Posts tagged ‘fintech charter’

Court: NY Jumps Gun on FinTech litigation

For the second time in less than four years, a federal court ruled yesterday that New York committed the legal equivalent of a false start when it filed a lawsuit against the Office of the Comptroller of the Currency (OCC) after it announced that it would begin accepting charter applications from non-depository FinTechs interested in obtaining federal bank charters. If you think you’re suffering from deja vu, you’re not. In 2017, a district court dismissed an earlier lawsuit New York’s Department of Financial Services filed against the OCC on the same grounds.

One of the key legal issues in banking is whether or not the OCC has the authority to grant federal bank charters to FinTechs even if they do not accept deposits. In the early 2000s, the OCC promulgated regulations permitting companies to apply for bank charters provided they engage in activities such as executing payment transactions. If the OCC has this power, it will enable many FinTechs to provide services traditionally regulated by the states, such as payday lending and perhaps even mortgage banking.

In Lacewell v. Office of Comptroller of Currency NYS is arguing that the OCC is acting beyond its authority by considering granting charters to non-depositories. It claims to be harmed by the revenue it would lose from licensing non-depositories and that New York consumers will be harmed by banking products which aren’t subject to New York’s consumer protection laws, such as its cap on interest rates.

But in yesterday’s ruling the court held that in the absence of a charter actually being granted, New York could not demonstrate it had been harmed enough to give it access to the federal courts.

Enjoy your weekend, folks!

June 4, 2021 at 10:03 am Leave a comment

NY Lawsuit taps “breaks” on Fintech Charter

New York’s lawsuit challenging the authority of the OCC to charter limited purpose fintech charters has already accomplished one of its primary goals by slowing down OCC’s charter approval timeline.

Comptroller Otting was originally hoping to see the first official application in the second quarter of 2019 but in an interview with American Banker he admits that a recent ruling allowing NY to go forward and challenge the OCC’s authority has put a “chill” on things,  NY argues that by granting bank charters to non-depository institutions many of these corporations will avoid state level regulation of activities such as mortgage brokering and payday lending.

“I respect the judge who made the decision. … However, we still feel we have the legal authority to do this,” Otting said. “If you apply his principle, then every bank would have to have an active deposit to do anything in the banking industry … we intend to defend what we think is our legal right.” he explained

An OCC motion to dismiss a similar lawsuit brought by a coalition of state regulators is currently pending in DC federal court.and the OCC might simply be waiting to see what happens to its motion to dismiss this case before deciding how  to  proceed.

I’m a little surprised by the OCC’s  caution.  the Judge’s ruling simply allows New York to take on the much more difficult task of winning on the merits of its claim.  Litigation was inevitable and will take  years to resolve.  Then again,  who wants to ask for a charter that you may not be able to keep?

Report released on Complaints to CFPB

I’ve never been a big  fan  of the cfpb’s Consumer complaint portal.  Given enough  data,  the statistics produced by this wiki inspired  innovation can be both  deceiving and counterproductive,  particularly since no effort is made to verify the accuracy of complaints before they are posted. So  I’ll   let you decide if you agree with me  after reading this report from the US public interest Group..

May 16, 2019 at 9:54 am Leave a comment

HMDA Amendments and Fintech Charters Highlight an Important Day of News

Two things happened yesterday that you should pay some attention to:  One development involves HMDA and could have a direct operational impact on your credit union within the next several months; the other development is a federal court decision allowing New York State to go forward with a lawsuit seeking to block the OCC from issuing “fintech charters”. This one could impact the entire financial services industry for decades to come.

First, the consumer Finance Protection Bureau issued a set of proposals-suitable for framing-which will further decrease the number of credit unions that have to comply with the Home Mortgage disclosure Act and its companion Regulation C. Most importantly, this proposed rule raises the numerical thresholds that, in conjunction with other criteria, trigger HMDA compliance.

