The impact of new Comptroller of the Currency Joseph Otting on fintech companies is the subject of an article by Ballard Spahr attorneys Scott Pearson and Dan Delnero published by LEND360 Connect.  LEND360 is the sponsor of a national conference focused on issues impacting the online lending space.

The article, Predicting Comptroller Otting’s Impact on Fintech, discusses how Comptroller Otting is likely to approach key issues now facing fintech companies such as the OCC’s proposal to grant special purpose national bank charters to companies that make loans but do not accept deposits, the Second Circuit’s decision in Madden v. Midland Funding, and the so-called “true lender” issue.

 

 

On Thursday, December 14, the Federal Communications Commission voted 3-2 to reverse its 2015 order classifying the provision of broadband internet access services as a “telecommunication service” subject to Title II of the Communications Act of 1934, and restoring the classification of broadband internet access services as an “information service” under Title I of the Communications Act.  This reclassification moves the provision of broadband internet services from treatment as a utility (with greater governmental oversight over the provision of the utility’s services) to treatment as another offering by a telecommunications service provider.

The December 14 Order consequentially rescinds the rules prohibiting blocking of lawful internet content and applications, throttling or degrading lawful internet traffic, and paid prioritization of certain internet traffic.  These three prohibitions form the core of the “net neutrality” rules – essentially, the rules that required all internet traffic to be treated equally.

The FCC reversal on net neutrality could impact consumer payments in a couple of ways.  First, fintech companies (generally speaking, young companies with fewer resources whose business models are supported by fast, cheap internet access) which find their internet speeds either throttled or more costly may be outcompeted by larger, more established businesses which can more easily pay for higher internet speeds.  This may result in fewer fintech companies bringing new ideas and products to market.

A more direct impact may be felt in peer to peer payment platforms.  One could imagine two or three reasonably similar mobile device based payment applications, which have purchased (or can afford) varying degrees of internet access.  If one P2P platform takes 1-2 seconds to transact, while another takes 10-15, from a user experience perspective it is reasonable to assume the slower platform will quickly be abandoned in favor of the quicker platform.  Again, this favors providers with either larger margins or deeper pockets that can afford to pay for faster internet access, or a model that introduces tiered pricing for speeds.  One can imagine P2P platforms offering free and premium versions of their platform, with a premium version introducing higher access and settlement speeds.

Relatedly, the FCC and the Federal Trade Commission signed a memorandum of understanding on December 14 in which the FTC agreed to monitor the broadband market, and investigate and take enforcement actions against internet service providers for unfair or deceptive acts or practices (using the FTC’s authority under Section 5 of the FTC Act).  While the FTC is focused on UDAP issues with respect to the provision of internet services, might the CFPB look at internet speeds (and their disclosure) in connection with consumer financial services and identify potential issues for purposes of its authority to prohibit unfair, deceptive, or abusive acts or practices?  For example, would banks or platform providers need to disclose their internet speed, and could they face a UDAAP challenge if their transactions failed to meet such speeds?

Following the FCC’s vote, New York Attorney General Eric Schneiderman announced his plans to “lead a multistate lawsuit to stop the rollback of net neutrality.”  According to media reports, nearly 20 states, including Massachusetts, Mississippi, Hawaii, Maine, Vermont, and Illinois, have indicated that they intend to participate in Mr. Schneiderman’s lawsuit.

A New York federal district court has dismissed the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s authority to grant special purpose national bank (SPNB) charters to nondepository fintech companies.

When the DFS lawsuit was filed, we commented that because the OCC had not yet finalized the licensing process for fintech companies seeking an SPNB charter, the DFS was likely to face a motion to dismiss for lack of ripeness and/or the absence of a case or controversy.  Consistent with our expectations, the OCC filed a motion to dismiss the lawsuit in which its central arguments were that because it has not yet decided whether it will offer SPNB charters to companies that do not take deposits, the DFS complaint should be dismissed for failing to establish any injury in fact necessary for Article III standing and because the case was not ripe for judicial review.

