Subscribe to our InfoBytes Blog weekly newsletter for news affecting the financial services industry.
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, 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)?
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.”
FTC Issues Summary of ECOA Enforcement and Educational Activity to CFPB as Bureau Prepares Annual Report
On February 3, the FTC provided the CFPB with an overview of its work on ECOA-related policy issues, focusing specifically on the Commission’s activities with respect to Regulation B. The letter discusses, among other items, the Commission’s fair lending research, policy development and educational initiatives such as (i) surveying consumers about their experiences in buying and financing automobiles; (ii) providing a report to businesses to help them avoid exclusionary or discriminatory outcomes when using big data analytics; (iii) creating a FinTech forum series that explores emerging financial technology and its implications for consumers; (iv) issuing a report to Congress on Commission efforts in African American and Latino communities related to fraud prevention; (v) hosting a workshop to examine marketplace changes based on population changes and diversity trends; and (vi) attending Interagency Task Force on Fair Lending meetings to share information on lending discrimination, predatory lending enforcement, and policy issues. The letter also discusses the Commission’s business and consumer education efforts on fair lending issues.
In prepared remarks at the “Global Interdependence Center’s Payment Systems in the Internet Age” Conference, Philadelphia Fed President Patrick T. Harker said that regulating the evolving FinTech industry benefits not only consumers, but also the innovators. While Harker did not speculate as to whether the Fed will become involved in FinTech regulation, he stated that it is in the best interest of FinTech companies “to have an established framework in which to operate.” He cautioned, however, that “all financial systems are a matter of trust” and thus FinTech firms will “need that trust the same as any other bank or financial institution.” Harker noted that regulations will help determine which companies can survive the “down side” of a credit cycle, but implementing regulations after a “crisis. . . could mean tighter strictures and less room for innovation.”
CFPB Fines Prepaid Debit Card Company and Payment Processor $13 Million for Preventable Service Breakdown, Claims Consumers Denied Access to Their Own Money
On February 1, the CFPB announced that it had entered a consent order against two companies—a prepaid card company and its payment processor—for failing to conduct adequate testing and preparation before and during a switch to a new payment processing platform in 2015. In addition, the Bureau cited both companies for improper administration of accounts after the switch. The allegations arise out of an approximate three week breakdown in services in October 2015 which, among other things, denied cardholders access to their accounts, delayed the processing of deposits and payments, and also, in some instances, erroneously double posted deposits which falsely inflated account holders’ balances. The consent order also notes that the prepaid card company failed to provide adequate customer service to consumers impacted by the breakdown. The CFPB stated that it received roughly 830 consumer complaints in the weeks following the switch. Based on these and other allegations, the Bureau ordered the two companies to prepare a plan to prevent future service disruptions and pay an estimated $10 million in restitution to harmed consumers as well as a $3 million civil penalty.
Texas Appeals Court Holds Email From: Line to be a Valid Electronic Signature Under States Uniform Electronic Transactions Act (UETA)
On December 22, in an unpublished decision, a Texas Court of Appeals held that an email exchange constituted an executed contract between two individuals under the state’s enactment of the Uniform Electronic Transactions Act (“UETA”). Khoury v. Tomlinson, No. 01-16-00006-CV (Tex. App. Dec. 22, 2016). The dispute involved an email sent from Appellant to Appellee, which outlined terms of an agreement to repay investment funds. Appellee responded to the email, stating "We are in agreement," but did not type his name or include a signature block at the end of his message. A jury found that an electronic contract was formed by this exchange, but the trial court granted the Appellee’s motion for judgment notwithstanding the verdict on the basis that the electronic contract violated the state statute of frauds. On appeal, the Appellant invoked the UETA, arguing that the email satisfied the writing requirement of the statute of frauds because it was an electronic record and that the header, which included a “From:” field bearing the Appellee’s name, constituted Appellee’s signature because that field serves the same “authenticating function” as a signature block. The appellate court agreed that the email was an electronic record sufficient to satisfy the writing requirement in the statute of frauds.
On January 23, the CFTC extended the comment period for the supplemental proposal for Regulation Automated Trading (Regulation AT) from January 24 to May 1. Acting CFTC Chairman Chris Giancarlo recently announced his intention to “allow more time for public comments on the proposal” in light of “the complexity of the supplemental notice and the well-reasoned requests from interested parties.” Initially proposed in November 2015, the CFTC released a revised version of the rule in November 2016 in response to concerns expressed by trading firms over, among other things, the requirement that they make their source code available to the agency without a subpoena. All comments will be posted on the CFTC’s website.
On January 18, the New York State Department of Financial Services (NYDFS) announced that it had approved the application of Coinbase, Inc., for a virtual currency and a money transmitter license. According to NYDFS, the license was issued to Coinbase—a digital currency wallet that facilitates transactions with Bitcoin and other virtual currencies—only after “a comprehensive review of Coinbase’s applications, including the company’s anti-money laundering, capitalization, consumer protection, and cyber security policies.” Having met the New York regulator’s standards for operations in the state, Coinbase may now operate, under supervision by NYDFS, as a service for buying, selling, sending, receiving and storing Bitcoin.
As previously covered in InfoBytes, NYDFS’s BitLicense framework—which was finalized back in June 2015—requires virtual currency companies to submit a 31-page application providing information covering, among other things: (i) written policies and procedures including, but not limited to BSA/AML, cybersecurity, privacy and information security, (ii) company information, (iii) biographical information on company directors and stockholders, and (iv) an explanation of the methodology used to calculate the value of virtual currency in fiat currency. In addition, the NYDFS released a set of FAQs to help clarify the BitLicense requirements. To date, NYDFS has approved five firms for virtual currency charters or licenses, while denying those applications that did not meet its standards.