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Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together “the OCC”), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York’s Superintendent of the Department of Financial Services (“DFS”). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS’s lawsuit alleges that the OCC’s decision to accept applications for “Special Purpose National Bank Charters” (or “fintech charters”) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (“NBA”) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (“Vullo I”), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.

In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term “business of banking” in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue fintech charters; (3) DFS’s challenge is barred by the applicable statute of limitations; and (4) the OCC’s decision to issue fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC’s decision to issue fintech charters was the “agency’s final decision,” the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC’s letter emphasizes that while “it will accept applications for fintech charters, [the agency] has not actually received any such applications, let alone granted one.” Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains “future-oriented and speculative.”

DFS filed its own letter in response, announcing not only DFS’s strategy for overcoming the OCC’s anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald’s Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS’s claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in “draft” form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC’s intent to issue fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald’s determination, DFS now has standing to make its claims against the OCC.

DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a fintech charter, and characterized the OCC’s representation to the Court that no fintech charters were currently being considered as “brutishly inconsistent” and duplicitous.

Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC’s traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC’s actions in the realm of offering fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC’s “unprecedented issuance” of fintech charters as “destructive to New York and New Yorkers” insofar as it would preempt state laws that “powerfully protect” consumers from the industry’s “well-known abuses.”

The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties’ jointly proposed briefing schedule, nor DFS’s request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.

While the OCC’s position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a fintech charter may have some merit, it is important to the industry that the legal question of the OCC’s authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.

The New York Department of Financial Services (NYDFS) has issued an Online Lending Report that calls for the application of New York usury limits to all online lending and increased regulation of online lenders making loans to New York consumers and small businesses.

On August 22, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar to discuss the report.  Click here to register.

A bill signed by New York Governor Cuomo required the NYDFS to study online lending in New York and issue a public report of its findings and recommendations by July 1, 2018. The report indicates that to gather data, the NYDFS asked 48 businesses believed to be engaged in online lending activities in New York to complete a “New York Marketplace Lending Survey.” The NYDFS received responses from 35 of those 48 businesses.  According to the report, the respondents varied in size “from small to some of the largest online lenders in the industry,” and of the 35 respondents, 28 were not currently licensed by the NYDFS and 7 were licensed by the NYDFS.

The report includes a background discussion of the NYDFS’s  supervisory authority and New York usury limits, payday lending, “lessons from the financial crisis,” “New York’s leadership in consumer protection,” and consumer litigation financing.  It also sets forth the survey results, which cover consumer and business loans and consist of statistical and other information about (1) customer and loan numbers, (2) duration of loans, (3) loan sizes, (4) APRs, (5) fees, costs, expenses, and other charges, (6) loan delinquencies (past due 30 days or more), (7) business models, (8) marketing and advertising, (9) credit assessment/underwriting, and (10) complaints and investigations.

The NYDFS had listed topics to be addressed in the report on its website and solicited public comments on such topics.  In the report, the NYDFS also summarizes the 12 comments it received in response to that solicitation.  The NYDFS describes the commenters as “technology and lending associations, chambers of commerce, business associations, and banking, mortgage and credit union associations.”

The report concludes with a discussion of the benefits and risks associated with the lending activities and practices of online lenders based on the survey results followed by the NYDFS’s conclusions and recommendations.  Most of these recommendations will require legislation.

Key items in the report consist of the following:

