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  • NYDFS will continue to pursue litigation if OCC moves forward with fintech charter

    State Issues

    On June 6, New York Department of Financial Services (NYDFS) Superintendent, Maria T. Vullo, spoke to the Exchequer Club in Washington, DC, emphasizing, among other things, her opposition to the OCC’s proposal for a fintech charter. Vullo noted that the OCC has not actually finalized plans for the new charter and Comptroller, Joseph Otting, is expected to announce his views on the pending proposal soon. As previously covered by InfoBytes, two legal challenges, one by NYDFS and one by the Conference of State Bank Supervisors, were recently dismissed in separate district courts for lack of subject matter jurisdiction and ripeness due to the fact that the OCC has not issued a fintech charter nor has it finalized its plans to issue one. In her speech, Vullo, acknowledged these lawsuits and her desire to continue the litigation “rather than accept the OCC’s lack of authority in the non-depository space and respect the states’ regulation of and consumer protections in this area.” Vullo noted that fintech, when done right, is a “very good thing” that can assist in bringing banking services to underserved customers. But she also stated that companies that use financial technology should not be granted “an exemption from the rules that banks and other financial institutions follow to manage risk and protect consumers.”

    Vullo also touched on (i) her support for the CFPB’s final rule on payday loans, vehicle title loans, and certain other high-cost installment loans; (ii) her concerns over the dismantling of the Bureau’s Office for Students; (iii) her opposition to the Department of Education’s position that only the federal government may oversee student loan servicers (see InfoBytes coverage here); and (iv) the potential risks with the unregulated virtual currency market.

    State Issues NYDFS OCC Fintech Fintech Charter

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  • CFPB Succession: Bureau asks court to stay payday rule litigation; Mulvaney: Bureau may resume PII collection; working on a fintech regulatory “sandbox”; will consider scale and frequency of violations in future actions

    Federal Issues

    On May 31, the CFPB filed a joint motion with two payday loan trade groups, requesting a stay of litigation pending the Bureau’s reconsideration of its final rule on payday loans, vehicle title loans, and certain other high-cost installment loans (Rule) and requesting a stay of the compliance date—currently set for August 19, 2019 for most substantive sections—of the Rule until 445 days after final judgment in the litigation. The motion argues that the stay is necessary for the duration of the rulemaking process because “the rulemaking process may result in repeal or revisions of the [Rule] and thereby moot or otherwise resolve this litigation.”  As previously covered by InfoBytes, on April 9, the payday loan trade groups filed the lawsuit in the U.S. District Court for the Western District of Texas asking the court to set aside the Rule because, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. The Bureau announced its intention to reconsider the Rule in January, and reiterated that intent in its Spring 2018 rulemaking agenda.   

    Additionally, acting Director of the CFPB, Mick Mulvaney, reportedly lifted the ban on the Bureau’s collection of personally identifiable information after an independent review concluded that “externally facing Bureau systems appear to be well-secured.” The ban was initially announced in December 2017, soon after Mulvaney began his acting role.

    On May 29, Mulvaney stated in response to a question at a luncheon hosted by the Women in Housing & Finance that the CFPB is working closely with the U.S. Commodities Futures Trading Commission (CFTC) on developing a regulatory “sandbox” for fintech companies—which would provide targeted regulatory relief for companies to test new consumer financial products. While he did not provide many details on the project, he did note the Bureau was reviewing similar state actions for guidance (as previously covered by InfoBytes, Arizona was the first state to create a regulatory sandbox for fintech innovation). Additionally, in response to another question, Mulvaney noted that the Bureau may begin to take into account the scale and frequency of violations when determining whether to take action against a company; a practice, according to Mulvaney, that was not done under previous leadership. When referring to his authority to decide when to pursue an action, he stated, “I think if [a company is] doing something less than one-tenth of 1 percent of the time, maybe…it's evidence of a lack of criminal intent, and maybe there's a good place ... for me to execute some prosecutorial discretion."

    Overall, Mulvaney’s remarks were consistent with previous comments about the direction of the Bureau, including his intention to end the practice of “regulation by enforcement” and his desire to move the CFPB under the Congressional appropriations process. He noted that he is still in the process of reviewing the public disclosure of consumer complaints and whether or not the Consumer Complaint Database will continue to be publicly available. Additionally, he was unable to provide a status update on the Bureau’s future debt collection rule (the Spring 2018 rulemaking agenda lists the rule in a “Proposed Rule Stage” and has the deadline for a notice of proposed rulemaking set for February 2019, see InfoBytes coverage here). Lastly, he reiterated the Bureau’s recent announcement that it is reviewing applications of the disparate impact doctrine under ECOA, stating that he is “reviewing all of [the Bureau’s] rules regarding ECOA, not just in auto lending” because Dodd-Frank requires that the Bureau “enforce federal consumer financial law consistently without regard to the status of the person.”   

