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.”

Earlier this month, the Pennsylvania Department of Banking and Securities issued a letter to “all persons engaged in activity regulated or licensed by the [Department] regardless of the means of delivery of such regulated financial service” which it described as intended to “reiterate[] and remind[]” such persons of its existing licensing guidance.  A number of states, including California, have previously undertaken initiatives to enforce licensing requirements applicable to fintech and other companies.  The Pennsylvania letter is a reminder of the need for such companies to make sure that they have all required licenses for the states in which they operate.

In the letter, the Department comments that “recent public and industry discourse regarding the delivery of financial services via ‘Fintech’ companies has clouded the regulatory environment concerning the regulation and oversight of the financial services and companies via existing consumer protection and licensing statutes.  The notion that a company labels itself as ‘Fintech’ because of the means by which it offers or delivers a financial service does not alter the underlying nature of the transaction or service it is offering.”

The Department states that it is “reiterating its previous guidance that a regulated financial service activity offered to consumers of the Commonwealth will be regulated in accordance with the statute governing the offering of that service regardless of the person offering such service or the means by which such service is offered.”  The Department states further that “a person that offers a financial service to the residents of Pennsylvania…regardless of whether they designate themselves as a ‘Fintech’ company or any other type of nomenclature, must be licensed in accordance with the appropriate statute and comply with all the provisions of the law under which they are regulated.  Compliance is required based upon the activity conducted and not the means in which that activity is conducted.”

In the letter, the Department cites to its previous guidance supporting this position.  Such guidance includes a 2008 notice regarding the need for nondepository entities charging more than 6% simple interest per annum on nonmortgage loans made to Pennsylvania residents to be licensed under the Pennsylvania Consumer Discount Company Act regardless of the method used to make the loans.  The Department’s position was upheld by the Pennsylvania Supreme Court.

The Conference of State Bank Supervisors has released a list of 33 companies that will serve as members of its Fintech Industry Advisory Panel.

According to the CSBS, the Advisory Panel’s purpose is “to support state regulators’ increased efforts to engage with financial services companies involved in fintech.”  More specifically, over the next twelve months, Advisory Panel members will participate in at least two in-person meetings with members of the CSBS Emerging Payments and Innovation Task Force and other state banking commissioners “to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.”  The Task Force consists of regulators from ten states, including the Superintendent of the New York Department of Financial Services.

The CSBS and the NY DFS have filed separate lawsuits challenging the OCC’s authority to grant special purpose national bank charters to nondepository fintech companies.  The OCC has filed motions to dismiss both lawsuits.

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.

The Office of the Comptroller of the Currency (OCC) has filed a motion to dismiss 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.

The DFS lawsuit, which was filed in May 2017 in a New York federal district court, is similar to the lawsuit filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.  Earlier this month, the OCC filed a motion to dismiss the CSBS lawsuit.

The arguments made by the OCC in support of its motion to dismiss the DFS lawsuit track those made in support of its motion to dismiss the CSBS lawsuit.  Most notably, the OCC again makes the central argument 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 present either a justiciable case or controversy under the U.S. Constitution or a reviewable final agency action under the Administrative Procedure Act.

In remarks given last month, Acting Comptroller Keith Noreika confirmed that the OCC is continuing to consider its SNPB charter proposal despite the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced.  While indicating that the OCC planned to vigorously defend its authority to grant an SNPB charter to a nondepository company in the DFS and CSBS lawsuits, Mr. Noreika was noncommittal about what the OCC’s ultimate position would be on implementing the proposal.  He also suggested that fintech companies consider seeking a national bank charter by using more established OCC authority.

A new research paper released by the Federal Reserve Bank of Philadelphia found that fintech lending has expanded consumers’ ability to access credit.  The paper, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information,” used account-level data provided by a large fintech lender to “explore the advantages/disadvantages” of loans made by such lender “and similar loans that were originated through traditional banking channels.”

The study’s key findings include:

  • The fintech lender’s consumer lending activities penetrated into areas that could benefit from additional credit supply, such as areas that have lost a disproportionate number of bank branches and highly concentrated banking markets.
  • Consumers presenting the same credit risk could obtain credit at lower rates through the fintech lender than through traditional credit cards offered by banks.
  • The lender’s use of alternative credit data allowed consumers with few or inaccurate credit records (based on FICO scores) to access credit at lower prices, thereby resulting in enhanced financial inclusion.

In February 2017, the CFPB issued a request for information that seeks information about the use of alternative data and modeling techniques in the credit process.