  • Application of consumer protection laws to small business loans.  The NYDFS recommends that New York consumer protection laws and regulations “should apply equally to all consumer lending and small business lending activities.” According to the NYDFS, such protections include laws and regulations relating to transparency in pricing, fair lending, fair debt collection practices, and data protection.  The NYDFS further states that its “equal application” recommendation “includes robust consumer disclosures; the use of technology easily permits transparency, including disclosures of the full cost of a loan to a borrower and providing the consumer with full understanding of the long-term consequences of accepting short-term relief for a financial need.”  The NYDFS acknowledges that under existing federal law, small business loans are generally exempt from coverage.  To our knowledge, no state has ever subjected small business loans to the same regulations as consumer loans.  The report is devoid of any empirical data supporting this extreme recommendation.  The report does not even mention, let alone address, the risk that subjecting small business loans to the same state statutes that apply to consumer loans may lead to a reduction in the availability of small business loans and an increase in pricing for such loans. The NYDFS does not even define what would be considered a “small business loan.”
  • Application of New York usury laws to all online lending.  The NYDFS recommends the application of New York usury law “to all lending in New York.”   According to the NYDFS, “a loan is a loan from a borrower’s perspective, and  the borrower deserves to get the benefit of New York’s protections, whether the borrower borrows from a bank or credit union or from an online lender.”  While the report acknowledges that out-of-state banks are exporting their interest rates into New York, the report cavalierly suggests that, contrary to well-established U.S. Supreme Court precedent, New York can nevertheless apply its usury limits to such loans.  The recommendation follows earlier discussions in the report in which (1) the NYDFS observes that “a number of online lenders” have partnered “with federally chartered banks, or FDIC-insured banks located  in jurisdictions that do not have interest rate protections on par with New York’s” to expand their consumer lending “through their online platforms without regard to the type of loan offered, the size of the loans or the interest rates charged,” (2) the NYDFS expresses its support for the use of the “true lender theory” to challenge claims by such online lenders that loans they have made in partnership with banks are not subject to New York usury law, and (3) the NYDFS describes the Second Circuit’s holding in Madden v. Midland Funding 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, but makes no mention of the fact that the OCC believes Madden was wrongly decided.

Thus, in recommending that “all lending in New York” be subject to New York usury laws, the NYDFS appears to be taking the position that no online lender partnering with a bank can permissibly rely on the bank’s federal law power to export interest rates to charge the interest the bank is permitted to charge on loans the bank has assigned to the online lender when such interest exceeds New York usury limits. The NYDFS also notes its opposition to H.R. 4439, the “Modernizing Credit Opportunities Act,” which is intended to address the uncertainty created by “true lender” challenges.  (A group of 21 state attorneys general recently sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 4439 and H.R. 3299, the “Protecting Consumers’ Access to Credit Act of 2017,” a bill often referred to as the “Madden fix” bill.)

The NYDFS also appears to be willing to ignore the comments it discusses in the report highlighting the importance of the access to credit that online lending provides to consumers and small businesses.  The NYDFS’s recommendation is likely to further reduce credit availability for New York consumers and small businesses.  Indeed, a recent study showed that credit availability contracted sharply in Connecticut, Vermont, and New York after Madden was decided. See Colleen Honigsberg, Robert J. Jackson, Jr., and Richard Squire, “The Effects of Usury Laws on Higher-Risk Borrowers,” Columbia Business School Research Paper No. 16-38 (May 13, 2016).

  • Expansion of licensing and supervision.  New York law currently requires a nonbank lender to obtain a “Licensed Lender” license if it makes consumer purpose loans of $25,000 or less or business purpose loans of $50,000 or less and the interest rate is greater than 16% (New York’s civil usury limit). The NYDFS comments in the report that “given the low level of national interest rates in recent years, certain online lenders have been able to offer profitable rates under New York’s usury limit such that they would not be required to be licensed and overseen by the Department.”  The NYDFS expresses its continued support for legislation that would “reduce the interest rate above which a non-depository lender is required to be licensed to 7 percent per annum from 16 percent per annum.”
  • Scrutiny of consumer litigation financing.  The NYDFS “notes the growth of consumer litigation financing” and expresses concern “about the amounts that consumers are required to provide to financing companies, which can be a significant portion of the total recoveries from their lawsuits that would be usurious if lending rules were to apply.”  It also expresses concern “about the information many companies provide to consumers about the transactions and the manner in which they provide that information.”  The NYDFS calls for further study of these issues and  expresses its belief that “legislation could provide important safeguards for consumer that do not currently exist.”  The NYDFS does not provide a scintilla of empirical data for its apparent conclusion that legislation containing consumer safeguards is necessary.  It should be noted that the discussion of litigation financing consists of just one paragraph of a 31-page report.

