Two state-chartered banks recently filed complaints for declaratory judgment and injunctive relief against the Administrator of the Uniform Consumer Credit Code for the State of Colorado, Julie Ann Meade.  The complaints were filed in Colorado federal court and seek to permanently enjoin enforcement actions brought by Meade against the banks’ non-bank partners who, according to the complaints, market and service loans originated by the two banks and which the banks sometimes sells to their partners.

In her enforcement actions, Meade took the position that the two banks are not the “true lenders” of the loans, and that, pursuant to the Second Circuit’s decision in Madden v. Midland Funding, LLC, the banks could not validly assign their ability to export interest rates as state banks under federal law.  Accordingly, the enforcement actions assert that the loans sold to the banks’ partners are subject to Colorado usury law despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act (Section 27).

In their complaints, the banks allege that Meade’s enforcement actions disregard their right under Section 27 to export their respective home state’s interest rates to borrowers in other states and the “valid-when-made” doctrine which provides that a loan that is non-usurious when made cannot later become usurious after assignment. The banks contend that the doctrine is incorporated into Section 27.  Accordingly, the banks argue that Meade’s enforcement actions against their partners for alleged violations of Colorado law are preempted by federal law.

For a fuller discussion of and links to the complaints, see our legal alert.

In a recent blog post, Alan Kaplinsky and Scott Pearson wrote about the remarks made by CFPB Director Richard Cordray and Comptroller of the Currency Thomas Curry at the LendIt USA conference in New York City earlier this month.  In the blog post, we expressed our strong disagreement with Comptroller Curry’s refusal to author an interpretive opinion to address the disruption in the lending markets caused by the Second Circuit’s Madden decision and promised to share our reasons at a later date for why we think that the OCC should go even further and propose a rule to address Madden 

Alan has now written an article published in BankThink, American Banker’s “platform for informed opinion about the ideas, trends and events reshaping financial services,” that urges the OCC to issue a rule to address Madden.  In Madden, the Second Circuit ruled that a company 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.  As Alan demonstrates in his article, there is clear OCC and U.S. Supreme Court precedent for the OCC to issue an interpretive opinion or regulation interpreting Section 85 to address an issue that is being litigated and the Supreme Court has indicated that it can properly do so.  As he also demonstrates, the need for an OCC rule is not eliminated by the OCC’s proposal to create a national bank charter for financial technology companies.

 

 

 

 

Earlier this week, we attended the LendIt USA conference in New York City, a leading annual fintech conference, at which both CFPB Director Richard Cordray and Comptroller of the Currency Thomas Curry spoke.

Director Cordray began his remarks by returning to his familiar “level playing field” theme, observing that “[e]venhanded oversight of all providers” regardless of size “is a basic rule of the road for effective regulation of the financial marketplace” and that “[n]obody gets a free pass to exploit regulatory arbitrage; everyone must be held to the same standards of compliance with the law.”  He then discussed the CFPB’s two most recent requests for information.

The first RFI, issued in November 2016, seeks information about market practices related to consumer access to financial information.  Director Cordray reported that the CFPB has received about 70 “extensive and thoughtful” comments from financial institutions, data aggregators, companies that use aggregated data, trade associations, consumer groups, and individuals.  He observed that “[c]ertain perspectives presented in the comments are not surprising,” with banks and other financial companies raising concerns about consumer data security and aggregators and users of the data recommending less fettered access and greater freedom to store and use collected data.  He commented that the CFPB is “keenly aware of the serious issues around privacy and security, for consumers and providers alike,”  and noted two “pressing” issues facing the CFPB:  how to satisfy the demands of consumers without exposing the providers that maintain consumer data to undue costs and risks and how to prevent consumers from subjecting themselves to undue risks, including the possibility that their data could be misused.  Echoing comments he made in October 2016, Director Cordray also stated that the CFPB “remain[s] concerned about reports of some institutions that may be limiting or restricting access unduly.”

