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  • CSBS Files Motion in Opposition to OCC’s Motion to Dismiss Fintech Charter Challenge

    FinTech

    On September 13, the Conference of State Bank Supervisors (CSBS) filed its response to the OCC’s motion to dismiss a lawsuit brought against the agency, which challenged its statutory authority to create a special purpose national bank (SPNB) charter for fintech companies. As previously discussed in InfoBytes, the OCC argued in its motion to dismiss that the CSBS lawsuit was premature because the agency has not reached a decision on whether it will make SPNB charters available to fintech companies or other nonbank firms. The OCC further asserted that under the National Bank Act (NBA), its interpretation of “the business of banking” deserves Chevron deference. In its response, CSBS disagreed and argued that in December 2016 the OCC “formally announced” its decision to begin chartering nonbanks, and that with the publication of a supplement to its Licensing Manual—which both stated its authority to issue SPNP charters to “institutions that neither take deposits nor are insured by the [FDIC]” and “invited interested parties to initiate the application process”—the OCC “crystalized its position.”

    In addressing other issues raised by the OCC in support of dismissal of the lawsuit, CSBS argued that:

    • CSBS has sufficient injury for standing because the OCC’s decision to grant charters interferes with states’ sovereignty and the ability to oversee and enforce state licensing and consumer protection laws;
    • the court must test the underlying legal premise, which is that the “OCC lacks the requisite statutory authority under the [NBA] to encroach upon the regulation of nonbanks by issuing national bank charters to institutions that do not take deposits, and therefore do not engage in the ‘business of banking’” because “there is no point in either [the] OCC or its charter applicants devoting resources to ultra vires charters that will be invalidated”;
    • the OCC’s position that CSBS has “failed to state a claim” concerning the interpretation of the “business of banking” is unsupported, and the court “must consider the statutory context of the term, including a regulatory regime that encompasses not only the NBA, but also other federal banking statutes” to conclude that the “business of banking” necessarily includes the taking of deposits; and
    • if the OCC seeks to expand its authority “into areas traditionally occupied by states, courts require a clear showing that Congress, acting through the agency, has approved such a result”—which the OCC has not shown.

    Fintech Courts CSBS OCC Litigation

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  • Senate Banking Committee’s Fintech Hearing Discusses Regulatory Challenges and Innovation Risks

    FinTech

    On September 12, the full Senate Committee on Banking, Housing, and Urban Affairs held a hearing entitled “Examining the Fintech Landscape” to discuss topics concerning fintech innovation and the regulatory landscape. Committee Chairman Mike Crapo (R-Idaho) opened the hearing by asserting that while fintech firms provide “new and innovative products and services in areas such as marketplace lending, digital payments and currencies, wealth management, insurance and more . . . [u]ncertainty remains around questions like data security and the proper regulatory treatment to ensure consumers and the financial system are safeguarded.” Sen. Crapo said that he welcomes the opportunity to learn more about fintech innovations, the impact on the financial system, and the current regulatory approach to this sector.

    Sen. Sherrod Brown (D-Ohio), ranking member of the Committee, also released an opening statement in which he called for the need to “improve federal oversight of data collection and data security,” especially in light of the recent credit reporting data breach. (See previous InfoBytes summary here.) Sen. Brown noted that he is interested in understanding “how Congress can encourage fintech innovation to make it easier for community banks to serve their customers, comply with important safety and soundness and anti-money laundering rules.”

    The three witnesses offered numerous insights related to the fintech industry, including (i) the need to manage risk without stifling fintech innovation; (ii) the importance of creating consistent standards and a regulatory framework; (iii) the need to clearly outline the definition of fintech firms and digital lenders; (iv) challenges when using algorithms and alternative data to assess creditworthiness; and (v) concerns regarding state preemption in the fintech space. The witnesses also answered questions concerning the concept of utilizing a regulatory sandbox to allow fintech firms to operate on a limited basis to test new ideas, and offered support for an innovation office, which would help fintech firms and regulators understand the emerging landscape.

    • Mr. Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office (testimony);
    • Mr. Eric Turner, Research Analysis, S&P Global Market Intelligence (testimony); and
    • Mr. Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law (testimony).