    Federal Issues CFPB CFPB Succession Enforcement Fintech Payday Rule

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  • SEC obtains court order halting allegedly fraudulent initial coin offering


    On May 29, the SEC announced it obtained a court order halting an alleged fraud involving an initial coin offering (ICO) that raised as much as $21 million from investors in the U.S. and overseas. In addition, the court approved an emergency asset freeze and appointed a receiver for the firm allegedly responsible for the scheme, the SEC said in its press release. According to the SEC’s complaint filed May 22 in California federal court, the firm’s president and one of two firms he controls allegedly violated the antifraud and registration provisions of the federal securities laws, by, among other things, (i) making misleading statements to investors about the nature of business relationships with the Federal Reserve and nearly 30 well-known companies, and (ii) including “fabricated, misleading, and/or unauthorized” testimonials from corporate customers on the firm’s website designed to “establish a presence and seeming expertise.” A second firm controlled by the defendant has also been charged with violating antifraud provisions. Among other things, the SEC seeks permanent injunctions, the return of profits associated with the fraudulent activity, plus interest and penalties, and a ban prohibiting the president from participating in ICOs in the future.

    Securities Initial Coin Offerings SEC Fraud Fintech

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  • CFTC, NASAA enter cryptocurrency, fraud information sharing partnership; CFTC releases virtual currency derivative guidance


    On May 21, the U.S. Commodity Futures Trading Commission (CFTC) announced it had signed a mutual cooperation agreement with the North American Securities Administrators Association (NASAA) to increase cooperation and information sharing on cryptocurrencies and other potential market fraud. The memorandum of understanding (MOU) is designed to “assist participants in enforcing the Commodity Exchange Act, which state securities regulators and state attorneys general are statutorily authorized to do alongside the CFTC,” leading to the possibility of additional enforcement actions brought under other areas of law. In order to receive the benefits—including investigative leads, whistleblower tips, complaints, and referrals provided to NASAA members by the CFTC—individual jurisdictions will be required to sign the MOU.

    The same day, the CFTC’s Division of Market Oversight and Division of Clearing and Risk (DCR) issued a joint staff advisory providing guidance on several enhancements to which CFTC-registered exchanges and clearinghouses should adhere when listing derivatives contracts based on virtual currencies. The advisory addresses the following five key areas for market participants: (i) “[e]nhanced market surveillance”; (ii) “[c]lose coordination with CFTC staff’; (iii) “[l]arge trader reporting”; (iv) “[o]utreach to member and market participants”; and (v) “Derivatives Clearing Organization risk management and governance.” According to the DCR director, the information provided is intended in part, “to aid market participants in their efforts to design risk management programs that address the new risks imposed by virtual currency products . . . [and] to help ensure that market participants follow appropriate governance processes with respect to the launch of these products.”

    Securities Fintech CFTC State Regulators Cryptocurrency Virtual Currency MOUs

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  • Federal Reserve Governor discusses potential impact of digital innovations on the financial system


    On May 15, Federal Reserve Board Governor Lael Brainard spoke at a digital currency conference sponsored by the Federal Reserve Bank of San Francisco to discuss how digital innovations may impact the financial system, specifically in the areas of payments, clearing, and settlement. Brainard discussed, among other things, the importance of understanding the impact these innovations may have on (i) investor and consumer protection issues, and (ii) cryptocurrency and distributed ledger technology governance, particularly with respect to Bank Secrecy Act/anti-money laundering concerns. In addition, Brainard commented on the inherent risks and challenges surrounding the concept of a central bank digital currency, and noted that at this time, “there is no compelling demonstrated need for a Fed-issued digital currency [because] [m]ost consumers and businesses in the U.S. already make retail payments electronically using debit and credit cards, payment applications, and the automated clearinghouse network. Moreover, people are finding easy ways to make digital payments directly to other people through a variety of mobile apps.” Brainard noted, however, that the Federal Reserve is monitoring these technological developments as “digital tokens for wholesale payments and some aspects of distributed ledger technology—the key technologies underlying cryptocurrencies—may hold promise for strengthening traditional financial instruments and markets” in the coming years.

    Fintech Federal Reserve Cryptocurrency Distributed Ledger Bank Secrecy Act Anti-Money Laundering

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  • Federal Reserve Governor discusses Community Reinvestment Act modernization

    Federal Issues

    On May 18, Federal Reserve Board Governor Lael Brainard spoke before a community development conference in New York City to discuss the Community Reinvestment Act’s (CRA) role in supporting low- and moderate-income (LMI) neighborhoods and the importance of “refreshing” CRA regulations to accommodate for, among other things, technology-driven changes that have made banking accessible via online and mobile platforms. Brainard covered five principles for CRA modernization, including (i) updating CRA regulations to accommodate different business models that serve the needs of LMI communities while still sustaining branches; (ii) clarifying performance measures for productive CRA investment activities and finding ways to “reduce the distortions that lead to some areas becoming credit ‘hot spots’ and others credit deserts”; (iii) tailoring CRA regulations and evaluation methods to take into account banks of different sizes and business models; (iv) improving and promoting consistency and predictability across and within agencies; and (v) ensuring that the revised CRA regulations continue to “mutually reinforce[e] laws designed to promote an inclusive financial services industry” as well as “fair access to credit.”

