Federal Judge Rules the OCC Lacks Authority to Issue Fintech Bank Charters

U.S. District Judge Victor Marrero approved a final judgment in favor of the New York Department of Financial Services (NYDFS) that sets aside the Office of the Comptroller of the Currency’s (OCC) special-purpose chartering regulation for certain non-depository fintech applicants seeking a limited-service national bank charter (the Fintech Charter).

The OCC has claimed authority to issue Fintech Charters through (i) its leeway to interpret the term “business of banking” under the National Bank Act; (ii) its authority to issue limited purpose national charters under 5 C.F.R. § 5.20(e)(1)(i); and (iii) its authority to interpret the term “business of banking” in such a way that it can grant a special-purpose banking charter to a company that is engaged in any one of the three core banking functions: receiving deposits, paying checks, or lending money. Given its interpretation of its authority, the OCC did not go through the Administrative Procedure Act (APA) rulemaking process when initiating the Fintech Charter process.

A Fintech Charter would permit certain fintech companies to charter as a national bank, thereby avoiding licensure requirements in states like New York, leading to this challenge by the NYDFS in May 2017. The case was dismissed in December 2017 for lack of standing and because the case was not ripe. The NYDFS filed a new complaint in September 2018, leading to the current litigation.

The court directed the OCC and NYDFS to negotiate a stipulated final judgment in the NYDFS’s favor. The parties submitted competing versions of the final judgment on October 7, 2019, and asked the court to endorse one of the versions. The two proposals were very similar, with both directing a final judgment in favor of the NYDFS and providing that each party bears its own fees and costs. However, the parties sought differing results regarding the regulation at issue (5 C.F.R. § 5.20(e)(1)(i)). The NYDFS proposed that regulation be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits.” The OCC, arguing against nationwide injunctions, proposed that the regulation be set aside on a narrower basis, only “with respect to all fintech applicants seeking a national bank charter that do not accept deposits, and that have a nexus to New York State, i.e., applicants that are chartered in New York or that intend to do business in New York (including through the Internet) in a manner that would subject them to regulation by DFS.”

Taking the NYDFS’s position, the court stated that it is not providing injunctive relieve of any kind, nationwide or otherwise, and instead, based on its prior holding that the NYDFS has standing and states an APA claim, is able to rule on the merits. Accordingly, the court vacates the regulation as an appropriate APA remedy because the OCC failed to justify its deviation from the rulemaking process.

The OCC disagrees with the decision and the court’s interpretation of the authority the National Bank Act grants the OCC and intends to appeal the ruling according to an OCC spokesperson.

CFPB Semi-Annual Report Shows Forward Momentum on Payment and Lending Regulations

Director of the Consumer Financial Protection Bureau (CFPB), Kathy Kraninger, faced the House Financial Services Committee this week after releasing its Spring 2019 Semi-Annual Report (the Report).

Included in the report is an overview of the CFPB’s Fair Lending Supervision program. The program, which assesses compliance with federal fair lending consumer financial laws and regulations, initiated 10 supervisory events at financial services institutions during the reporting period. From exam reports issued by Supervision, the most common violations involved the failure to collect data as required by the Home Mortgage Disclosure Act and the failure to create and preserve records required by the Equal Credit Opportunity Act.

The Report also covers the CFPB’s ongoing efforts to engage in a number of rulemakings to implement directives mandated in the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Dodd-Frank Act, and other statutes. In these rulemakings, the CFPB seeks to achieve the consumer protection objectives of the statutes while keeping the regulatory burden on financial services providers to a minimum.

Below, we summarize a selection of pre-rulemaking, proposed rulemaking, and final rulemaking outlined in the Report.

Pre-rulemaking activities for upcoming periods as reflected in the CFPB’s report:

• Business Lending Data (Regulation B). Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act (ECOA), requiring financial institutions to collect and report certain information concerning credit applications made by women-owned, minority-owned, and small businesses. The CFPB expects it will resume pre-rulemaking activities on the Section 1071 project within this next year.
• Remittance Transfers. An exception to disclosure requirements for international remittance transfers exists in Section 1073 of the Dodd-Frank Act which allows insured depository institutions and insured credit unions to estimate certain pricing information in certain circumstances. This exception will expire, as provided for in the statute, on July 21, 2020. In advance of this expiration, the CFPB is considering appropriate steps, including rulemaking.

Proposed rules for upcoming periods as reflected in the CFPB’s report:

• Debt Collection Rule. In July 2016, the CFPB released an outline of proposals under consideration regarding companies that are debt collectors under the Fair Debt Collection Practices Act. Since that time, the CFPB has continued to engage in research and pre-rulemaking activities regarding debt collection practices. A notice of proposed rulemaking was issued in May 2019.