For those of you too big to avoid HMDA there is also good news. When Dodd- Frank was passed Congress increased the categories of data points that lenders had to collect. It also gave the CFPB discretion to add additional categories. This was the equivalent of offering unlimited make-your-own Sundays at a 10 year-old’s-birthday party. The CFPB added more than a dozen data points that had to be collected. In a separate request for information referred to as an ANPR issued yesterday the CFPB is looking for feedback about the   burdens imposed buy these additional collection responsibilities, raising the very real likelihood that it will follow- up with regulations sharply reducing the number of CFPB mandated categories.

While this is all good news, I wonder if it’s happening a little too late to help credit unions. After all, many financial institutions have already absorbed the expense of updating software, training staff and developing new policies and procedures Still, these proposals represent the most important mandate  relief Credit Unions have seen in the Dodd-Frank era. They are worthy of a comment letter.

in the other development yesterday , New York’s very own Department of Financial Services was given the go-ahead to challenge the authority of the OCC to issue special purpose “fintech charters “ The decision means that the state will be front-and-center in a good old-fashioned legal dispute about the power of the OCC to grant federal   charters to technology companies offering banking services under the erstwhile National Banking Act. The question comes down to this: when is a bank a bank?

There is also a very practical reason why this case is so important for state-level regulators: Depending on how the charter is implemented, it could provide a convenient means for entities traditionally regulated by states, such as mortgage bankers and payday lenders, to nationalize their operations using computer platforms and in so doing, no longer being subject to state oversight.

The issues at stake should actually be taken on by Congress but merely suggesting that makes me come across as a foolish idealist. Get ready to hear more about both of these developments in future blogs.

 

On that note have a good weekend.  Lets Go Islanders!!!

May 3, 2019 at 10:32 am Leave a comment

Seven Questions About FinTech Charters

Image result for fintechYesterday’s announcement by the OCC that it will begin accepting FinTech Bank charter applications is as big a development for banking as passage of the Riegle-Neal Act in 1994 which lead to the rapid consolidation of community banks and credit unions that we are still seeing today and the enactment of the Gramm Leach Bliley Act which broke down depression barriers between commercial and investment banking leading to the behemoths that we live with today. FinTechs will over time have a profound effect on the way credit unions and all financial institutions go about their business. Here are some questions I’ve been asking myself and some preliminary answers:

What is a FinTech Charter anyway? In 2003, the OCC amended §12 CFR 5.26 (e)(1). The new regulation authorized the creation of special purpose banks that do not engage in fiduciary activities but conduct at least one of the following core banking functions: receiving deposits, paying checks, or lending money. At the time the provision received little attention but it is this regulation that the OCC argues allows it to authorize special charters for companies that use computer platforms to process payments or lend money for example.

Why would companies be interested in a FinTech Bank Charter? As the New York Times explained this morning, tech companies have been advocating for just such a charter because they believe it will allow “online lenders and payment companies to more easily and directly compete with traditional banks, a change that one regulator said would allow innovative businesses to expand nationwide.” With a national charter, these companies will have one set of national rules. This has always been the appeal of a national charter.

Why should credit unions care? Now for the potentially more troubling reason, at least from a competition standpoint. Maybe not today, maybe not tomorrow, but someday and someday fairly soon, bigger FinTech companies will not be as dependent as they are now on establishing banking relationships. For example, many credit unions now have contracts with Apple’s iPay. The new charter will make it much easier for Apple to not only facilitate payments but ultimately to facilitate payments using its own bank. Think of how many vendors you have and then think of each one as a potential competitor.

Are there safety and soundness risks? That’s a great question Henry. The major concern that I have with this new charter is that it will further degrade the firewall between commercial business and banking. This approach worked great for the American economy in the 1920’s but not so much in the 1930’s. In its FinTech Chartering Manual released yesterday, the OCC acknowledged that FinTech’s will be unique. They will not accept deposits and therefore not be subject to FDIC oversight. But they will have to meet capital requirements. But even these capital requirements will be unconventional as much of the money for these businesses is raised by venture capitalists.