 

The New York Department of Financial Services (“NYDFS”) has adopted a regulation that requires “consumer credit reporting agencies” (“CCRAs”) to register with the NYDFS, prohibits CCRAs from engaging in certain practices, and requires CCRAs to comply with certain provisions of the NYDFS cybersecurity regulation.

The new regulation became effective upon the publication of a Notice of Adoption by the NYDFS in the State Register on July 3, 2018.  Its definitions of “consumer credit report”  and “consumer credit reporting agency” closely track the definitions of, respectively, the terms “consumer report” and “consumer reporting agency” in the FCRA.  However, the term “consumer credit report” is limited to “a consumer report…bearing on a consumer’s credit worthiness, credit standing, or credit capacity.”  Similarly, the term “consumer credit reporting agency” is limited to “a consumer reporting agency that regularly engages in the practice of assembling or evaluating and maintaining [information from furnishers] for the purpose of furnishing consumer credit reports to third parties.”  The term “New York consumer” is defined as “an individual who is a resident of New York State as reflected in the most recent information in the possession of a [CCRA].”

Registration.  A CCRA must register with the NYDFS if “within the previous 12-month period, [it] has assembled, evaluated, or maintained a consumer credit report on one thousand or more New York consumers.”  Every CCRA “that is required to register…at any time between June 1, 2018 and September 1, 2018” must register by September 15, 2018.  Registration must be renewed by February 1, 2019 for the 2019 calendar year and by February 1 of each year thereafter.

The regulation prohibits a CCRA that is required to be registered and has not done so from engaging in the business of a CCRA in New York by furnishing a consumer credit report on a New York consumer to any individual or entity.  It also prohibits any “regulated person” from paying “any fee or other compensation” or transmitting any information about a New York resident to a CCRA that is required to be registered and has not done so.  A “regulated person” is defined as “any person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law.”

Prohibited Practices.  A CCRA that is required to be registered is prohibited from engaging in various practices including engaging in any “unfair, deceptive, or predatory act or practice toward any consumer that is prohibited by any federal law, or by any New York State law that is not preempted by federal law,” or engaging in “any unfair, deceptive, or abusive act or practice in violation of section 1036 of the [Dodd-Frank Act].”

Cybersecurity.  A CCRA that is required to be registered must comply with specified provisions of the NYDFS cybersecurity regulation.  Except for the provisions that have a February 28, 2019 compliance date, a CCRA must comply with the specified provisions of the cybersecurity regulation by November 1, 2018.

Earlier this week New York Attorney General Eric Schneiderman sent a letter to select state legislators adding his backing to the creation of a licensing regime in New York for student loan servicing, similar to what has been emerging in state legislatures across the country over the past two years.

The letter provides express support for Governor Cuomo’s 2019 Executive Budget Proposal, which calls for, among other things, establishment of a Student Loan Ombudsman at the Department of Financial Services. As described in an outline summarizing the proposal:

The Governor will advance a comprehensive plan to further reduce student debt that includes creating a Student Loan Ombudsman at the Department of Financial Services; requiring all colleges annually provide students with estimated amounts incurred for student loans; enacting sweeping protections for students including ensuring that no student loan servicers or debt consultants can mislead a borrower or engage in any predatory act or practice, misapply payments, provide credit reporting agencies with inaccurate information, or any other practices that may harm the borrower; and prohibiting the suspension of professional licenses of individuals behind or in default on their student loans.

Draft legislation in line with this proposal appears in Senate Bill S7508 and Assembly Bill A9508. Last year, Assembly Bill A8862 was introduced (establishing “the student loan borrower bill of rights to protect borrowers and ensure that student loan servicers act more as loan counselors than debt collectors”) and is currently in committee in the New York State Senate.

As we’ve previously noted, California, Connecticut, the District of Columbia, and Illinois have already enacted similar laws, and we have been closely tracking pending legislation in other states, including Ohio, Missouri, New Jersey, Virginia, and Washington. This is a trend that shows no signs of abating, and adoption in New York could serve as an additional catalyst as more states take up the issue.