In dismissing the DFS lawsuit, the district court agreed with both of the OCC’s arguments.  As an initial matter, the court observed that the DFS’s claims were based on the premise that the OCC had reached a decision on whether it would issue SPNB charters to fintech companies (Charter Decision).  The court concluded, however, that the DFS had failed to show that the OCC had reached a Charter Decision.  In reaching its conclusion, the court pointed to statements made by former Acting Comptroller Keith Noreika indicating that the OCC was continuing to consider its SPNB charter proposal but had not made a decision as to its ultimate position.  It also noted that Joseph Otting, the new Comptroller, has not yet taken a public position on the SPNB charter proposal.

With regard to Article III standing, the court concluded that the injuries that the DFS alleged would result from the Charter Decision “would only become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue SPNB charters to fintech companies.”  Such alleged injuries included the potential for New York-licensed money transmitters to escape New York’s regulatory requirements and for their consumers to lose the protections of New York law as well as the DFS’s loss of the funding it receives through assessments levied on the New York-licensed financial institutions that would obtain SPNB charters.  According to the court, in the absence of a Charter Decision, “DFS’s purported injuries are too future-oriented and speculative to constitute an injury in fact.”

With regard to ripeness, the court concluded that DFS’s claims were neither constitutionally nor prudentially ripe.  According to the court, the claims were not constitutionally ripe for the same reason that Article III standing was lacking–namely, the claims were not “actual or imminent” but instead were “conjectural or hypothetical.”  The court also found that the claims were not prudentially ripe because they were contingent on future events that might never occur–namely, an OCC decision to issue SPNB charters to fintech companies.

The court noted that it had received a letter from DFS requesting the court, if it dismissed the case on the basis of ripeness, to require the OCC to provide “prompt and adequate notice to the Court and [the DFS] if and when a decision is made to accept applications from so-called fintech companies for [SPNB charters], and (2) allow [the DFS] to reinstate the case on notice with adequate opportunity for the issues to be briefed and argued prior to the granting of any application by the OCC.”  The court stated that because it did not have subject matter jurisdiction, it could not grant the requested relief.  Nevertheless, the court suggested “that it would be sensible for the OCC to provide DFS with notice as soon as it reaches a final decision given DFS’s stated intention to pursue these issues and in consideration of potential applicants whose interests would be served by timely resolution of any legal challenges.”

Another lawsuit challenging the OCC’s SPNB proposal was filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court and in July 2017 the OCC filed a motion to dismiss in that case.   On December 5, the case was reassigned to Judge Dabney L. Friedrich.  Prior to the reassignment, the CSBS had filed a motion requesting oral argument and the court entered an order indicating that it would schedule oral argument if it “in its discretion, determines that oral argument would aid it in its resolution of Defendants’ motion.”

In remarks last week at Georgetown University’s Institute of International Economic Law’s Fintech Week event, Acting OCC Comptroller Keith Noreika provided the “latest on our thinking regarding a charter for fintech companies that offer banking products and services.”

The Acting Comptroller began his remarks by expressing his “optimism about banks, fintech companies, and the business of banking as a whole.”  He also confirmed the OCC’s efforts to explore and support innovation, including by developing “a framework for OCC participation in bank-run pilots that allow banks to develop and test products in a controlled environment.”  He indicated that “[t]he idea behind our effort is to create principles that support the industry’s need for a place to experiment while furthering the OCC’s understanding of innovative products, services, and technologies. Information gathered in the pilots can inform OCC policies and help make sure that we are ready to supervise the new activity when rolled out on a larger scale.”

With regard to the OCC’s proposal to allow fintech companies to apply for a special purpose national bank (SPNB) charter, the Acting Comptroller first observed that because there was so much interest in the proposal, he felt it was important to provide an update on where we are in that process and to correct some misperceptions that I see out there.”