What are the appropriate capital requirements for FinTech charters? No one will really know precisely what an appropriate capital buffer will be for these financial entities. Here is my worst case scenario: Facebook creates a FinTech subsidiary that specializes in processing payments and making consumer and mortgage loans. How would the general public react the next time they find out that the parent company loses 20% of its value in one day? Even assuming that there is an adequate firewall between Facebook and its affiliated bank, I think your average consumer will react very nervously to this news.

How will this affect credit unions? To me the charter underscores why credit unions face an existential threat. Limiting the growth of any financial institution, let alone one that is dependent on deposits, is an antiquated regulatory straightjacket in an age of internet banking. If the industry does not get greater flexibility to grow, all but the largest credit unions are going to suffocate.

What Happens Next? The OCC is now accepting FinTech applications and the way it is talking, you can bet there are a few already in the hopper. Part of the application process is a public comment period which will allow interested stake holders to weigh in with any concerns that they have. There will also be lawsuits. In May 2017, in response to a white paper, New York State’s Department of Financial Services filed a lawsuit claiming, among other things, that the OCC did not have the authority to create FinTech charters. That case was dismissed late last year because the court concluded it was premature to bring such a lawsuit but with the OCC now open for business, the lawsuit making the same basic arguments is sure to come.

But I said it before and I will say it again. These companies are an inevitable outgrowth of changes in the economy. While it’s fun to grouse about competitive inequities, it’s much more beneficial to recognize the new reality and to start positioning your credit union to compete in this evolving ecosystem.

In an ideal world Congress would get involved in such an important issue. There are too many important legal and policy issues to be left exclusively to unelected regulators and federal judges but Congress hasn’t exactly demonstrated that it has the ability any longer to deal with complicated important issues.

 

August 1, 2018 at 11:00 am Leave a comment

UPDATED Consumer Groups Wrong to Oppose Fintech Charter

fintechWhen it comes to financial innovation, the financial industry can either lead, follow or get blown away;  nevertheless Consumer groups are opposing  OCC’s proposal to grant  special purpose charters to tech companies that want to provide limited banking services. Keeping in mind that the views I express in this blog are mine and mine alone, their reactionary opposition to the proposal envisions a world that does not exist and minimizes the important role technology can and ultimately will play in bringing services to the almost 20 percent of American’s who are underbanked.

In December, the OCC released a white paper outlining a framework for providing Special Purpose Charters to technology companies offering financial services. At this point we are dealing with a very general overview. The OCC contends that it can use its power to authorize special purpose banks to grant fintech charters to technology companies that want to offer core banking services, including, receiving deposits, paying checks or lending money. Depending on which one of these a company wants to take on, it may not even need deposit insurance.

Consumer groups and some legislators are concerned that this framework will permit payday lenders to offer their products even in states such as New York, where usury laws make payday loans illegal. In a recent letter signed by a large array of consumer groups including Arcade Credit Union, critics of this proposal argue that, as presently drafted “ the OCC , with the stroke of its pen, will put millions of people and years of state level enforcement at risk of exploitation by high cost lenders”. In addition, they argue that by giving these corporations a federal charter, state level enforcers, including AG’s will not have the ability to appropriately regulate their activities.

It is these types of well-intentioned but misguided arguments that drive me nuts about consumer groups. The world is not perfect. Even though there will undoubtedly be some companies that take advantage of a fintech charter to offer Payday Loans, this legitimate concern has to be weighed against the very real value of a more efficient banking system. For example, a fintech charter would make transactions cheaper by allowing corporations to offer services directly to consumers rather than work with a middle man. In addition, research indicates that the unbanked and underbanked are much more comfortable using a smart phone then going into a branch. If our goal is to help as many people as possible get banking services, then technology is the way to do it.