    Fintech Federal Issues Senate Banking Committee Privacy/Cyber Risk & Data Security Data Collection / Aggregation

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  • Legislation Introduced to Make Bitcoin Purchases up to $600 Tax-Exempt

    FinTech

    On September 7, Representatives Jared Polis (D-Colo.) and David Schweikert (R-Ariz.)—co-chairs of the Congressional Blockchain Caucus—introduced the Cryptocurrency Tax Fairness Act of 2017 to allow for tax and IRS reporting requirements exemptions on cryptocurrency transactions of up to $600. The bill is in response to an IRS notice issued in 2014 that held that virtual currency, such as bitcoin and other forms of cryptocurrency, must be treated as property for U.S. federal tax purposes. According to a press release issued by Rep. Polis’ office, this “outdated guidance classifies even the smallest of cryptocurrency transactions the same as buying or selling stock, which dis-incentivizes consumers from using virtual currencies to pay for goods and services.” The bill proposes amending the Internal Revenue Code to exclude up to $600 of “gain from the sale or exchange of virtual currency for other than cash or cash equivalents” from gross income and ordering the Treasury Department to create “regulations providing for information returns on virtual currency transactions for which gain or loss is recognized.”

    Fintech Federal Issues Federal Legislation Bitcoin Cryptocurrency

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  • Senate Committee on Banking, Housing, and Urban Affairs to Hold Fintech Hearing

    FinTech

    On September 12, the Senate Committee on Banking, Housing, and Urban Affairs will hold an open session hearing entitled “Examining the Fintech Landscape.” The hearing will feature witnesses from the U.S. Government Accountability Office, S&P Global Market Intelligence, and the University of Maryland School of Law. The hearing will take place at 10:00 am EDT and be made available via webcast.

    Fintech Federal Issues Senate Banking Committee

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  • Basel Committee on Banking Supervision Issues Consultative Document on Implications of Fintech for the Banking Industry

    FinTech

    As waves of innovative financial technology (fintech) continue to reshape the financial services landscape, banking institutions and their supervisors have invested significant effort in analyzing its impact and developing an appropriate response. On August 31, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, weighed in. Through the release of a consultative document, Sound Practices: Implications of fintech developments for banks and bank supervisors, the BCBS identified 10 key observations, accompanied by 10 recommendations, for banks and bank supervisors to address the challenges posed by advances in fintech.

    The report summarizes the main findings of a BCBS task force established to analyze developments in fintech and their impact on the banking industry. Quantifying the size and growth of fintech is difficult; among other reasons, most jurisdictions have not formally defined “fintech” (notably, the report includes a glossary of terms and acronyms related to the delivery of fintech products and services, and is the first attempt by the BCBS to provide a common definition in this space). Yet the significant number of financial products and services derived from fintech innovations and the trend of rising investment in fintech companies globally warrants attention. As the BCBS acknowledges, while the impact of fintech on banking remains uncertain, “that change could be fast-paced and significant.”

    In its report, the BCBS observes that the rise of fintech innovation has resulted in “a battle for the customer relationship and customer data,” the result of which “will be crucial in determining the future role of banks.” To assess the impact of the evolution of fintech products and services, the BCBS identified five stylized scenarios describing the potential impact of fintech on banks. In addition, the BCBS assessed six case studies focused on specific innovations (e.g., big data, cloud computing, innovative payment services, and neo-banks), in order to understand the individual risks and opportunities of a specific fintech development through the different scenarios. The extent to which banks or new fintech entrants will own the customer relationship varied across each scenario. However, in almost every scenario, the position of the incumbent banks will be challenged. The BCBS finds that “a common theme across the various scenarios is that banks will find it increasingly difficult to maintain their current operating models, given technological change and customer expectations.”

    In analyzing fintech’s potential impact, the BCBS analyzes previous waves of innovation in banking, such as ATMs, electronic payments, and the Internet. While each of these have changed the face of banking, the BCBS highlights two key differences as it concerns fintech’s potential impact: the current pace of innovation is faster now than in previous decades and the pace of adoption has also increased. As a result, the Committee warns, “the effects of innovation and disruption can happen more quickly than before, implying that incumbents may need to adjust faster.”

    The BCBS stated that banking standards and supervisory expectations “should be adaptive to new innovations, while maintaining appropriate prudential standards.” Against this backdrop, the Committee concluded its report with 10 key observations and recommendations for consideration by banks and bank supervisors.

    These include:

    • The overarching need to ensure safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector;
    • Key risks for banks related to fintech developments, including strategic/profitability risks, operational, cyber and compliance risks;
    • Implications for banks of the use of innovative enabling technologies;
    • Implications for banks of the growing use of third parties, via outsourcing and/or partnerships;
    • Cross-sectoral cooperation between supervisors and other relevant authorities;
    • International cooperation between banking supervisors;
    • Adaptation of the supervisory skillset;
    • Potential opportunities for supervisors to use innovative technologies ("suptech");
    • Relevance of existing regulatory frameworks for new innovative business models; and
    • Key features of regulatory initiatives set up to facilitate fintech innovation.

