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Special Alert: OCC Issues Highly-Anticipated Guidance for Evaluating Charter Applications from Fintech Companies
On March 15, 2017, the Office of the Comptroller of the Currency (OCC) issued further guidance regarding how it will evaluate applications by fintech companies to become Special Purpose National Banks (SPNBs). In its release, the OCC summarized the more than 100 comments it received in response to its December 2016 white paper and provided a draft supplement to the OCC Licensing Manual outlining proposed requirements for fintech companies to become SPNBs.
Last week’s release is the latest in the OCC’s efforts to support the intersection between banking and technology companies. In August 2015, Comptroller Thomas Curry announced the OCC’s intent to assemble a team of policy experts, examiners, attorneys, and other agency staff to begin researching innovative developments in the financial services industry. In March 2016, the OCC published a summary of its initial research and plans to guide the development of responsible financial innovation. In September 2016, the OCC issued a notice of proposed rulemaking clarifying the framework and process for receiverships of national banks without FDIC-insured deposits. That proposal applied to all non-depository national banks, including those with special purpose national bank charters. In October 2016, the OCC detailed its plans to implement a responsible innovation framework and announced the establishment of the Office of Innovation, a dedicated, central point of contact for fintech companies as well as requests and information related to innovation. Finally in December 2016, the OCC published a white paper announcing its intent to create a SPNB charter for fintech companies and invited comments and posed discrete questions for consideration regarding the proposals.
If you have questions about the guidance or other related issues, visit our Financial Institutions Regulation, Supervision & Technology (FIRST) and FinTech practice pages for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.
On March 15, the Conference of State Bank Supervisors released a statement from its president, John W. Ryan, in response to last December’s OCC white paper titled Exploring Special Purpose National Bank Charters for FinTech Companies (the Proposal). As previously covered in an InfoBytes Special Alert, the white paper outlines the authority of the OCC to grant national bank charters to FinTech companies and describes minimum supervisory standards for successful FinTech bank applicants. CSBS’s statement follows a comment letter submitted to the OCC in January (along with several other letters submitted by stakeholders—see previously posted InfoBytes summary) in which numerous concerns about the federal charters were raised. Ryan stated that the OCC’s Proposal "sets a dangerous precedent [by demonstrating that] the OCC has acted beyond the legal limits of its authority [and has] bypassed and ignored bipartisan objections from Congress, [thereby] creat[ing] new risks to consumers.” He asserted that the proposed charter would “preempt existing state consumer protections without a comparable mechanism to replace them. It also exposes taxpayers to the risk of inevitable [F]inTech failures." Furthermore, state regulators oversee "a vibrant system of non-depository regulation," he noted. Many mortgage, debt collection, and consumer finance companies operate under state charters, and non-banks have access to a streamlined process to obtain licenses to operate in more than one state via a nationwide licensing system. “State regulators continuously improve this process—having slashed approval times by half in recent years—and lead the way in developing model frameworks and consumer protections for cutting-edge areas like virtual currency. And by its very nature, state regulation limits systemic risk.”
On March 10, 2017, the SEC issued an Order disapproving of a proposed rule change by the BATS BZX Exchange (“the Proposal”), which proposed to list and trade “commodity-based trust shares” issued by the Winklevoss Bitcoin Trust. The Proposal, if approved, would have established a bitcoin exchange-traded fund (“ETF”) that market participants could invest in through the BATS BZX Exchange platform. Specifically, in rejecting the Proposal, the Commission emphasized the lack of regulation in the bitcoin market, noting both (i) that the BATS BZX Exchange platform “would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares”; and (ii) that bitcoin regulation, at present, would leave a bitcoin ETF more susceptible to manipulation than an ETF comprised of other commodities, such as gold and silver. Ultimately, the Commission concluded that, “[a]bsent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant, regulated markets related to the underlying asset—the [Commission] does not believe that a national securities exchange can meet its” regulatory obligations.
Comments submitted in response to the original BATS BZX Exchange proposed rule change can be accessed here.
Governor’s Proposed NY State Executive Budget Includes More Online Lending Supervision; State Assembly Budget “Rejects” Proposed Change
Article 7 of the New York State Constitution requires the Governor to submit an executive budget each year, which contains, among other things, recommendations as to proposed legislation. On February 16, New York Governor Andrew Cuomo released a proposed 2017-18 Executive Budget that includes a proposed amendment to the New York Banking Law that would provide the New York Department of Financial Services (“NYDFS” or “DFS”) expanded licensing authority over online and marketplace lenders. (See Part EE (at pages 243-44) of the Transportation, Economic Development and Environmental Conservation Bill portion of the Executive Budget).