Final rules for upcoming periods as reflected in the CFPB’s report:

• Payday, Vehicle Title, and Certain High-Cost Installment Loans. In 2018, the CFPB announced that it intended to open a rulemaking to consider changes to its 2017 rule titled Payday, Vehicle Title, and Certain High-Cost Installment Loans. While the rule originally has a compliance date in August 2019, the CFPB issued a Notice of Proposed Rulemaking in February 2019 that proposed to delay the compliance date for certain rules for 15 months. This additional time is intended to allow the CFPB to review comments on its main rulemaking and to consider implementation challenges that have arisen since 2017.
• The Expedited Funds Availability Act (Regulation CC). The Expedited Funds Availability Act (EFA Act), implemented by Regulation CC, governs availability of funds after a check deposit, and check collection and return processes. The CFPB worked with the Federal Reserve Board to jointly issue a proposal for implementing a statutorily required adjustment for inflation the dollar amounts in the EFA Act and to reflect recent amendments to the statute. The CFPB also sought additional comments concerning issues raised in the Board’s March 2011 proposal regarding the EFA Act. The Federal Reserve and CFPB issued a final rule in June 2019 regarding inflationary adjustments under Regulation CC, and to extend Regulation CC to certain U.S. territories.

House Financial Services Committee Holds Hearing on the CFPB’s Semi-Annual Report

On October 16, the House Financial Services Committee (Committee) held their semi-annual hearing where the CFPB Director testified about the Spring 2019 Semi-Annual Report that the CFPB recently submitted to the Committee.

The hearing began with an opening statement by Chairwoman of the Committee, Maxine Waters (D CA), that discussed her viewpoint of several actions taken or directed by the CFPB Director during her tenure. In conjunction with the hearing, Rep. Waters also released a report prepared by the majority staff of the Committee that, among other things, discusses select trends in the CFPB’s enforcement actions and certain other CFPB investigations and settlements. Following Rep. Water’s opening statement, Ranking Member of the Committee, Patrick McHenry (R NC) delivered his opening remarks that highlighted several actions that have or may affect the CFPB’s organizational structure and operational functions, but did not directly address the constitutionality of the for-cause removal provision in the Dodd-Frank Act that is now at issue in multiple pieces of litigation in the federal courts.

Additionally, Committee members considered two pieces of legislation – The Fair Lending for All Act (H.R. 116) and a draft that would amend Section 989A of the Dodd-Frank Act. The Fair Lending for All Act would clarify and expand protections under the ECOA so that it would apply to all people regardless of sexual orientation, gender identity, and the applicant’s physical location, in addition to establishing criminal penalties for ECOA violations. Moreover, it would expand certain data collection requirements and would also create an Office of Fair Lending Testing within the CFPB. The amendment to the Dodd-Frank Act would enable the creation of a program that provides grants to states to prevent fraud from being committed against seniors. That amendment is colloquially known as the Empowering States to Protect Seniors from Bad Actors Act.

To watch the 3-hour hearing, please see here.

CFPB Announces Symposium on Small Business Lending

The CFPB announced that it will hold a symposium on November 6, 2019 about Section 1071 of the Dodd-Frank Act that amended the ECOA to require financial institutions to collect, report, and make public certain information concerning credit applications made by women-owned, minority-owned, and small businesses.

U.S. Financial Regulatory Agencies Join the Global Financial Innovation Network

On October 24, 2019, the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC) announced joining the Global Financial Innovation Network (GFIN). Prior to this announcement, the CFPB was the only U.S. federal regulator to participate in the GFIN. The announcement states that participation in the GFIN furthers the regulators’ objectives of enhancing regulatory clarity for all stakeholders, and identifying emerging regulatory opportunities, challenges, and risks. These four regulatory agencies join 46 other global GFIN member financial institutions, central banks, and international organizations.

Originally proposed in August 2018, the GFIN was created in January 2019 to facilitate interaction among regulators seeking to provide a way for innovation to take place across jurisdictions, including a pilot for firms seeking to test innovative products and services across multiple jurisdictions.

FinCEN’s New Global Investigations Division to Support an International Culture of Compliance

On October 15, 2019, Financial Crimes Enforcement Network (FinCEN) Deputy Director Jamal El Hindi delivered a speech on FinCEN’s efforts to foster a culture of compliance in the U.S. and worldwide to the US-MENA Privacy Sector Dialogue, an initiative launched in 2006 through coordination between the U.S. Department of the Treasury, the Federal Reserve Board of New York, the International Monetary Fund, and the Union of Arab Banks.