    By issuing this guidance, BCBS is prompting global regulators to address technological advancements and novel business models with the same sense of urgency that the banking and fintech industries are employing. It will be incumbent on the financial services industry – traditional and novel business models alike – to work together to inform and shape what those supervisory guidelines will look like.

    Comments on BCBS’s consultative document will be accepted through October 31, 2017.

    Fintech Basel Bank Supervision Vendor Management

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  • OCC Files Motion Seeking Dismissal of NYDFS Fintech Challenge

    FinTech

    On August 18, the OCC filed a motion in the U.S. District Court for the Southern District of New York to dismiss a lawsuit brought by the New York Department of Financial Services (NYDFS) challenging the OCC’s fintech charter, which would allow the OCC to consider applications from fintech firms for Special Purpose National Bank Charters (SPNB). See Vullo v. Office of the Comptroller of the Currency, Case 17-cv-03574 (S.D.N.Y., Aug. 18, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that the case is not ready for judicial review because NYDFS’ claims that the charter is unlawful and would grant preemptive powers over state law are “contingent on future actions that [the] OCC might or might not take.” Therefore, because NYDFS “cannot point to any injury-in-fact that it has suffered as a result of [the] OCC’s purported actions . . . all of the potential injuries . . . are future-oriented and speculative, and therefore insufficient to confer standing.” Citing Lujan v. Defenders of Wildlife, the OCC asserted that injury must be “likely”—not just “speculative” in nature.

    The OCC additionally contended that NYDFS’ challenge lacks standing because:

    • The matter fails to meet the fitness and hardship prongs for ripeness and lacks evidence of concrete hardship: (i) the fitness prong is not met because the OCC’s inquiry regarding whether to offer SPNB Charters is ongoing and it has not decided whether it will accept applications for the charters; and (ii) the hardship prong is not met because the OCC averred NYDFS “will not suffer any immediate or significant hardship” if the court were to delay review of this matter.
    • Any challenge to the OCC’s 2003 amendment to Section 5.20(e)(1) is “time-barred by the statute of limitations applicable to civil actions against federal agencies.” Furthermore, “[i]nsofar as the adoption of the amendment . . . constitutes a final agency action that [NYDFS] seeks to challenge here, any cause of action would have accrued on January 16, 2004, when the Final Rule became effective. 68 Fed. Reg. 70122 (Dec. 17, 2003). Accordingly, the time for filing a facial challenge to the regulation expired on January 16, 2010.”
    • NYDFS’ complaint fails to state a claim on which relief may be granted because the OCC would have had to have issued Section 5.20(e)(1) charters—non-finalized policy statements and requests for public input alone are insufficient to satisfy the “final agency action” requirement needed to give rise to a claim under the Administrative Procedure Act. The OCC asserted it has not completed its decision-making process and that its actions have not affected rights or obligations or resulted in legal consequences.
    • Under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.
    • The OCC has statutory and constitutional authority to issue a Section 5.20(e)(1) charter because: (i) the limited judicial authority cited by the DFS is not entitled to weight; (ii) the historical understanding of “bank” is consistent with the OCC’s interpretation; and (iii) any SPNB charters issued to fintechs pursuant to Section 5.20(e)(1) would not violate the Tenth Amendment.

    See additional InfoBytes coverage on NYDFS’s challenge to the OCC’s special purpose fintech charter here and here.

    Fintech Courts OCC NYDFS Litigation

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  • Federal Reserve Releases Paper Studying the Evolution and Forward Looking Growth of Fintech

    FinTech

    On August 1, the Federal Reserve Board released a paper on the origins and growth of financial technology, and how these “deep innovations” have the potential to affect financial stability. The paper, “FinTech and Financial Innovation: Drivers and Depth,” was authored by John Schindler and adapted from a speech prepared for Banco Central do Brasil’s XI Annual Seminar on Risk, Financial Stability and Banking. Fintech, according to Schindler’s adaptation of the Financial Stability Board’s definition, is best understood as a “technologically enabled financial innovation that could result in new business models, applications, processes, products, or services with an associated material effect on financial markets and institutions and the provision of financial services.” Schindler considers the following to fall into the definition of fintech: (i) online marketplace lending; (ii) equity crowdfunding; (iii) robo-advice; (iv) financial applications of distributed ledger technology; (v) and financial applications of machine learning (also called artificial intelligence and machine intelligence). The paper provides a deeper discussion into the following topics driving fintech innovation:

    • supply and demand factors of financial innovation, including regulatory changes and changes to financial or macroeconomic conditions, contributing to the use of technologies supporting fintech financial products and services;
    • depth of innovations such as peer to peer lending, high frequency trading, mobile banking and payments, bitcoin, and blockchain all with the “potential to have transformational effects on the financial system”; and
    • demographic demands.

