The Losing Race Against the Machine

December 17, 2020 at 10:00 am 2 comments

In the waning days of this lousy year, one of the most important battles about the future of the financial services industry is coming to a head. Regulators, judges, Silicon Valley entrepreneurs and industry stakeholders are trying to figure out how federal law with its roots in the 19th Century is to be applied to banking institutions based on technology created in the 21st. However this battle is decided, its outcome will have tremendous implications for the future of credit unions and all but the largest banks. 

In November, a coalition of banks, credit unions – including CUNA and NAFCU – and consumer rights groups wrote letters in opposition to an application by Figure Technologies to obtain a national bank charter from the OCC. On December 7th, BitPay also applied for recognition by the OCC as a nationally chartered trust. What both of these applications have in common is that the entities in question want the benefits of being a national bank – i.e. the possibility of providing services to anyone, anywhere in the country – while picking and choosing the banking services they actually provide. For instance, Figure wants to avoid FDIC oversight by only taking uninsured deposits. It’s not entirely clear how exactly this is going to work, but apparently, the idea is to only take money from large investors. At the same time, Figure will use its existing block-chain technology to offer an ever-larger variety of loans such as HELOCs and mortgage loans to persons around the country. On the one hand, regulators such as the OCC are anxious to offer a home for these FinTechs, but on the other hand, if they don’t have to accept deposits and they aren’t subject to the more rigorous regulations currently imposed on non-banks by states, then banks and credit unions will be at even more of a disadvantage against FinTechs than they already are, and a good chunk of the consumer protection framework will become obsolete. 

This is why New York’s Department of Financial Services is suing the OCC over its attempt to offer non-bank charters. A decision in this case, which is currently pending before the Court of Appeals for the Second Circuit could come any time now, and Figure’s maneuvers to comply with the OCC’s traditional chartering requirements while avoiding the need for FDIC oversight and insurance is clearly an attempt to get around a ruling in favor of the DFS. 

Finally, the FDIC is trying to protect its turf. It just finalized regulations clarifying the ability of non-banks to consolidate with industrial loan banks without becoming holding companies subject to Federal Reserve Board supervision. 

All this is being done against the backdrop of truly amazing technology, which will redefine banking, and vastly improve the consumer experience. For example, Figure’s ultimate goal is to use block-chain technology to streamline the entire mortgage process, from origination to sale to the secondary market. If everything goes according to plan, the certainty of using block-chain technology will reduce the need for most lawyers (dear god!), compliance folks and settlement agents – a process that takes several weeks will be reduced to a matter of days. All this is good for consumers, but only if this innovation takes place in a modernized framework which takes into account not only consumer protections, but safety and soundness concerns, particularly as the distinction between the revenue earned by FinTechs engaging in traditional commerce, and their role as quasi-bankers becomes blurred. There’s only one institution that can fix this mess, and that’s Congress.

Entry filed under: Compliance, Federal Legislation, Legal Watch, Mortgage Lending, New York State, Regulatory, Technology. Tags: , , , , , , .

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2 Comments Add your own

  • 1. Jerry  |  December 17, 2020 at 11:42 am

    Congress fix something… really!?

    • 2. Henry Meier  |  December 17, 2020 at 4:58 pm

      Therein lies the dilemma-so it goes


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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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