Weekly Fintech Focus

  • The Supreme Court holds that the CFPB director is removable by the president at will, setting up potential challenges to the CFPB’s prior enforcement actions and rulemakings.
  • The CFPB finalizes the Payday Lending Rule and removes a lender’s requirement to conduct an ability-to-repay analysis.
  • The FDIC follows the OCC in codifying the valid-when-made rule.
  • The OCC issues an interpretive letter to clarify that national banks do not need state money transmission licenses.
  • The Senate Banking Committee discusses CBDCs and other developments in the digitization of money and payments.
  • OCC: Banks face higher compliance risks due to pandemic.
  • FinCEN issues advisory on scams and money mule schemes related to COVID-19.
  • Venmo pilots business payments for micro SMBs.
  • SoFi applies for national bank charter with the OCC.

CFPB’s Director Structure is Unconstitutional

On June 29, 2020, the U.S. Supreme Court ruled that the Consumer Financial Protection Bureau’s (CFPB) leadership structure was unconstitutional. The CFPB was established as an independent regulatory agency, and until this ruling, the CFPB was led by a single director who is removable by the president only for-cause. The Court’s ruling leaves the rest of the CFPB intact, and only makes the CFPB’s director removable by the president at will.

This decision may have important implications for the CFPB’s prior enforcement actions and rulemakings and for the powers of other independent agencies. In light of the Court’s decision, the CFPB ratified most of the actions the CFPB took between 2012 and today. The CFPB’s Director Kathleen L. Kraninger stated that “[t]he Bureau is taking action to ensure that consumers and market participants understand that the same rules continue to govern the consumer financial marketplace.”

CFPB Finalizes Payday Lending Rule and Rescinds the Underwriting Rules

On July 7, 2020, the CFPB finalized its Payday Lending Rule with significant changes to the underwriting rules that were first issued in 2017. Following a reconsideration period of the Payday Lending Rule, which began in January 2018, the new final rule now rescinds the original ability-to-repay provisions, which would have made it an unfair and abusive practice for a payday lender to make covered loans without reasonably determining that consumers have the ability to repay the loans. In rescinding the ability-to-repay provisions, the CFPB explained that it would not be abusive for a lender to fail to make an ability-to-repay determination because this does not take unreasonable advantage of consumer vulnerabilities, and consumers will still be able to understand the material risks, costs, and conditions of covered loans even without this determination.

The payment provisions of the Payday Lending Rule remain. The payment provisions generally require that payday lenders obtain permission from borrowers prior to attempting to debit payments from a borrower’s account and also limit the number of consecutive times a lender can attempt to debit a borrower’s account.

FDIC Follows the OCC to Codify the Valid-When-Made Rule

The Federal Deposit Insurance Corporation (FDIC) recently issued its final rule to resolve a lingering legal question created by a 2015 Second Circuit decision, Madden v. Midland Funding, and to codify the longstanding valid-when-made rule. The FDIC’s final rule follows closely behind the Office of the Comptroller of the Currency’s (OCC) final rule, issued last month.

The FDIC’s final rule clarifies that Section 27 of the Federal Deposit Insurance Act (12 U.S.C. § 1831d) makes a loan valid-when-made, meaning that if the loan is permissible at the time it is made, it will not become illegal if there is a change in state law, a change in the commercial paper rate, or there is a sale, assignment, or other transfer of the loan.

Like the OCC, the FDIC does not address “true lender” issues at this time. However, the final rule does reiterate that the FDIC continues to view unfavorably entities that partner with a state bank with the goal of evading a state’s usury laws.

OCC Confirms that National Banks Do Not Need State Money Transmission Licenses

The OCC recently issued an interpretive letter stating that a national bank may exercise its fiduciary powers in any state without a money transmission license. The interpretive letter responded to a question by a national bank that had brought a subsidiary that undertook payroll services (and was licensed as a money transmitter in several states) into a trust structure that was assumed by a subsequently created national bank. The subsidiary began surrendering its money transmission licenses, but it was informed by some states that it must still hold a money transmission license to carry out its payroll activities. State money transmission exemptions differ, with some states exempting banks and financial institutions generally, and other states taking a narrower approach in their statutory drafting that limits the exemption to certain types of banks and financial institutions. The OCC provides examples, comparing Maryland’s money transmission law that generally exempts banks and financial institutions (exempting state-and federally chartered banks, credit unions, and savings and loan associations) with Connecticut’s more narrow approach (generally exempting “[a]ny federally insured federal bank, out-of-state bank, Connecticut bank, Connecticut credit union, federal credit union or out-of-state credit union”).