According to a Memorandum in Support of the Governor’s Budget, the proposed amendment would (i) address “[g]aps in the State’s current regulatory authority [that] create opportunities for predatory online lending,” and (ii) “ensure that all types of online lenders are appropriately regulated,” by (a) “increase[ing] DFS’ enforcement capabilities,” and (b) “expand[ing] the definition of ‘making loans’ in New York to not only apply to online lenders who solicit loans, but also online lenders who arrange or otherwise facilitate funding of loans, and making, acquisition or facilitation of the loan to individuals in New York.” If enacted, the NYDFS’s new authority would, under the Governor’s current proposal, become effective January 1, 2018.
This proposal in the Governor’s Executive Budget has, however, been challenged by the New York State Legislature. On March 13, after several hearings on the Governor’s proposed budget, the New York State Assembly released its own 2017-18 Assembly Budget Proposal (“Assembly Budget”), which, among other things, expressly rejected the aforementioned proposed amendment to the banking law found in “Part EE.” The Senate is now expected to release its own budget proposal shortly. And, once it is released, the two house of the State Legislature will reconcile the two bills in committees and pass legislation that stakes out the House’s position on the Governor’s proposals. From there, negotiations will begin in earnest between the Legislature and the Executive, with the goal of reaching a budget agreement on or before March 31, 2017.
 See also N.Y. Banking Law § 340; N.Y. Gen. Oblig. Law § 5-501(1); N.Y. Banking Law § 14-a(1); N.Y. Gen. Oblig. Law § 5-521(3); N.Y. Ltd. Liab. Co. Law § 1104(a).
OCC Releases Draft “Licensing Manual Supplement” to be Used for Evaluating Fintech Bank Charter Applications; Will Accept Comments Through April 14
On March 15, the OCC released both a Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies (“Draft Fintech Supplement”) and a Summary of Comments and Explanatory Statement (“March 2017 Guidance Summary”) (together, “March 2017 Guidance Documents”) in which it provides additional detail concerning application of its existing licensing standards, regulations, and policies in the context of Fintech companies applying for special purpose national bank charters. The Draft Fintech Supplement is intended to supplement the agency’s existing Licensing Manual. The March 2017 Guidance Summary addresses key issues raised by commenters, offers further explanation as to the OCC’s decision to consider applications from Fintech companies for an Special Purpose National Bank (“SPNB”) charter, and provides guidance to Fintech companies that may one day wish to file a charter application.
The March 2017 Guidance Documents emphasize, among other things, certain “guid[ing]” principles including: (i) “[t]he OCC will not allow the inappropriate commingling of banking and commerce”; (ii) “[t]he OCC will not allow products with predatory features nor will it allow unfair or deceptive acts or practices”; and (iii) “[t]here will be no “light-touch” supervision of companies that have an SPNB charter. Any Fintech companies granted such charters will be held to the same high standards that all federally chartered banks must meet.” Through its commitment to (and alignment with) these principles, the OCC “believes that making SPNB charters available to qualified [FinTech] companies would be in the public interest.”
Notably, the OCC emphasized that its latest Fintech guidance “is consistent with its guiding principles published in March 2016” and “also reflects the agency’s careful consideration of comments received (covered by InfoBytes here) on its December 2016 paper discussing issues associated with chartering Fintech companies.” As covered in a recent InfoBytes Special Alert, the OCC has, over the past several months, taken a series of carefully calculated steps to position itself as a leading regulator of Fintech companies.
Finally, although it does not ordinarily solicit comments on procedural manuals or supplements, the OCC will be accepting comments on the aforementioned Fintech guidance through close of business April 14.
On March 10, the Department of Justice (the “Government”) announced that a California-based technology company agreed to settle the Government’s allegations that it violated the False Claims Act by making false statements and claims in its negotiation and administration of a General Services Administration (“GSA”) contract. According to the Government’s press release announcing the settlement, the settlement resolved allegations that the company failed to “fully and accurately disclose its discounting practices to GSA contracting officers.” More specifically, the Government had alleged that the company provided false information about customer discounts in connection with the contract negotiations, and violated the price reduction clause in the contract by not providing government customers with additional discounts when commercial discounts improved. The company agreed to pay $45 million to resolve the allegations, which were first made in a whistleblower lawsuit filed under the False Claims Act. $10.195 million of the total settlement will be paid to the whistleblower, as the rules under the False Claims Act provide that private individuals may to sue on behalf of the government and share in a portion of the recovery.
In a March 15 letter to CFPB Director Richard Cordray, Rep. Emanuel Cleaver (D-Mo.) called upon the Bureau to address potential abuses by FinTech companies that may be engaged in predatory small-business lending. In so doing, he asked that the Bureau “investigate whether FinTech companies engaged in small business lending are complying with all anti-discrimination laws, including the Equal Credit Opportunity Act.” The letter also seeks responses to three questions:
- When does the CFPB anticipate finalizing regulation and guidance to fully implement Section 1071 of the ECOA (requiring financial institutions to collect and maintain loan data for women-owned, minority-owned and small business credit applicants)?