Finally, and most importantly the ship is leaving with or without regulation. fintech charters make sense, if only because anyone under the age of 30 is much more likely to use a mobile banking app than a branch.

One more thing, some of the same groups that are arguing against the fintech charter are the same groups supporting the CFPB’s Payday Loan Proposal. It seems to me that they can’t have it both ways. Either state level regulation of Payday Lending is adequate, in which case there is no need for national standards, or state regulation of payday lending can already be circumvented by consumers in need of a short term loan. I strongly suspect the latter is closest to the truth. Why should a framework that doesn’t work be used to block financial innovation?

January 17, 2017 at 10:37 am 1 comment

fintechWhen it comes to financial innovation, the financial industry can either lead, follow or get blown away;  nevertheless Consumer groups are weighing in in opposition to   OCC’s proposal to grant  special purpose charters to tech companies that want to provide limited banking services. Keeping in mind that the views I express in this blog are mine and mine alone, their reactionary opposition to the proposal envisions a world that does not exist and minimizes the important role technology can and ultimately will play in bringing services to the almost 20 percent of American’s who are underbanked.

In December, the OCC released a white paper outlining a framework for providing Special Purpose Charters to technology companies offering financial services. At this point we are dealing with a very general overview. The OCC contends that it can use its power to authorize special purpose banks to grant fintech charters to technology companies that want to offer core banking services, including, receiving deposits, paying checks or lending money. Depending on which one of these a company wants to take on, it may not even need deposit insurance.

Consumer groups and some legislators are concerned that this framework will permit payday lenders to offer their products even in states such as New York, where usury laws make payday loans illegal. In a recent letter signed by a large array of consumer groups including Arcade Credit Union, critics of this proposal argue that, as presently drafted “ the OCC , with the stroke of its pen, will put millions of people and years of state level enforcement at risk of exploitation by high cost lenders”. In addition, they argue that by giving these corporations a federal charter, state level enforcers, including AG’s will not have the ability to appropriately regulate their activities.

It is these types of well-intentioned but misguided arguments that drive me nuts about consumer groups. The world is not perfect. Even though there will undoubtedly be some companies that take advantage of a fintech charter to offer Payday Loans, this legitimate concern has to be weighed against the very real value of a more efficient banking system. For example, a fintech charter would make transactions cheaper by allowing corporations to offer services directly to consumers rather than work with a middle man. In addition, research indicates that the unbanked and underbanked are much more comfortable using a smart phone then going into a branch. If our goal is to help as many people as possible get banking services, then technology is the way to do it.

Finally, and most importantly the ship is leaving with or without regulation. fintech charters make sense, if only because anyone under the age of 30 is much more likely to use a mobile banking app than a branch.

One more thing, some of the same groups that are arguing against the fintech charter are the same groups supporting the CFPB’s Payday Loan Proposal. It seems to me that they can’t have it both ways. Either state level regulation of Payday Lending is adequate, in which case there is no need for national standards, or state regulation of payday lending can already be circumvented by consumers in need of a short term loan. I strongly suspect the latter is closest to the truth. Why should a framework that doesn’t work be used to block financial innovation?

January 17, 2017 at 9:38 am Leave a comment

Why OCC’s Fintech Charter Is A Game Changer

Its the end of the world as we know it whether we realize it or not.

On Friday, The OCC announced that it had the power to grant bank charters to financial technology companies and was going to use it.   Specifically, it explained that fintechs could apply to operate “special purpose” banks.

It laid out the case for its legal authority but invited the public to comment on the issues involved as it moves forward.  Needless to say, the CU industry should weigh-in.

How big a deal is this? Time will tell but think of it this way: When Apple introduced Apple Pay it had to partner with banks and credit unions that were willing to use its technology to facilitate payment transactions.  Now, with the OCC moving forward with its plans, the Apples of the world can simply become  special purpose banks so long as they engage in at least one of three “core activities” receiving deposits, paying checks, or lending. 12 C.F.R. § 5.20.