The second RFI discussed by Director Cordray was the RFI issued last month seeking information about the use of alternative data and modeling techniques in the credit process.  He indicated that the CFPB’s goal in issuing the RFI is “to learn more about issues raised by new technologies and new uses of data” and, in particular, to obtain information “about the potential benefits and risks of using, applying, and analyzing unconventional sources of information to predict people’s creditworthiness.”  He reviewed the main inquiries posed by the RFI, with emphasis on the CFPB’s interest in learning how the use of alternative data might impact so-called “credit invisibles,” meaning consumers with no credit history or credit histories that are too limited to generate a reliable credit score, and the application of fair lending laws to alternative data.

In addition to not providing any meaningful new insights into the CFPB’s views on fintech issues, perhaps the most disappointing aspect of Director Cordray’s remarks was his touting of the CFPB’s no-action letter (NAL) policy in his discussion of Project Catalyst,  the CFPB’s initiative launched in November 2012 for facilitating innovation in consumer-friendly financial products and services.  The CFPB’s NAL policy, which was finalized in February 2016, stated that the CFPB would publish NALs, along with a version or summary of the request, on its website.  Since we could find no NALs on the CFPB’s website, we assume no NALs have been issued.

Indeed, even if any NALs have been issued, they would be of marginal value to the recipients.  As we observed when the NAL policy was finalized, the NAL policy provides no immunity against private litigation or enforcement actions by other federal and state government agencies.  (In fact, the CFPB stated in the policy that an NAL can be revoked or modified at any time.)  To make matters worse, an NAL will receive no deference from the courts and may only cover one or more of the “enumerated consumer laws” and not UDAAP which is often of the greatest concern to banks and companies because of the lack of clarity as to what constitutes an “unfair,” “deceptive” or “abusive” act or practice.  Perhaps the reason no NALs have been issued is that none have been requested because of their marginal value as well as the potential for publication of an NAL to give competitors access to important confidential strategic information.

Comptroller Curry’s remarks focused primarily on the OCC’s fintech charter proposal, which he defended against a number of attacks from state regulators, consumer advocates, as well as industry opponents.  Comptroller Curry said that the OCC definitely has authority to grant special purpose charters without new legislation.  Companies obtaining these charters should not expect “light touch” supervision, as the OCC will supervise them in the same manner that it supervises full-service banks.  Furthermore, the OCC will not grant charters to companies engaging in practices considered to be predatory or abusive.

Comptroller Curry also said that there will be “appropriately calibrated” capital and liquidity standards, as well as financial inclusion requirements for obtaining a charter.  Details on the requirements will be outlined in a forthcoming supplement to the OCC’s licensing manual.  He added that national banks are subject to state law to a much greater extent under Dodd-Frank than previously was the case, so concerns about excessive preemption are misplaced.  Comptroller Curry said that companies will benefit from the OCC’s high standards and “rigorous supervision,” as it adds value to the companies.

Unlike Director Cordray, Comptroller Curry took questions from the audience, including questions from us.  Although he did not indicate whether there has been any contact between the White House and the OCC concerning policy, he said that the OCC intended to comply with the spirit of the recent executive orders concerning deregulation, although it is not required to follow them as an independent agency.  He noted that the OCC already had completed a recent decennial review of its rules as required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996.  Asked whether the OCC would issue an interpretive opinion concerning the Madden v. Midland Funding case consistent with its amicus brief, Comptroller Curry said that it would not, since the agency cannot overrule the Second Circuit.

We strongly disagree with Comptroller Curry’s refusal to author an interpretive opinion which certainly would be helpful outside the Second Circuit (and maybe even within the Second Circuit since the OCC had not weighed in on Madden until it reached the Supreme Court).  For reasons that we will articulate in the future, we think that the OCC should propose to issue a regulation codifying the “valid when made” doctrine.

On March 21, 2017, from 12:00 pm to 1:00 pm ET, Ballard Spahr will hold a webinar, “Alternative Credit – Opportunities, Risks and the CFPB’s Request for Data.”  More information and a link to register is available here.