Over the past few years, FinCEN has provided guidance related to financial institutions’ culture of compliance related to anti-money laundering safeguards and reporting. In particular, in 2014 guidance, FinCEN highlighted six principles for establishing a culture of compliance:

1. Leadership Should Be Engaged
2. Compliance Should Not Be Compromised By Revenue Interests
3. Information Should Be Shared Throughout the Organization
4. Leadership Should Provide Adequate Human and Technological Resources
5. The Program Should Be Effective and Tested By an Independent and Competent Party
6. Leadership and Staff Should Understand How Their BSA Reports Are Used

Deputy Director El-Hindi praised U.S. financial institution’s efforts to improve a culture of compliance, but noted that around the world, that same ethos may not be well-established due to a number of factors, including different levels of distinction between the public and private sector, and different levels a trust between the government and its people. He noted that the international financial sector is in an “evolutionary state” as new technologies come online, including new payment systems and virtual currency.

With these differences, coming to consensus on moving towards a culture of compliance is challenging. Deputy Director El-Hindi suggests looking to personal reputations as a baseline for a culture of compliance because “business professionals everywhere need to be concerned about their personal reputations.” To that end, “[r]eputational risk, personal honor, family honor, institutional pride, [and] national pride . . . [are] foundations for a culture of compliance in other jurisdictions.”

Another avenue for pursuing a global culture of compliance is FinCEN’s newest division, the Global Investigations Division (GID). We previously discussed the creation of GID here. Deputy Director El-Hindi explains that GID provides a focus on FinCEN’s Section 311 authorities to collect information and investigate problematic jurisdictions, financial institutions, classes of transactions, and types of accounts that pose primary money laundering concerns. FinCEN uses Section 311 to identify primary money laundering concerns and to propose prophylactic rules to address those issues. He noted that to date, FinCEN has only used Section 311 statutory authority to address problematic jurisdictions and financial institutions. However, due to the rapid changes in the financial landscape, particularly with respect to greater disintermediation, he thinks that FinCEN may use its Section 311 authority to also designate classes of transactions and types of account as primary money laundering concerns.

Deputy Director El-Hindi did not show his hand as to what classes of transactions or types of account he was specifically concerned about, but mentioning disintermediation brings to mind issues surrounding the adoption of virtual currency and other fintech trends, including challenger banks and artificial intelligence applications.

CFTC Chairman Announces Focus on an Innovation Agenda

CFTC Chairman Heath Tarbert announced that the CFTC’s fintech initiative, LabCFTC, is going to be elevated to become an independent operating office of the agency to emphasize the CFTC’s innovation initiatives. In his announcement during a speech at the Fintech Forward 2019 Conference on October 24, 2019, Chairman Tarbert said that LabCFTC will “play an even greater role as [the CFTC] work[s] to develop and write the rules for these transformative new products,” including developments in blockchain, digital assets, and cybersecurity. Chairman Tarbert emphasized his commitment to innovation, and noted that the CFTC’s efforts will focus on a “principles-based approach to regulation.”

According to Chairman Tarbert, a principles-based approach to regulation means that the CFTC “set[s] the destination but leave[s] it to our registrants to find the best path to get there.” This approach provides the flexibility for market participants to utilize new technology while retaining the regulatory mandates established by the CFTC. He further acknowledged that technology moves faster than regulation, but the CFTC is still able to set the parameters to allow innovation to thrive responsibly.

In conjunction with this conference, the CFTC also released a primer on artificial intelligence in financial markets as an educational tool. The primer provides an overview of artificial intelligence development and uses, describes its benefits and challenges, and describes the CFTC’s role in promoting responsible development of artificial intelligence deployments in financial markets.

House Passes Beneficial Ownership Bill

On October 22, 2019, the House passed the Corporate Transparency Act of 2019 (H.R. 2513) on a bipartisan basis (249-173). Rep. Carolyn Maloney (NY-12), the acting chair of the House Oversight Committee, introduced the bill. The bill would add a section to the Bank Secrecy Act requiring corporations and LLCs in the U.S. (as those terms are defined under state law) to disclose their beneficial owners for purposes of preventing money laundering and the financing of terrorism. In addition to a host of exemptions for entities like banks, broker-dealers, and charities, the bill exempts companies with over 20 employees and over $5 million in gross receipts or sales, and which have a physical presence in the U.S., as those companies are unlikely to be anonymous shell companies created to hide or launder illicit funds.

A beneficial owner is defined by the bill as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise,” exercises substantial control of the company, owns 25% or more of the equity interests of the company, or receives substantial economic benefits from the assets of the company. The bill would require businesses to file a report with FinCEN at the time of corporate formation providing the name, date of birth, address, and unique identifying number of each beneficial owner of the company. The business would also be required to file an annual report to FinCEN providing the current beneficial owners of the company and any changes to the beneficial owners during the previous year.