It’s not just the big guys who are going to benefit. Credit unions now meet with vendors anxious to interest them in technology that can do everything from instantaneously underwrite loans to facilitating quicker payments to making toast for members.  These startups need your business to get to consumers.   Now they will have the option of competing against you rather than partnering with you.

As the Comptroller explained in his remarks “Many fintechs will choose to partner with existing banks or provide services to banks and other financial companies, but some will seek to become a bank. In those cases, it will be much better for the health of the federal banking system and everyone who relies on these institutions, if these companies enter the system through a clearly marked front gate, rather than in some back door, where risks may not be as thoughtfully assessed and managed.”

The OCC’s announcement is also  likely to set off  a mad scramble among state regulators. After all, why should states give the federal government a monopoly over an entirely new type of financial institution?

As for credit unions, the OCC’s move demonstrates yet again why they need more FOM flexibility.  When everyone is connected in a virtual community limiting CU’s  to physical boundaries makes no sense.

All of this will, of course,  further accelerate changes to a financial landscape that are already affecting  the way your credit union does business and against whom it is competing.  Good luck.

December 5, 2016 at 9:20 am 3 comments

Is A Fintech Charter On the Horizon?

The most interesting statistic I heard last week at the Association’s annual Northeast Economic Forum was that 48% of new mortgages last year were originated by nonbanks. Technology has come to mortgage lending and the companies that emphasize electronic mortgage applications and processing are beating the pants off lenders that rely on having people apply at their brick-and-mortar branches.

I was thinking about this factoid this morning as I read an interview with the OCC’s General Counsel, Amy Friend, in the American Banker.  The OCC is rolling out plans for creating a special charter for fintech companies. Now here is a regulator that sees the writing on the wall and wants to remain relevant.

Why would companies want to be regulated by the OCC? The OCC says that the idea has appeal to a lot of  companies that don’t want to be regulated by fifty different state regulators.  Anyone who has taken a look at New York’s proposed cybersecurity regulations can understand why.

She explains that “We can provide a single charter with some uniformity, and that makes it very appealing. But, we also take that authority very seriously, and understand its implications. The comptroller has made it clear that if we decide to grant a national charter in this area, the institution that receives the charter will be held to the same high standards of safety, soundness and fairness that other federally chartered institutions must meet.” She further explains that institutions might want to get both a traditional bank charter and take deposits in which case they will also need to be regulated by the FDIC. Why not the NCUA as well?

The plan is still in the conceptual stages but in March the OCC released a white paper on supporting financial innovation in the banking system  and last month it proposed regulations clarifying its  authority to wind-down bankrupt  non-depository financial institutions  that are not insured by the Federal Deposit Insurance Corporation . The regulation is seen as a first step in explaining how the OCC could oversee bankrupt Fintech charters.

More on Navy

In Thursday’s blog I highlighted the CFPB’s consent order against Navy Federal and the impact it could have on credit unions who suspend services to members who have caused them a loss. Judging by the number of readers I really hit a nerve.

According to the Bureau, it was an unfair and deceptive practice for Navy to freeze electronic account services to members who were delinquent on loan payments. That simply isn’t true-at least according to the NCUA.  To add a little fuel to the fire here is a 1997 opinion from the NCUA in which it explains that credit unions may restrict services to members who are delinquent:

“In the past, we have allowed for suspension of services when the member caused a loss as a result of bankruptcy, an NSF check or a charged-off loan, but we have never addressed the issue of a delinquent loan. You advise that a delinquent loan increases the FCU’s collection costs resulting in a loss to the credit union. As long as the FCU has a rational basis for limiting services, we would have no legal objection.”

So how can Navy be fined, in part, for adopting practices explicitly authorized by its primary regulator for almost thirty years? Is this another example of CFPB overreach? Inquiring minds want to know.

October 17, 2016 at 9:06 am 3 comments


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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