He then referenced his remarks in July 2017 in which he confirmed his view “that companies that offer banking products and services should be allowed to apply for national bank charters so that they can pursue their businesses on a national scale if they choose, and if they meet the criteria and standards for doing so.  Providing a path for these companies to become national banks is pro-growth, can reduce regulatory burden for those companies, and can bring enhanced services to millions of people served by the federal banking system.”

He also observed that national bank charters “will never be compulsory and should be just one choice for companies interested in banking,” existing as an option alongside other choices such as “becoming a state bank or state industrial loan company, or operating as a state-licensed financial service provider.”  He added that “[a] fintech company also has the option to pursue partnerships or business combinations with existing banks, or it could even consider buying a bank, if that makes sense.”

The Acting Comptroller commented that while such options exist, “[i]f, and it is still an if, a fintech company has ambitions to engage in business on a national scale and meets the criteria for doing so, it should be free to seek a national bank charter. That includes pursuing a charter under the agency’s authority to charter special purpose national banks or the agency’s long-existing authority to charter full-service national banks and federal saving associations, as well as other long-established limited-purpose banks, such as trust banks, bankers’ banks, and other so-called CEBA credit card banks.”  He observed that many fintech and online lending business models are a good fit for such categories of national bank charters, and noted that there was some interest in fintechs becoming full-service banks, trust banks, or credit card banks.

The Acting Comptroller described the OCC’s proposal to use its authority to charter nondepository fintech companies as “a work in progress,” and noted the challenges to such authority by the Conference of State Bank Supervisors and the New York Department of Financial Services and the OCC’s defense of its authority even though it has not yet decided whether it will exercise that specific authority.  He commented that before the OCC reaches a decision, it needs “to be certain that the companies expressing interest in becoming a national bank fully understand just what it means to be a bank” and that “[t]alking about and applying for are a long way from approval of an application, and even further away from resulting in the kind of harm and abuse suggested.”

He labeled the argument being made by opponents of the SPNB charter that it may be a “slippery slope toward the inappropriate mixing of banking and commerce” a concern “that I think has been exaggerated with the intent of scuttling our idea for a fintech charter.”  He commented that the suggestion “that such mixing would result in destabilizing the market and increase consumer abuses” is an idea that “has been blown out of proportion.”

He then described the process that the OCC might use in considering SPNB charter applications. The OCC would consider every application on its own merits.  Issues it might consider are whether: (1) the business plan is sound, (2) the proposed management team passes muster, (3) the proposed company has adequate capital and liquidity, (4) the proposed company has adequate processes for ensuring that it operates in a safe and sound manner, provides fair access, and treats customers fairly, and (5) the proposed company has a good chance to succeed.

The Acting Comptroller noted that there already are “dozens of examples where commercial companies are allowed to own banks at the state and federal levels without such abuse and harm—national credit card banks, state merchant processing banks, state-chartered ILCs” and commented that commercial companies are allowed to own such banks “for good reason—they support legitimate business goals and deliver valued products and services to their customers.”  He also stated that if a chartered bank does not meet the Bank Holding Company Act’s definition of what it means to be a bank for the purposes of the Act, “its parent company would not become a bank holding company solely by virtue of owning the bank, and therefore, nonbank holding companies, commercial entities, or other banks could own such banks under the law.”

He also indicated that he wanted to make it “crystal clear” that the chartered entity regulated by the OCC “would be a bank, engaged in at least one of the core activities of banking—taking deposits, paying checks, or making loans” and that those “who suggest that the OCC is considering granting charters to nonfinancial companies are wrong, and the more sophisticated ones know it.”  He cautioned that fear should not prevent “a constructive discussion of where commerce and banking coexist successfully today and where else it may make sense in the future.”

Among the more than 20 bills that the House Financial Services Committee is scheduled to mark-up this Wednesday, October 11, is a bill to provide a “Madden fix” as well as several others relevant to consumer financial services providers.