Another part of the bill (the COUNTER Act of 2019) would require the Treasury Department and other agencies to enter into rulemakings and studies to address certain money laundering risks, would encourage coordination within and among financial institutions, and would foster innovation in anti-money laundering compliance. The bill would require studies to look at strategies to combat trade-based money laundering, evaluate the consequences of financial institution de-risking, and the extent and effect of Chinese money laundering activities in the U.S. The bill also directs FinCEN to carry out a study on the status of implementation and internal use of emerging technologies, such as artificial intelligence, digital identity technologies, and blockchain technologies within FinCEN. The bill also would direct FinCEN to create a pilot program for sharing suspicious activities reports within a financial group, specifically foreign branches, subsidiaries, and affiliates (except those branches, subsidiaries, or affiliates located in China, Russia, or jurisdictions that are subject to countermeasures, are identified as state sponsors of terrorism, or are identified as not being able to reasonably protect the privacy or confidentiality of such information). Additional coordination on anti-money laundering compliance could occur between two or more financial institutions that enter into collaborative arrangements to comply with the Bank Secrecy Act. Finally, the bill would require that the Treasury Department, and each Federal functional regulator, create an Innovation Lab to support the development of responsible innovation and new technology to comply with the Bank Secrecy Act, and that the heads of each Innovation Lab will serve on an Innovation Council to coordinate innovation activities.

Bank and Fintech Investment in Innovation Grows

The McKinsey Global Banking Annual Review 2019, released earlier this week, found that investments in fintech grew by 29% in 2018. This increase has caused the number of fintech unicorns globally to top 40, with their collective worth approximately $150 billion. The report identified a number of factors driving the growth of fintech:

• Increased consumer confidence in fintech. A consumer survey conducted by McKinsey found that most respondents trust big tech companies to handle their financial needs. Included in the survey results were Amazon (65%) and Google (58%).
• Fintech spending on innovation. Both banks and fintechs spend approximately 7% of their revenue on information technology, despite the two sectors having very different IT spending priorities. Banks report spending most of their budgets to maintain legacy architecture and only spend approximately 35% of their budget on launching and scaling up innovative solutions, whereas fintechs spends more than 70% of their IT budgets on innovation.
• Fintech focus on emerging markets. A high degree of fintech disruption has been observed by McKinsey in emerging markets. As banks have decreased their IT spending by 40 basis points of revenues since 2013, fintechs have increasingly moved into those markets. In particular, digital platform companies like Apple, Facebook, and Amazon have made significant investments in customer-facing technology in emerging markets.
• Bank partnerships with fintech. Research by McKinsey shows that 79% of leading banks have partnered with a fintech to foster innovation in payments, lending, investment, or other areas.
• Increased reliance on advanced analytics and artificial intelligence. McKinsey identified the development and implementation of advanced analytics (AA) and artificial intelligence (AI) capabilities as a particularly fruitful way that banks can partner with fintechs. AA and AI are already producing new and highly effective tools for identifying emerging trends and risks, and AA and AI are expected to further drive the digitization of paper-intensive businesses such as mortgages, CMIB, and commercial and transaction banking.

Dutch Antitrust Regulator Studying Big Tech Firms

On October 22, 2019, the Netherlands Authority for Consumers and Markets (ACM), the Dutch antitrust regulatory, launched a market study into big tech companies including Apple, Google, Amazon, and Facebook, as well as Chinese big tech companies such as Tencent and Alibaba, which are planning to enter the Dutch payments market. The ACM’s main research question will focus on whether these tech companies have plans to be active competitors in the Dutch payments market, what those plans are, and what impact those plans will have on consumers and businesses. The ACM will also seek to understand what new payment options will become available from these companies and whether small businesses will have sufficient opportunity to enter the payments market.

In its announcement, the ACM acknowledges that the European rules on access to payment data (PSD2) make it possible for greater competition and innovation in the payment system, and that the entrance of big tech companies into that market would boost competition and innovation. Yet, ACM also acknowledges that the entry of big tech companies carries anticompetitive risks.

Beginning in early-2020, the ACM will interview experts, send surveys to big tech companies, other fintech firms, banks, and other market participants. ACM intends to share insights gained in the study by mid-2020. If there are questions about this study or opinions about the questions being asked, the ACH is receiving correspondence at BigTechs@acm.nl.

Perkins Coie has experience responding to inquiries on emerging technologies in the U.S. and Europe. If you seek advice or support in responding to the ACM or other regulators about your fintech or other technology, please contact Youssef Sneifer at YSneifer@perkinscoie.com or Sam Boro at SBoro@perkinscoie.com.