Posts tagged ‘Fintech’

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

Gov Approves HERO’s Act

Good morning folks, with a special shout out to those of you who work in the great state of New York.

The Governor has approved the HERO Act, legislation which mandates that all businesses in NYS implement policies addressing a wide range of issues related to airborne illnesses, such as COVID. For those of you with ten or more employees, you also must give your employees the option of creating committees to address work place health related issues on an ongoing basis.

The bill is phased-in over a six month period with the first requirements taking effect in 30 days. Adopting an approach similar to what we saw when the state passed sexual harassment legislation, the state will be providing sample policies that your credit union can adopt.

One other piece of good news is a reminder that this law applies to both federal- and state-chartered credit unions.

Stay tuned, the Association will be hosting a webinar next Wednesday to take a first look at this important new mandate.

Remote Notarization Hearing Today

At 10 o’clock today, the Assembly will be holding a virtual hearing to analyze issues related to authorizing remote notarization on a permanent basis in New York. Remote notarization refers to the ability of a notary to verify the authenticity of a signature without the signer being physically present. Lisa Morris from Hudson Valley Credit Union will be testifying for the Association.

He’s Back!

The former Benign Dictator of Consumer Finance is back. Ricard Cordray has been given a high profile job at the U.S. Department of Education from which he will oversee issues related to the federal student loan program.  Not coincidentally, his portfolio gives him a high-level platform to address one of the key issues the Biden administration is being pressured to address — whether to forgive or not to forgive all of those student loans — while not being so high as to require Senate confirmation.

California Chimes In

California joined  Illinois’s  financial regulator in prohibiting lending platform Chime from implying in its advertisements and websites that it was a bank as opposed to a lending platform that passes through loans. The state’s actions come as federal and state regulators continue to grapple with the issue of when FinTechs should be classified as banks with the accompanying regulatory requirements that this classification would impose.

Earlier this week the Federal Reserve board issued proposed guidance for the Federal Reserve banks to consider when deciding whether or not FinTechs should be given access to the Federal Reserve System. Don’t underestimate this power: remember it was a Federal Reserve Bank which blocked Colorado from starting a state-level bank to provide marijuana banking services.

Captain obvious here: this is an issue that Congress needs to address sooner rather than later.

On that note, enjoy your weekend. If all goes according to plan, yours truly will be gathering with a group of vaccinated middle age men to play his first round of in-person poker in more than a year.

May 7, 2021 at 9:35 am Leave a comment

Meet Walmart, Your Friendly, Small Town Community Banker

Walmart signaled just how serious it is about expanding its offerings in the consumer banking sphere with the announcement that it lured away Omer Ismail to run its new FinTech joint venture.  On the off chance you don’t know who Omer Ismail is, he has been one of the key architects behind Goldman’s Marcus online consumer bank. 

Last month, Goldman announced that it was starting a joint venture with online FinTech Ribbit Capital.  As Bloomberg reported in breaking the news this morning, “Walmart’s move — depriving one of Wall Street’s elite firms of the talent atop its own foray into online banking — underscores the seriousness of the retailer’s intent to intertwine itself in the financial lives of its customers.” 

Stay tuned.

Surcharge Bans Continue to Fall

A federal court in Kansas last week became the latest court to strike down a state level ban on merchant surcharges for the use of credit cards.  This trend is hardly surprising following the Supreme Court’s ruling in Expressions Hair Design that a similar ban in New York State triggered First Amendment scrutiny. The case is CARDX, LLC, Plaintiff, v DEREK SCHMIDT, in his official capacity as Kansas Attorney Gen., Defendant., 20-2274-JWB, 2021 WL 736322, at *1 [D Kan Feb. 25, 2021]

Yours truly continues to be perplexed as to why so many consumer groups consider surcharging good policy.  The reality is that there after these laws are struck down, there is nothing that requires merchants to pass on the increased revenue to consumers paying cash.  This is a lesson that many New York consumers have already learned the hard way.

On that note, enjoy your day.  Who knew that 46 degrees could feel so balmy?  I, for one, am breaking out the sunscreen!

March 1, 2021 at 9:04 am Leave a comment

To Pay or Afterpay, That is the Question

When it comes to financial innovation, the land down under is the equivalent of a financial services petri dish, especially when it comes to consumer credit. So humor me this morning as I delve into one of the hottest financial services stocks, Afterpay. 