    Schindler’s position is that fintech evolved, in large part, due to a combination of a number of supply and demand factors occurring in a relatively small period of time, which, as a result, drove new financial innovations.

    Fintech Federal Reserve Blockchain Agency Rule-Making & Guidance

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  • Mortgage Closing Relies Exclusively on Electronic Loan Documents

    FinTech

    On August 9, a Wall Street Journal article reported the first mortgage refinance conducted entirely through a remote electronic online closing using electronic signatures. The loan will soon be electronically sold to Freddie Mac. While electronic mortgages are not new, this was the first closing that did not require a notary public be physically present, according to the article. Using an online notary service, the borrowers answered a series of questions to authenticate their identities, and without the need to “wet sign” any of the documents. Freddie Mac’s Vice President of Single-Family Business Transformation Management, Samuel E. Oliver III, stated that “by having things digitized, a loan would be able to get to the secondary market much more quickly. . . . [M]ortgages could be delivered to an investor in as little as one day—a process that takes a median of 29 days now.”

    As previously covered in InfoBytes, Freddie Mac released a bulletin last September outlining conditions, which allow closing documents to be electronically recorded. Freddie Mac also provides several resources concerning eClosings  and eMortgages on their website.

    Fintech Lending Mortgages Electronic Mortgages Electronic Signatures

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  • UNCITRAL Adopts Legal Framework for Electronic Records Use

    FinTech

    On July 13 the United Nations Commission on International Trade Law (UNCITRAL) adopted the Model Law on Electronic Transferable Records (MLETR). If broadly enacted by nations, the MLETR would provide uniform legal framework for the use of electronic records in connection with transferable records—including bills of lading, bills of exchange, promissory notes and warehouse receipts. By establishing uniform standards under which electronic records of such documents may be the equivalent to paper, the MLETR has the potential to streamline international commerce and provide a higher level of security over paper documents. The model law, among other things, addresses standards for establishing control of an electronic record as the equivalent of possession of a paper instrument, as well as guidance for establishing the reliability of systems and methods used for the generation and transfer of such records. Like the UETA and ESIGN in the United States, the MLETR is meant to be technology-neutral and is designed to work within the framework of existing laws governing transferable records. The full text of the final MLETR and an accompanying Explanatory Note (akin to official comments) will be available here.

    Fintech ESIGN UNCITRAL Electronic Records MLETR UETA

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  • OCC Files Motion to Dismiss CSBS Suit Over Fintech National Bank Charter

    FinTech

    On July 28, the OCC filed a motion in the U.S. District Court for the District of Columbia to dismiss a lawsuit brought by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s fintech charter. See Conf. of State Bank Supervisors v. Office of the Comptroller of the Currency, Case 1:17-cv-00763-JEB (D.D.C. Jul. 28, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that CSBS does not have standing to bring the case because the OCC has not yet come to a decision on whether it will make special purpose national bank charters available to fintech companies and other nonbank firms, and therefore, “[n]o tangible effect on CSBS or CSBS's members could even arguably occur until a 5.20(e)(1) Charter has been issued to a specific applicant.” For similar reasons, the OCC argued that the case was not ripe for judicial review.

    Addressing the merits, the OCC cited Independent Community Bankers Ass’n of South Dakota, Inc. v. Board of Governors of the Federal Reserve System, 820 F.2d 428 (D.C. Cir. 1987), cert. denied, 484 U.S. 1004 (1988), arguing that the ruling confirms its authority to issue special purpose bank charters and “illustrates that the legal concept of a special purpose national bank power is not novel or unprecedented, but rather follows a decades-old OCC practice.” The OCC further argued that under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.

    As previously discussed in a Special Alert, CSBS claimed the fintech charter violates the National Bank Act, Administrative Procedure Act, and the U.S. Constitution, and that the OCC has acted beyond the legal limits of its authority. Furthermore, CSBS asserts that providing special purpose national bank charters to fintech companies “exposes taxpayers to the risk of inevitable [fintech] failures.”

    However, shortly after the OCC’s motion was filed, a federal judge ordered that the OCC’s motion to dismiss be stricken based on excessive footnoting. The judge, in a minute order on the docket, cited that the excessive number of footnotes “appear[] to be an effort to circumvent page limitations.” On August 2, the OCC filed a renewed motion to dismiss.

    Fintech Agency Rule-Making & Guidance CSBS Courts OCC Litigation Licensing

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