These bills are the following:

  • H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017.  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”
    This language is identical to language in a bill introduced in July 2017 by Democratic Senator Mark Warner as well as language in the Financial CHOICE Act and the Appropriations Bill that is also intended to override Madden.  Like those bills, H.R. 3299 would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks.  In the view of Isaac Boltansky of Compass Point, the bill is likely to be enacted in this Congress.
  • H.R. 2706, “Financial Institution Consumer Protection Act of 2017.”  This bill is intended to prevent a recurrence of “Operation Chokepoint,” the federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed. Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  The bill includes provisions that (1) prohibit a federal banking agency from (i) requesting or ordering a depository institution to terminate a specific customer account or group of customer accounts, or (ii) attempting to otherwise restrict or discourage a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers. unless the agency has a material reason for doing so and such reason is not based solely on reputation risk, and (2) require a federal banking agency that requests or orders termination of specific customer account or group of customer accounts to provide written notice to the institution and customer(s) that includes the agency’s justification for the termination.  (In August 2017, the DOJ sent a letter to the chairman of the House Judiciary Committee in which it confirmed the termination of Operation Chokepoint.  Acting Comptroller Noreika in remarks last month, in which he also voiced support for “Madden fix” legislation, indicated that the OCC had denounced Operation Choke Point.)
  • H.R. 3072, “Bureau of Consumer Financial Protection Examination and Reporting Threshold Act of 2017.”  The bill would raise the asset threshold for banks subject to CFPB supervision from total assets of more than $10 billion to total assets of more than $50 billion.
  • H.R. 1116, “Taking Account of Institutions with Low Operation Risk Act of 2017.”  The bill includes a requirement that for any “regulatory action,” the CFPB, and federal banking agencies must consider the risk profile and business models of each type of institution or class of institutions that would be subject to the regulatory action and tailor the action in a manner that limits the regulatory compliance and other burdens based on the risk profile and business model of the institution or class of institutions involved.  The bill also includes a look-back provision that would require the agencies to apply the bill’s requirements to all regulations adopted within the last seven years and revise any regulations accordingly within 3 years.  A “regulatory action” would be defined as “any proposed, interim, or final rule or regulation, guidance, or published interpretation.”
  • H.R. 2954, “Home Mortgage Disclosure Adjustment Act.”  The bill would amend the Home Mortgage Disclosure Act to create exemptions from HMDA’s data collection and disclosure requirements for depository institutions (1) with respect to closed-end mortgage loans, if the institution originated fewer than 1,000 such loans in each of the two preceding years, and (2) with respect to open-end lines of credit, if the institution originated fewer than 2,000 such lines of credit in each of the two preceding years.  (An amendment in the nature of a substitute would lower these thresholds to fewer than 500 closed-end mortgage loans and fewer than 500 open-end lines of credit.)
  • H.R. 1699, “Preserving Access to Manufactured Housing Act of 2017.”  The bill would amend the Truth in Lending Act and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) to generally exempt a retailer of manufactured housing from TILA’s “mortgage originator” definition and the SAFE Act’s “loan originator” definition.  It would also increase TILA’s “high-cost mortgage” triggers for manufactured housing financing.
  • H.R. 2396, “Privacy Notification Technical Clarification Act.”  This bill would amend the Gramm-Leach-Bliley Act’s requirements for providing an annual privacy notice.  (An amendment in the nature of a substitute is expected to be offered.)

In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  Yesterday, at the Online Lending Policy Summit in Washington, D.C., Acting OCC Comptroller Keith Noreika advocated a Madden “fix” as an example of an action Congress could take “to reduce burden and promote economic growth.”  Mr. Noreika stated that the OCC supports proposed legislation that would codify the “valid when made rule” and provide that a loan that is made at a valid interest rate remains valid at that rate after it is transferred.

During the Q&A following Mr. Noreika’s remarks, I asked whether the OCC would consider issuing an interpretive opinion to address Madden should Congress fail to act.  Unlike former Comptroller Curry, who we criticized for his reluctance to weigh in on the issue, Mr. Noreika responded that the OCC would “not be hesitant” to formally address the “valid when made” rule.

