Weekly Fintech Focus
- FDIC issues an updated brokered deposit rule, creating new exceptions relevant to fintechs working with bank partners.
- FDIC issues a final rule clarifying its expectations for ILC charter applications.
- CFPB issues an advisory opinion on Special Purpose Credit Programs to clarify how creditors can offer these programs to disadvantaged groups.
- CFPB grants access to its compliance assistance sandbox to an earned wage access company, which meets the CFPB’s recent guidance on such programs.
- PayPal wins the first round in its efforts to throw out aspects of the CFPB’s prepaid rule, resulting in a court throwing out certain mandatory disclosures and the 30-day waiting period for digital wallets.
- New York enacts second-in-nation law requiring disclosures for commercial purpose loans.
- The CSBS goes to court again to stop the OCC from issuing a charter to a fintech company.
FDIC Creates New Exceptions for Fintech Companies with Its Final Brokered Deposit Rule
On December 15, 2020, the Federal Deposit Insurance Corporation (FDIC) finalized its updated brokered deposit rule, providing clarifications that give welcome guidance to fintechs that engage with banks to provide customers with deposit accounts. The final rule narrows the FDIC’s limitations on brokered deposits giving more room under the exceptions for fintechs to operate in concert with their bank partners. The final rule builds on the proposed rulemaking we discussed here in 2019. The final rule will be effective April 1, 2021, with a full compliance date of January 1, 2022. The FDIC also published a Financial Institution Letter summarizing the final rule.
The most consequential changes to the brokered deposits rule create exceptions for certain arrangements:
- Exclusive Deposit Placement Arrangements—Where a fintech develops an exclusive business relationship with one insured depository institution (IDI) and is not placing or facilitating the placement of deposits at any other IDI, the FDIC will consider that fintech to not be a deposit broker.
- Engaged in the Business of Placing Deposits and Holding Customer Funds—The FDIC amends the definition of “deposit broker” by requiring that the entity must have a business relationship with the customer and must receive customer funds before placing deposits to satisfy the “engaged in the business of placing deposits” part of the definition.
- Expanded Primary Purpose Exception—The FDIC’s new framework for evaluating the business relationships for purposes of the primary purpose exception narrows the type of third parties that will be considered to have the primary purpose of facilitating the placement of deposits.
Each fintech seeking to fit within one of these exceptions should review with legal counsel as the exceptions do broaden fintechs’ abilities to act in this space, but are still complex exceptions requiring close analysis of the fintech’s business practices.
FDIC Clarifies Its Expectations for ILC Applicants
On December 15, 2020, the Federal Deposit Insurance Corporation (FDIC) issued a final rule updating the requirements for companies seeking to create an industrial bank or industrial loan company (ILC) charter. ILCs are entities chartered by a state with an available ILC charter option and insured by the FDIC to make loans without being subject to Federal Reserve oversight. Under the final rule, the FDIC codified its expectations for businesses that seek to own ILCs. The final rule is not a major change from prior practice, but rather codifies the FDIC’s general expectations for applicants. The final rule is effective April 1, 2021.
CFPB Issues an Advisory Opinion on Special Purpose Credit Programs
On December 21, 2020, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion regarding special purpose credit programs (SPCPs) to clarify the content requirements for the written plan required by Regulation B as they apply to for-profit organizations administering an SPCP.
Under the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B, a creditor may not discriminate against any applicant, with respect to any aspect of a credit transaction on the basis of race, color, religion, national origin, sex or marital status, or age. SPCPs act as a kind of exception to this prohibition by enabling creditors to provide an SPCP to respond to the special social needs of a class of persons and to benefit economically disadvantaged groups. To develop an SPCP, a creditor may consider prohibited bases when targeting these credit programs. In order to offer an SPCP, a for-profit creditor must establish and administer the program pursuant to a written plan that identifies the class of persons that the program is designed to benefit, and extend credit to a class of persons who, under the organization’s customary standards of creditworthiness, likely would not have received credit or would have received credit on less favorable terms than standard applicants.
Creditors may be wary of pursuing SPCPs because considering protected classes in credit decisions is generally prohibited and there has been very little guidance about how to administer such a program. The CFPB’s advisory opinion is intended to provide clarity where it has been lacking. In particular, the CFPB’s advisory opinion provides clarification regarding the contents of the written plan and how a creditor may make its determination about the need to develop an SPCP.
The CFPB recommends that the written plan include the following:
- The class of persons that the program is designed to benefit;
- A written plan must explain whether the class of persons will be required to demonstrate a financial need and/or share a common characteristic. Such a class could be defined with or without reference to a characteristic that is a prohibited basis under ECOA (e.g., minority residents of low-to-moderate income census tracts, operators of small farmers in rural counties, minority or woman-owned small business owners, etc.).
- The procedures and standards for extending credit pursuant to the program;
- Procedures and standards should be designed to increase the likelihood that a class of persons who would otherwise be denied credit will receive credit pursuant to the program, or that a class of persons who would receive credit on less favorable terms will receive credit on more favorable terms pursuant to the program. The written plan should describe the procedures and standards and explain how they will increase credit availability to the identified class of persons.
- To accomplish these goals a creditor may, for example, introduce a new product or service, modify the terms and conditions or certain eligibility requirements for an existing product or service, or modify policies and procedures related to certain loss mitigation programs, such as loan modifications. For example, a creditor may offer a new small business loan product for woman-owned businesses by relaxing its customary standard of requiring three years of experience in the industry to one year, if the creditor has determined that this requirement would probably prevent woman-owned businesses from qualifying for small business financing.