The company started in 2017, and it is now beginning to get a foothold in the American market, with potential competitors, including Visa, which is soon to follow suit. What intrigues me so much is that Afterpay has brought fintech to a buy-now, pay-later consumer product, that avoids the grasp of the Truth in Lending Act (TILA). I’m curious how much longer it will be able to pull off this feat. 

This is the basic idea of how Afterpay works. On the retail side, it enters into agreements whereby it pays the full amount due, while the consumer commits to make payments in no more than four installments. The retailers pay a fee to Afterpay in return for the knowledge that the transaction is complete. Eligible consumers agree to repay Afterpay in increments. Not all consumers are eligible to enter into these agreements, and Afterpay has the right to deny the purchase request. 

The catch from a regulatory standpoint is that this is not considered credit under TILA because repayments must be made in four or fewer installments. TILA only kicks in on the fifth installment. Isn’t that clever?

According to the Financial Times, the stock is taking off. Analysts have predicted that the model wouldn’t survive the severe downturn in retail shopping caused by COVID. What they didn’t foresee was that the system works just as well, if not better, for online shopping. It appeals to millennials who want to avoid taking out credit cards, but could use short-term credit options. 

But one business’s financial innovation is another regulator’s gaping loophole. This article in Law360 (subscription required) highlights regulatory action which California is already seeking to take against Afterpay, alleging that it has to be properly licensed as a lender as a matter of state law. Pure speculation on my part, but you can probably bet New York State is looking into doing a similar analysis. 

Besides, the company can only grow as big as the number of retailers willing to participate. Time will tell how many of them decide it is in their financial interest to partner with Afterpay.

September 21, 2020 at 9:18 am Leave a comment

New York and OCC Battle Over What Is A Bank

When is a bank a bank?  The answer to this question is not simply of interest to your faithful blogger.  It has real important practical consequences for your credit union and the competition it will be facing in the coming years.  Simply put, at what point do the Apples of the world become so intertwined with traditional banking activity that they should be subject to at least some of the same safety and soundness constraints as banks and credit unions?

The answers to some of these questions will begin to be answered sooner than you might think and New York’s Department of Financial Services is playing a leading role in the debate.  Politico has reported that Acting Comptroller of the Currency Brian Brooks plans on shortly allowing payment processors to apply for federal charters with the OCC.  It is not entirely clear from the article, but the OCC is either prepared to argue that payment processors can be licensed under its proposed FinTech charter or can be granted a separate charter unique to their business model.

This news comes as New York is suing the OCC over its authority to charter FinTechs which help process bank transactions but don’t hold deposits.  A case is before the Court of Appeals for the 2nd Circuit.  DFS argues that the OCC has no authority to grant charters to FinTechs because they don’t accept deposits.  The OCC argues that deposit taking is not a mandatory criterion to be chartered by the OCC.

Even as a decision in the lawsuit is pending, the OCC and DFS have continued their increasingly public debate.  On Wednesday (Law360 subscription required) acting OCC Comptroller of the Currency Brian Brooks and DFS Superintendent Linda Lacewell both appeared at a forum sponsored by the Cato Institute.  Brooks took the opportunity to argue that there is nothing in the national bank act which precludes the OCC from chartering non-depositories.

If he is correct, then over time you will see the nationalization of businesses such as mortgage bankers and licensed lenders who have historically been subject to state consumer protection laws which are generally more extensive than federal requirements.

No matter which side ultimately wins the debate, recent events have underscored just how loosely regulated the payment processing industry is, even as it continues to be free of the traditional regulatory oversight imposed on financial institutions. Recently the CEO of one of the most high profile payment processors, German based Wisecard, was arrested after the company was unable to account for $2.1 billion missing from its balance sheet.

September 11, 2020 at 12:46 pm Leave a comment

The Most Important Provision of Dodd-Frank You Didn’t Know About  

Yesterday, the CFPB announced that it would be issuing an Advanced Notice of Proposed Rulemaking (ANPR) formally beginning the rulemaking process to breathe life into what will be one of the most important consumer provisions in the Dodd-Frank Act.

Section 1033 of the Act provides that consumers must be given access to information about their consumer products in a form that is readily accessible.  Specifically, the provision provides that, “subject” to rules prescribed by the CFPB “covered persons”, a term which includes any entity providing a consumer financial product or service “shall make available to a consumer, upon request, information in their control or procession concerning the financial product or service”.