 

 

 

 

On October 13, 2016, the Brookings Institute will hold an event in Washington, D.C. titled: “How to make fintech work for all Americans.”  Speakers include industry representatives and an FDIC representative.  Brookings describes the event as “a conversation about the effects of the fintech boom, with a particular focus on how regulation and public policy can enhance or hinder the industry’s ability to solve some of the more intractable problems facing middle-class.”

Among the questions to be addressed are whether “regulation and policy inhibit innovation and skew benefits toward the well-to-do.”  In discussing regulation and policy, speakers could address CFPB larger participant rulemaking for installment/marketplace lenders and other concerns raised by regulators concerning marketplace lending.

 

 

While the CFPB has indicated it will be monitoring FinTech innovations, it has not yet held a public event devoted to FinTech or financial innovation.  Both the FTC and OCC have already held such events this year and now the Federal Reserve’s Board of Governors has announced that it will be hosting a research and policy conference on financial innovation, “Online Lending to Households and Small Businesses,” in Washington, D.C. on December 2, 2016.  According to the Fed, the purpose of the conference “is to bring together academics, industry participants, and policymakers to discuss current academic research related to innovations in online lending and its implications for borrowers, traditional lenders, the macroeconomy, financial stability, and regulatory policy.”  Attendance at the conference is by invitation only.

In connection with the conference, the Fed has issued a call for “high quality research papers in all areas related to online lending” and has identified topics of particular interest.  The topics include the characteristics of online borrowers and lenders; similarities and differences between online lenders and traditional lenders in areas such as underwriting and risk standards, production processes, technology, cost structure, and profitability; new regulatory challenges posed by the emergence of online lending; and consumer protection and online lending.  The conference’s organizing committee will select papers for presentation.

 

Tomorrow, July 11, the House Financial Services Committee’s  Subcommittee on Financial Institutions and Consumer Credit will hold a hearing titled: “Examining the Opportunities and Challenges with Financial Technology (“FinTech”): The Development of Online Marketplace Lending.”  According to the Committee memorandum, the hearing “will give Committee members the opportunity to assess the development of the FinTech market, including how online lenders and banks interact.  Further, the hearing will evaluate the current regulatory structure and recent policy developments.”

In March 2016, the CFPB announced that it had begun to take complaints about marketplace lenders.

 

On June 9, 2016, the FTC will host a “FinTech forum on marketplace lending,” the first in a forum series described by the FTC as “exploring emerging financial technology and its implications for consumers.”  According to the FTC, the forum “will examine the range of marketplace lending models, their potential benefits to consumers, possible consumer protection concerns, and the applicability of consumer protection laws to market participants.”

The regulators scheduled to be speakers at the forum include several FTC representatives as well as Thomas Dresslar, a Deputy Commissioner of the California Department of Business Oversight (DBO), who, according to the FTC, “is directing the DBO’s inquiry into the online lending market.”  In December 2015, the DBO announced that it was launching an inquiry into the marketplace lending industry and, in April 2016, it issued a summary report of aggregate data provided by the companies that responded to the DBO’s online survey that was part of the inquiry.

In March 2016, the CFPB announced that it had begun to take complaints about marketplace lenders.

 

The CFPB recently joined other federal regulators who have indicated a growing interest in marketplace lending with its announcement that it is accepting consumer complaints about loans obtained through marketplace lenders.  The U.S. Department of the Treasury had previously demonstrated its interest in marketplace lending by issuing a request for information (RFI) in July 2015.

Politico has reported that “multiple sources have indicated” that the Treasury will release a white paper next week containing its findings from the responses it received to the RFI.  According to Politico, the Treasury received over 100 responses.  Politico also reported that a Treasury spokesperson indicated in a statement that the white paper will contain research and recommendations on the industry.

When it issued the RFI, the Treasury indicated that the information it sought was intended to allow it to study the business models of online marketplace lenders and the products offered to small businesses and consumers; the potential for online marketplace lending to expand credit access for historically underserved markets; and how the financial regulatory framework should evolve to support the industry’s “safe growth.”