- Either (i) the time period during which the program will last or (ii) when the program will be reevaluated to determine if there is a continuing need for it; and
- If an organization opts for the latter approach, reevaluation could be made contingent on a certain set of circumstances or simply a set date.
- The organization could also use a combined approach with triggers on a certain date or when certain origination volume has been reached, whichever comes first.
- A description of the analysis the organization conducted to determine the need for the program.
- The written plan must describe or incorporate the organization’s analysis of the need for the program into the written plan.
The CFPB notes the following as it relates to the determination of a need for the SPCP:
- The organization’s determination for the program can be based on a broad analysis using the organization’s own research or data from outside sources, including governmental reports and studies. The advisory opinion cites to the examples of sources in Regulation B and notes that the research might be in the public domain or collected from the government through research like the SBA’s credit surveys.
- The research relied on should have a nexus to the organization’s customary credit standards.
- A creditor starting a new SPCP can use statistical methods to estimate demographic characteristics, but it cannot request demographic information that it is otherwise prohibited from collecting, even to determine whether there is a need for such a program. Once the program is established, a creditor may then request and consider information regarding a common characteristic.
CFPB Grants Sandbox Approval to an Earned Wage Access Company
Recently, we covered the CFPB’s advisory opinion greenlighting certain types of earned wage access (EWA) as not credit products under Regulation Z. Just a few weeks later, the CFPB followed its advisory opinion with an approval for an EWA company to take advantage of the CFPB’s compliance assistance sandbox to further develop its EWA products. The CFPB’s approval order confirms that the EWA company’s program meets the requirements established in its recent advisory opinion. The approval order permits the EWA company to operate in the compliance assistance sandbox for a period of 24 months.
PayPal Comes Out on Top in First Ruling on CFPB’s Prepaid Access Rule
On December 30, 2020, the District Court for the District of Columbia ruled in favor of PayPal in its closely watched effort to vacate certain of the Consumer Financial Protection Bureau’s rules on prepaid cards and digital wallets. PayPal brought this suit against the CFPB in May 2019, arguing that the CFPB’s disclosure requirements as applied to digital wallets would result in PayPal being mandated to make misleading and inapplicable disclosures to customers. Digital wallets generally enable customers to store payment credentials in order for the customer to make purchases or transfers, and PayPal argued that treating digital wallets the same as standard prepaid cards was a “fundamental category error.” The CFPB will almost certainly appeal the ruling, so we will continue to monitor the developments in this case.
In the district court’s ruling, the judge held that the CFPB exceeded its authority by mandating certain disclosures in its prepaid accounts rule. In short, the judge wrote, “I cannot presume—as the Bureau does—that Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.” The court’s ruling is broad regarding mandatory disclosures, stating that under the Electronic Funds Transfer Act (EFTA), Congress only directs the CFPB to “issue model clauses for optional use by financial institutions” with a requirement that the CFPB be flexible and “take account of variations in the services and charges under different electronic fund transfer systems” and “issue alternative model clauses” where appropriate. Accordingly, the court would expect that CFPB-issued disclosures would only be model forms rather than mandatory. Should this ruling stand, any other mandatory EFTA-related disclosures could also be challenged.
The district court also struck the CFPB’s 30-day waiting period for linking certain credit products to prepaid accounts for similar reasons as its decision on mandatory disclosures. In short, the court held that the CFPB may issue requirements for the disclosure of credit terms, but may not regulate the specific terms of credit, and the 30-day waiting period is a “substantive regulation banning a consumer’s access to and use of credit.”
New York Enacts Law Imposing Disclosure Requirements for Commercial Loans
On December 23, 2020, New York governor signed into law the New York State Small Business Truth in Lending Act, which imposes disclosure requirements on certain non-bank providers of “commercial financing” and is expected to go into effect after 180 days. The law requires certain commercial lenders to provide to their customers disclosures in connection with their offerings, including disclosures concerning finance charges, annual percentage rates, financing and repayment amounts, terms, fees, prepayment costs, and collateral requirements. Most notably, it also authorizes the superintended to issue rules and regulations regarding administering the law, including in connection with the calculation of any metric required to be disclosed; the formatting, designation, and method for the disclosures; and defining the terms used in the law. The law is intended to provide greater transparency with respect to the loans offered to small business borrowers.
The governor released an accompanying memorandum acknowledging businesses’ and consumer groups’ concerns over the new law. In the memorandum, he noted that he has secured an agreement from the legislature to improve the bill for clarification and to better align the requirements under applicable federal regulations.
State Regulators File a Complaint Opposing OCC Fintech Charters
A national organization of state banking and financial regulators in the United States, the Conference of State Bank Supervisors (CSBS), filed a complaint seeking an injunction against the Office of the Comptroller of the Currency (OCC) to prevent the OCC from issuing a national bank charter to a fintech company. CSBS alleges that the OCC does not have authority under applicable federal laws to issue such charters to nonbank companies. Specifically, CSBS argues that the OCC’s conduct enables “nonbank fintech companies . . . to escape state regulation by preempting and displacing the licensing, regulation, and supervision responsibilities of state authorities over these institutions . . . . [going] far beyond the limited chartering authority granted to it by Congress under the National Bank Act . . . and other federal banking laws.” These laws, according to CSBS, permit the OCC to issuer charters only to those institutions that carry “business of banking” or other special purpose activity as authorized by Congress.