsuit based on grounds that substantially mirror the OCC’s arguments for dismissal in the CSBS lawsuit.  The DFS also submitted a letter to the court in which, in addition to outlining the arguments it would make in opposing an OCC motion to dismiss, it indicated that it intends to file a motion for a preliminary injunction to prevent the OCC from issuing any SPNB charters while the lawsuit is pending.  On February 12, the court directed the parties to submit a proposed briefing schedule by letter.

 

 

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.

 

 

 

 

“Disclosure Sandbox.”  In September 2018, the Bureau proposed significant revisions to its “Policy to Encourage Trial Disclosure Programs” which sets forth the Bureau’s standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.

Last week, the CFPB added the following update to its blog post about the proposal:

The original headline [which referred to “companies”] suggested that the proposed Disclosure Sandbox would be open only to “fintech companies.”  In fact, as the body of the post indicates, any covered entity, regardless of its categorization as“FinTech, “bank,” “credit union” or otherwise, could apply to test a trial disclosure with the Sandbox.

Among the issues raised by the proposal that we noted was whether waivers would only be granted in connection with financial products or services that involve technological or other innovations and will not be granted in connection with conventional products or services.  While the CFPB’s update indicates that non-fintech companies would be eligible for a waiver, it continues to be uncertain whether waivers would be granted in connection with conventional products or services.

NAL Policy and New “Product Sandbox.”  In December 2018, the CFPB issued proposed revisions to its 2016 final policy on issuing “no-action” letters (NAL), together with a proposal to create a new “product sandbox.”  The comment period on the proposals ended earlier this week.  As might be expected, like its “disclosure sandbox” proposal, the CFPB’s proposed revisions to the NAL policy and proposal to create a new “product sandbox” has drawn criticism from consumer and public interest groups.

Among the arguments made in a comment letter from 77 “consumer, civil rights, legal services, labor and community groups” are claims that the proposals could violate the Administrative Procedure Act, exceed the Bureau’s authority, and would expose consumers to risk of harm.  The objections to the proposals set forth in another comment letter filed by 9 consumer and public interest groups that include the Center for Responsible Lending and the National Consumer Law Center also include claims that the creation of a “product sandbox” exceeds the CFPB’s authority and the proposals violate rulemaking requirements.  In addition, the letter includes suggestions for how the proposals might be modified.

 

 

 

A new executive order signed by President Trump on February 11, 2019 is intended to maintain American leadership in artificial intelligence (AI) research and development (R &D).  The order directs certain federal agencies to pursue various strategic objectives to promote and protect American advancement in AI.  Those agencies are to be identified by the National Science and Technology Council Select Committee on Artificial Intelligence Select Committee.  In addition, any of such agencies that perform R&D are directed to make AI an R&D priority.

Among other things, the executive order also:

  • directs the heads of all federal agencies to “review their Federal data and models to identify opportunities to increase access and use by the greater non-Federal AI research community in a manner that benefits that community, while protecting safety, security, privacy, and confidentiality.”  More specifically, the agencies are directed to “improve data and model inventory documentation to enable discovery and usability, and [to] prioritize improvements to access and quality of AI data and models based on the AI research community’s user feedback.”
  • directs the OMB Director, in coordination with other officials, to issue a memorandum to the heads of all agencies that (1) informs the development of regulatory and non-regulatory approaches by such agencies regarding technologies and industrial sectors that are either empowered or enabled by AI and advance American innovation, and (2) considers ways to reduce barriers to the use of AI.  A draft of the memorandum is to be issued for public comment before it is finalized.
  • directs the Secretary of Commerce, through the Director of the National Institute of Standards and Technology, to issue a plan for federal engagement in the development of technical standard and related tools in support of reliable, robust, and trustworthy systems that use AI technologies.

Last summer, the U.S. Treasury Department issued a report that recommended sweeping regulatory changes intended to promote innovation in the consumer financial services market, reduce regulatory burdens on consumer financial services providers, and update regulations applicable to various types of consumer lending and related consumer financial products and services.  That report included a section focused on big data, machine learning, and AI in which the Treasury stated that it recognized the significant benefits that the increased application of AI and machine learning technologies can provide.  It urged regulators not to impose unnecessary burdens or obstacles to the use of AI and to provide greater regulatory clarity that would enable further testing and responsible deployment of such technology.

Members of Ballard Spahr’s Consumer Financial Services Group have counseled clients on issues arising from applications of AI in the consumer finance space.  In July 2018, the Group conducted a webinar, “Artificial Intelligence in the Consumer Financial Services Industry,” in which the topics included (1) applications of AI to marketing, underwriting, servicing, and collections, and (2) compliance issues arising from the use of AI, including managing fair lending and discrimination risks, delivering adverse action notices, handling of data sharing and data security risks.

 

I am pleased to announce that Judy Mok, an attorney with extensive experience negotiating complex payments transactions for some of the world’s largest retailers and financial institutions, has joined Ballard Spahr as Of Counsel in the firm’s Consumer Financial Services Group.  She will be based in the firm’s New York office.

Judy has a wealth of experience in negotiating and drafting commercial agreements, with a focus on strategic partnership arrangements.  Her substantial experience includes negotiating and drafting co-branded and private-label credit card agreements, payment network agreements, merchant agreements, servicing agreements, processing agreements, and portfolio purchase and sale agreements.

Judy’s arrival further bolsters Ballard’s offerings in the consumer payment systems space, as she reunites with two former colleagues who joined the firm last year: Chris Ford, a noted Fintech attorney who has led some of the country’s largest and most innovative payment systems transactions, and David Medlar, who has negotiated intricate deals involving payment systems, merchant acquisition, and gateway payment services.

To learn more about our new colleague, read our firm’s announcement.

 

Democratic Congressman Bill Foster, who represents the 11th District of Illinois, has sent a letter to Maxine Waters, Democratic Chairwoman of the House Financial Services Committee, to express his “strong interest in serving as the Chair of the Taskforce on Financial Technology and Innovation that will be convened in the coming weeks.”  Ms. Waters announced her plans to create the Taskforce upon becoming Chairwoman.

In his letter (obtained by Politico), Mr. Foster mentions various credentials he holds, including his “prior career as a scientist and small business owner” and his participation as co-chair in the Blockchain Caucus.  He describes the caucus as working “to understand and explore, among other things, how a new and emerging technology can improve government services, curb identity theft, and put consumers in charge of their own identity.”

Mr. Foster indicates that as Taskforce Chair, he would work closely with Ms. Waters and the subcommittee chairs to understand and examine developments in the Fintech industry, “including marketplace lending for consumers and small businesses, partnerships with traditional financial institutions, cryptocurrency, blockchain, alternative data utilized in credit underwriting, artificial intelligence, and machine learning.”

He references the CFPB’s proposal issued last week to rescind the ability-to-repay provisions of its payday loan rule [link to alert] and states that “[i]n the context of this new development, ensuring that the underserved and underbanked communities have options and access to credit beyond predatory lenders will be a concern at the forefront of our inquiry.”  He also states that “although many financial technology companies are not subject to the same regulatory regime as traditional banks, including compliance with the Community Reinvestment Act, the Taskforce would work to examine how such companies can shoulder their fair share of the obligation to help meet the needs of low- and moderate-income communities, and ensure a fair playing field with community banks and other financial institutions.”

Mr. Foster also indicates that the Taskforce would attempt “to better understand the methods by which financial technology companies use complex algorithms to underwrite loans,” and to also understand what steps such companies are taking “to ensure that they do not engage in discriminatory practices that violate fair lending laws.”