Mr. Noreika also was asked whether, as we have previously suggested, the OCC would address the risk posed by the theory that a bank making loans is not the “true lender” if a nonbank marketing and servicing agent acquires the “predominant economic interest” in the loans.  Unfortunately, Mr. Noreika stated that “true lender” guidance might be unnecessary at this time due to prior guidance issued during the tenures of former Comptrollers Hawke and Duggan.  Mr. Noreika acknowledged that the OCC’s views were not being followed uniformly by the courts, and we do not think the OCC has been sufficiently clear on the issue.  Accordingly, we remain hopeful that the OCC will involve itself here, as well, and will make it clear that Section 85 fully applies to loans made by national banks, even if a nonbank agent of the bank has the predominant economic interest in the loans.

With regard to the OCC’s special purpose national bank (SPNB) charter proposal, Acting Comptroller Noreika stated (as he previously did in July 2017) that the OCC is continuing to consider the proposal and intends to defend its authority to grant an SNPB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors.  Remarking that “we will keep you posted,” however, he remained noncommittal about what the OCC’s ultimate position would be on implementing the proposal and again suggested that fintech companies consider seeking a national bank charter by using more established OCC authority such as trust banks and bankers’ banks.  For a fintech company that is not part of a corporate group engaged in nonfinancial activities prohibited by the Bank Holding Company Act, a standard national bank charter may remain a better option.

Indeed, we have previously suggested that a non-bank marketplace lender should consider conversion to a standard national bank.  Many years ago, two of my Ballard partners successfully converted a consumer finance company to a standard national bank with the right to export throughout the country “interest” (as broadly defined under the OCC’s regulations) as permitted by its home state and to accept FDIC-insured deposits.

Mr. Noreika also indicated that the OCC intends to revisit its guidance on deposit advance products, observing that its views on such products are not necessarily consistent with those of the CFPB.  In November 2013, the OCC issued final guidance that made it impractical for many banks to provide or continue to provide deposit advance services.  Since the CFPB’s final payday loan rule is expected to cover deposit advance loans, there will be a need to reconcile any new OCC guidance with the CFPB’s rule.

Finally, Acting Comptroller Noreika referenced his letter sent last month to House Financial Services Committee Chairman Jeb Hensarling in which he “added [his] voice to that chorus in letters to Congress denouncing Operation Chokepoint.”  “Operation Chokepoint” was a federal enforcement initiative allegedly involving both the DOJ and the federal banking agencies, that targeted banks serving online payday lenders and other lawful companies that have raised regulatory or “reputational” concerns.  A lawsuit brought by the payday lending industry, challenging Operation Chokepoint, is ongoing.  In a tone that conveyed strong conviction, Mr. Noreika indicated that it was not the OCC’s policy to direct banks to close entire categories of accounts without assessing the risks presented by individual customers or the bank’s ability to manage such risks. Mr. Noreika observed that “banks make the decisions to retain or terminate customer relationships, not the regulators, and not the OCC.”

I left the meeting much encouraged with the direction the OCC appears to be taking.

 

The Electronic Transactions Association (ETA) will hold its Annual FinTech Policy Forum on September 14, 2017 at Google’s DC offices.  The event will include commentary from industry leaders, Members of Congress, and regulators who will discuss the intersection of technology and public policy on such topics as privacy, data protection, Internet of Things (IoT), mobile technology, online small business lending, the continuing convergence of traditional and new players and helping the underserved.

On September 12, 2018 at 10:00am EDT, The Senate Committee on Banking, Housing, and Urban Affairs will hold an open session hearing entitled “Examining the Fintech Landscape.”  Witnesses will be: Mr. Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office; Mr. Eric Turner, Research Analyst, S&P Global Market Intelligence; and Mr. Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law.  The hearing will likely focus on a number of high-level topics including online lending issuance models, the push for federal charters, FinTech’s impact on credit availability, and the state licensure process.