The OCC’s interpretive letter clarifies that the National Bank Act (12 U.S.C. § 92a) gives national banks the ability to act in any of their fiduciary capacities in any state in which the state permits its own institutions to act in that capacity. The National Bank Act preempts state licensing laws that conflict with a national bank’s ability to conduct its fiduciary activities in a particular state. So, if a state bank can conduct money transmission, then a national bank that operates in that state may do so as well. Further, the interpretive letter clarifies that a national bank is not limited in where it may market its fiduciary activities, in where its fiduciary customers may be located, or where the property being administered may be located.

Senate Banking Committee Holds Hearing on the Digitization of Payments

On June 30, 2020, the Senate Banking Committee held a hearing on the digitization of money and payments, which discussed efforts by industry to develop digital money and payments systems and the issues surrounding a central bank digital currency (CBDC). The witnesses at the hearing included the former chairman of the Commodity Futures Tradition Commission, J. Christopher Giancarlo, the chief executive officer of digital asset company Paxos, Charles Cascarilla, and law professor, Nakita Q. Cuttino.

Chairman Mike Crapo (R-ID) opened the hearing, highlighting the need for advances in payment systems. Ranking Member Sherrod Brown (D-OH) instead used his opening statement to critique BigTech companies and what he calls their disruption of industries that have enriched BigTech, but not led to the advances in access and cost savings for consumers as advertised. Both Giancarlo and Cascarilla noted their support for digitization as a tool for modernization of the U.S.’s financial market infrastructure, including the development of CBDCs. Professor Cuttino cautioned the Committee to consider innovations like CBDCs and whether such developments will achieve the open access proponents seek, and whether CBDCs will leave behind those already partially excluded from the financial system like rural and low-income Americans or create unnecessary tradeoffs in consumer data protection.

OCC: Banks Face Higher Compliance Risks Due to Pandemic

As a result of COVID-19, the OCC noted in its Semiannual Risk Perspective Report that banks face an elevated risk of compliance and other operational risks “due to a combination of altered operations, employees working remotely, and the requirement to operationalize new federal, state, and propriety programs designed to support consumers.”

The OCC also noted that historically low interest rates and a rapid increase in loan volumes have inflated bank balances sheets and may “broadly affect bank earnings, credit quality, operations, and capital” and that the forecasted outlook of the industry is uncertain. As a result, the OCC stated that it will employ its own risk-based approach in deciding whether a new supervisory response is necessary to carryout its oversight of banks’ mandates during its Bank Secrecy Act examinations.

These factors, among others, have led to an increase in compliance risk.

FinCEN Issues Advisory on Scams and Money Mule Schemes Involving COVID-19

The Financial Crimes Enforcement Network issued an advisory on indications of two forms of consumer fraud occurring during the COVID-19 pandemic—imposter scams and money mule schemes.

Imposter scams most commonly occur when malicious actors impersonate federal government agencies, international organizations, and charities whereby the bad actors contact a target under the false pretense of representing an official organization and thereafter convince the target to provide funds or sensitive information. These scams frequently involve topics related to stimulus benefits under the CARES Act and COVID-19 tracing efforts. Phishing schemes have also been prevalent. FinCEN specifically noted that the IRS, CDC, WHO, and other non-profits and academic institutions have had known imposters.

Additionally, money mule schemes have also been prevalent. These scams occur when a person transfers illegally acquired money or funds on behalf of or at the direction of another. Typically, the transferor is unaware that he or she is part of a larger criminal scheme yet is motivated by a potential romance or job position. FinCEN specifically noted numerous red flags related to each of these fraudulent schemes within its advisory.

As is par for the course, no single financial red flag is necessarily indicative of illicit or suspicious activity and the totality of the circumstances should be considered.

Industry Developments

Venmo Pilots Business Payments for Micro SMBs

Venmo, a PayPal subsidiary, announced a pilot feature that enables sole proprietors and other small businesses to accept payments into an additional Venmo profile that is separate from the individual’s main account. These business profiles will make use of touch-free transactions with QR codes to aid in social distancing measures in addition to having the option to send that QR code to customers directly via email. The pilot feature will also enable customers to access data about their transactions and the number of customers served.

This initial pilot phase is only available for a limited number of users, but Venmo will be releasing additional information for eligible sellers in the future.

SoFi Applies for National Bank Charter with OCC

Social Finance (SoFi) submitted its national bank charter application to the OCC. If granted, SoFi Bank, National Association will be able to accept customer deposits and make loans without using a bank partner, and benefit from no longer being regulated by a multitude of state regulators. SoFi stated that it chose to pursue the “de novo” path as it specifically allows it to take on insured consumer deposits.