- Has the CFPB engaged in any supervisory activities over FinTech small business lenders and, if so, did the CFPB identify any ECOA-related compliance issues?
- Will the CFPB solicit complaints through its consumer complaint portal from consumers, particularly those from communities of color, who feel they have been discriminated against by a FinTech lender offering small business loans (and, if not, how can consumers formally submit a complaint)?
In a Decision released on February 16, 2017, the New York Industrial Board of Appeals struck down the portions of a New York Department of Labor regulation (12 NYCRR § 192), set to go into effect on March 7, that would have restricted a New York employers’ ability to pay its employees via payroll debit card. Specifically, the board ruled that the Department had exceeded its authority under New York labor law and encroached upon the jurisdiction of banking regulators when imposing fee limits and other restrictions on the cards.
The new rule – which was adopted by the Department of Labor in September 2016, and codified at section 192 of the New York Labor Law – set forth numerous regulations clarifying and/or specifying the acceptable methods by which employers in New York State may pay wages to certain employees. Among other things, the regulation required that an employer provide written notice to the employee and obtain written consent from the employee at least seven business days prior to taking action to issue the payment of wages by payroll debit card. The new rule would also have prohibited many fees, including charges for monthly maintenance, account inactivity and overdrafts, and for checking a card’s balance and contacting customer service.
At issue before the Industrial Board of Appeals was a petition submitted by a single payroll debit card vendor challenging the Department of Labor’s authority to regulate payroll debit cards. Ultimately, the Board agreed with the vendor, finding that the Department sought to improperly regulate banking services provided by financial institutions – an area subject to the exclusive jurisdiction of the New York Department of Financial Services. In reaching this holding, the Board noted that that the Department of Financial Services already regulates and has issued guidance concerning the fees that financial institutions may charge for banking services, including those related to checking accounts and licensed check cashers. The Board also noted that, should the Department of Labor wish to challenge the Decision, it may bring an Article 78 proceeding in New York Supreme Court, or, alternatively, it may choose to revise the Prepaid Card-related provisions identified in the Decision.
OCC Chief Issues Remarks on Fintech Charter Plan; Federal Reserve Governor Highlights Virtual Currency Risks
On March 6, Thomas Curry, Comptroller of the Office of the Comptroller of the Currency (OCC) spoke at the LendIt USA 2017 conference and addressed arguments against the regulator’s authority to provide charters to Fintech firms as presented in its December 2016 white paper, Exploring Special Purpose National Bank Charters for Fintech Companies (see InfoBytes Special Alert). Curry stated, “[T]he National Bank Act  give[s] the OCC the legal authority to grant national bank charters to companies engaged in the business of banking,” and added that “[i]t is not circumscribed just because a company delivers banking services in new ways with innovative technology.” Curry says the OCC plans to publish a supplemental document to clarify ways it will evaluate Fintech companies that apply for charters.
Regarding the risks posed by institutions creating their own virtual currencies, Federal Reserve’s lead governor, Jerome Powell, said in remarks made to Yale University on March 3 that the risks and technological challenges are far too high for central banks to undertake. “Any central bank actively considering issuing its own digital currency would need to carefully consider the full range of the payments system and other policy issues, which do seem substantial, as well as the potential societal benefits,” said Powell. “I would expect private-sector systems to be more forward-leaning than central banks in providing new features to the public through faster payments systems as they compete to attract retail customers,” Powell said. “A central bank-issued digital currency would compete with these and other innovative private-sector products and may stifle innovation over the long run.”
Special Alert: District Court Confirms Telephonic Consent to Preauthorized ACH Debits Complies with ESIGN and EFTA
On February 17, a U.S. District Court in Nashville, TN found that a creditor complied with both the Electronic Signatures in Global and National Commerce Act (“ESIGN”) and the Electronic Fund Transfer Act and its implementing regulation, Regulation E (collectively “EFTA”) when it obtained a consumer’s “written” authorization over the telephone to enroll in recurring ACH payments and mailed a paper copy of the authorization to the consumer two days later. This case (“Blatt”) is significant because it clarifies and confirms much of the existing understanding of the interaction between ESIGN and the Uniform Electronic Transactions Act, and provides precedent for advancing the validity of widespread industry practices in other courts.
 15 U.S.C. § 7001, et seq.
 15 U.S.C. § 1693, et seq.
 12 C.F.R. §1005.1, et seq.
If you have questions about the ruling or other related issues, visit our FinTech and Auto Finance practice pages for more information, or contact a Buckley Sandler attorney with whom you have worked in the past.