 

The interest of federal regulators in marketplace lending continues to grow.  In March 2016, the CFPB announced that it is taking complaints about marketplace lenders.  In July 2015, the Treasury Department issued a request for information regarding online marketplace lending and, in February 2016, the FDIC published an article highlighting the risks for banks that partner with marketplace lenders.

Now, the FTC has joined in by announcing that on June 9, 2016, it will host a half-day forum in Washington, D.C. “exploring the growing world of marketplace lending and its implications for consumers.”  The forum will be the first in a series of FTC events looking at consumer protection across different areas of emerging financial technology.

According to the FTC’s announcement, the forum will bring together marketplace lending industry participants, consumer groups, researchers, and government representatives.  It will examine the various models used by marketplace lenders, potential benefits to consumers, and possible consumer protection concerns.  It will also look at how existing consumer protection laws might apply to companies participating in the marketplace lending space.

 

The CFPB announced that it is now accepting consumer complaints about loans obtained through marketplace lenders and also issued a consumer bulletin directed at consumers who are shopping for such loans.  The CFPB’s press release contains the following description of a marketplace lender:  “A marketplace lender uses an online interface to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan.  Generally, the marketplace lending platform handles all underwriting and customer service interactions with the borrower.  Once a loan is originated, the company generally makes arrangements to transfer ownership to the investors while it continues to service the loan.”

To initiate the process for submitting a complaint via the CFPB’s website, a consumer must first click on a “submit your complaint” link.  The consumer is then directed to “choose a product or service to get started.”  Among the products a consumer can choose are different types of loans, such as “mortgage,” “payday loan,” and “other consumer loan.”  The CFPB has specifically included loans obtained from marketplace lenders in the “other consumer loan” category, which is described as covering “problems with pawn loans, title loans, online loans, store loans, and other installment loans, such as those used for person-to-person or ‘marketplace’ lending, rent-to-own, or medical debt.”  However, the CFPB apparently contemplates that consumers will also use other loan categories to submit complaints about marketplace lenders.  In its press release, the CFPB states “Because marketplace lenders offer several types of consumer loans, a consumer submitting a complaint should select among the different complaint categories for products and services that best apply to their situation.  For example, a consumer can select products such as ‘mortgage,’ ‘consumer loan,’ or ‘student loan.’ ”

The CFPB’s bulletin, entitled “Understanding online marketplace lending,” tells consumers that marketplace lending “uses online ‘platforms’ to connect consumers or businesses who seek to borrow money with investors willing to buy or invest in the loan.  In most cases, once a loan is made the platform collects principal and interest payments from borrowers and sends the payments, less certain fees that the platform keeps, to investors.”  The bulletin advises consumers to consider certain issues before taking a loan (such as how much the consumer can afford and really needs to borrow), warns consumers about refinancing certain kinds of debt (such as fixed-rate federal student loans), advises consumers to check their credit reports, and lists various issues consumers should think about when loan shopping (such as loan term, interest rate, fees and penalties.)  (The CFPB notes that consumers “should take these steps before applying for any loan,” not just a loan from a marketplace lender.)

The CFPB’s objectives in taking these actions are questionable, since consumers already could complain about marketplace loans using the CFPB’s existing loan categories.  Rather than seeking to provide additional protection to consumers, perhaps the CFPB’s primary objective is to warn marketplace lenders that they are clearly on the CFPB’s radar screen.

Indeed, the CFPB’s advice to consumers appears to signal the type of scrutiny marketplace lenders can expect from the CFPB.  The CFPB tells consumers to “keep in mind that marketplace lending is a young industry and does not have the same history of government supervision and oversight as banks or credit unions.  However, marketplace lenders are required to follow the same state and federal laws as other lenders.”  (While the CFPB is not currently taking complaints about business loans, including business loans made by marketplace lenders, it recently indicated that, subject to an assessment of feasibility, it plans to build an infrastructure to intake and analyze small business lending complaints.)