    Federal Issues Federal Reserve CRA Fintech

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  • Maryland expands scope of unfair and deceptive practices under the Maryland Consumer Protection Act, increases maximum civil penalties

    State Issues

    On May 15, the Maryland governor signed HB1634, the Financial Consumer Protection Act of 2018, which expands the definition of “unfair and deceptive trade practices” under the Maryland Consumer Protection Act (MPCA) to include “abusive” practices, and violations of the federal Military Lending Act (MLA) and Servicemembers Civil Relief Act (SCRA). The law also, among other things:

    • Civil Penalties. Increases the maximum civil penalties for certain consumer financial violations to $10,000 for the initial violation and $25,000 for subsequent violations
    • Debt Collection. Prohibits a person from engaging in unlicensed debt collection activity in violation of the Maryland Collection Agency Licensing Act or engaging in certain conduct in violation of the federal FDCPA.
    • Enforcement Funds. Requires the governor to appropriate at least $700,000 for the Office of the Attorney General (OAG) and at least $300,000 to the Office of the Commissioner of Financial Regulation (OCFR) for certain enforcement activities.
    • Student Loan Ombudsman. Creates a Student Loan Ombudsman position within the OCFR and establishes specific duties for the role, including receiving, reviewing, and attempting to resolve complaints from student loan borrowers.
    • Required Studies. Requires the OCFR to conduct a study on Fintech regulation, including whether the commissioner has the statutory authority to regulate such firms. The law also requires the Maryland Financial Consumer Protection Commission (MFCPC) to conduct multiple studies, including studies on (i) cryptocurrencies and initial coin offerings and (ii) the CFPB’s arbitration rule (repealed by a Congressional Review Act measure in November 2017).

    State Issues UDAAP SCRA Military Lending Act FDCPA Student Lending Arbitration Civil Money Penalties Fintech Cryptocurrency State Legislation

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  • FDIC Chairman delivers remarks on the impact of technology in the business of banking


    On May 7, FDIC Chairman, Martin J. Gruenberg, spoke at the Forum on the Use of Technology in the Business of Banking about the importance of understanding the ways in which emerging technology is positively affecting banking operations, while also recognizing associated risk management challenges. Gruenberg noted that the benefits of technology—such as reduced transaction costs, operational efficiency, payment speed improvements, and economic inclusion and access to mainstream banking—also pose challenges to financial institutions that may be amplified as new products and services are adopted. Challenges include: (i) cybersecurity risks; (ii) Bank Secrecy Act/anti-money laundering concerns; and (iii) various other consumer protection issues. Gruenberg also discussed the role of the FDIC’s Emerging Technology Steering Committee, which was established to address these issues, and its two working groups responsible for “monitoring trends, opportunities, and risks in this area, and evaluating impacts on banking, general safety and soundness, deposit insurance, financial reporting, economic inclusion, and consumer protection.” He stressed that the committee’s work will inform the agency’s “supervisory strategy for responding to opportunities and risks presented by the use of emerging technologies to supervised institutions.”

    Fintech FDIC Consumer Finance Risk Management

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  • CFTC Commissioner says FSOC should take lead in future fintech policy regulation


    On May 3, Commodities Futures Trading Commission (CFTC) Commissioner Rostin Behnam emphasized that the Financial Stability Oversight Council (FSOC) should take the lead in evaluating the future of oversight and regulation of the fintech industry. In his keynote address to a financial regulatory conference in Washington, D.C., Behnam highlighted the rise of cryptocurrencies as an example of the need to “identify and craft an appropriate path forward for ensuring that legal issues resulting from these technologies are identifiable and solvable before they cross the horizon.” According to Benham, FSOC, due to its mandate in the Dodd-Frank Act, has the authority to, among other things, convene financial regulators for collaboration and propose policy direction based on input from all stakeholders. Acknowledging the need for all market participants and regulators to be aligned when it comes to fintech regulation, Benham stated that “anything less than decisive action by policymakers in the short term” will lead to uncertainty.

    Fintech CFTC FSOC Virtual Currency Dodd-Frank

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  • New York Senate introduces bill to enact state charters for on-line lenders

    State Issues

    On May 2, the New York Senate introduced a bill that, if passed, would establish a new article under the state’s banking law to provide for the chartering and regulating of internet lending services corporations (on-line lenders). Among other things, the “New York limited state charter for internet lending services,” S8340, would (i) authorize the New York Department of Financial Services (NYDFS) to issue limited state charters to on-line lenders who “engage in the business of making loans over an internet or electronic platform”; (ii) allow chartered on-line lenders to approve or deny consumer loan applications submitted through NYDFS-approved electronic means; (iii) limit the principal amount of personal loans to $25,000 and $50,000 for business and commercial loans, as well as require the adherence to legally authorized interest rates; (iv) require that chartered on-line lenders be able to demonstrate fiscal solvency with “a minimum capital requirement of not less than $250,000”—an amount five times higher than what is required of brick and mortar-based licensed lenders; and (v) grant NYDFS the authority to regulate chartered on-line lenders.

    S8340 further notes that, at present, the state’s banking law does not provide a regulatory environment to oversee the operations of on-line lenders. The bill currently sits with the Senate’s Banks Committee.

    State Issues State Legislation Fintech NYDFS

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