In other words, tucked away in Dodd-Frank is a provision that will create a federal standard which will give consumers the right to decide not only whether or not their information is going to be shared with a third party but whom they choose to share it with.

It’s not surprising that when the CFPB held a symposium on this section earlier this year, among its biggest advocates were Fintechs.  The ability to access consumer information in real-time and to get permission to do so in a standard format will make it that much easier for third parties to do everything from managing finances to creating computer generated retirement plans.  The lack of existing standards has created a no-man’s-land with banks and other financial intermediaries disputing what information third parties are entitled to and in what format.

This has put an emphasis on Fintechs working directly with banks and credit unions.  If record standards become standardized and consumers have the decisive say in who gets access to their information, you will see more and more Fintechs becoming less and less interested in working directly with your credit union.

The legal downside, yes there is always a legal downside, is that this brave new world will come with a host of legal requirements, such as new notices, and liability conundrums such as determining who is responsible for misused information.

On a policy level, it’s another example of how technology is chipping away at many of the activities previously performed by your friendly neighborhood banker or credit union.  Stay tuned for the ANPR.

Dodd-Frank and Section 1033

July 28, 2020 at 9:25 am Leave a comment

Why Amazon Is A Threat To Your Credit Union

The announcement earlier this week that Amazon will be joining forces with Goldman Sachs’ consumer bank, Marcus, to offer small business lines of credit to its platform users is an inevitable evolution in the nascent competition that is taking place between banks, credit unions and fintech’s  that will only grow in intensity in the coming years.  It’s time for the industry to start taking a stand against this potentially monopolistic behavior if it hopes to compete on a level playing field in the brave new world of fintech finance.

According to CNBC, small business owners who use Amazon’s platform will be invited to apply for small business lines of credit with interest rates ranging from 6.99% to 20.99%.  The collaboration has been rumored for months. Apparently, Amazon decided not to go it alone because it discovered that being a first class tech company doesn’t qualify you to run a bank.

The announcement comes at a time when Congress an Attorneys General have begun investigating anti-trust issues related to Amazon, Facebook and Google.  This agreement is a classic example of how network affects are increasingly going to make it impossible for all but the largest institutions to offer competitive services.

Some of the issues that need to be addressed aren’t new to credit unions.  For example, a two years ago the supreme court expounded on what constitutes a two sided platform when it dismissed an anti-trust claim that merchants had brought against American Express.

Amazon Marketplace arguably meets the four elements of a transaction platform that the dissent identified were present in the majority opinion, i.e., the platform“(1) offer[s] different products or services, (2) to different groups of customers, (3) whom the ‘platform’ connects, (4) in simultaneous transactions.” (PLATFORM CONDUCT: NAVIGATING NEW GROUNDS; Eric Hochstadt, Yehudah Buchweitz, Eric A. Rivas)

Simply put, the more data Amazon has, the more consumers are attracted to its platform.  The more consumers that are attracted to its platform, the more businesses are compelled to sell on its platform and the more Goldman Sachs has a captive audience to offer its own products.  Today its small business loans, tomorrow similar deals will be struck for a broad array of financial products.

This is a classic anti-trust case conundrum.  Unless regulators step, in lenders of all shapes and sizes will face almost insurmountable barriers to entry.  It won’t be enough to offer good loans at fair prices, because they won’t have the data available to refine their offerings or access to the marketplace where consumers will increasingly turn to shop for financial products.

Can this admittedly apocalyptic view of the future be avoided?  Yes it can, but only if the industries that have a stake in fair competition support measures to create a level playing field.

June 12, 2020 at 9:52 am Leave a comment

Why You Need To Know Your Member’s Digital Footprint

Regardless of how big or small your credit union is, its  ability to capture and understand the digital footprint of its members  and use it to make lending decisions is going to be a key determinant of its future success or failure.

This point was crystalized for me Wednesday by Manju Puri of Duke University and the FDIC, who summarized research she conducted which demonstrates just how powerful and important digital information is becoming. Using ten easily accessible variables she and her fellow researchers were able to determine with accuracy comparable and at times exceeding the credit bureaus whether or not an individual is a good lending risk. The relatively limited dataset  included information seemingly  unrelated to lending such as the time of day a website was accessed; the email service provider  used; the email address chosen by the user and my personal favorite, whether a user consistently uses lowercase when writing email. Other more technical information included whether the consumer used a tablet, phone or computer to go online; the operating system they used and if their customer uses settings authorized device tracking.

Using this data, the researchers concluded that the simple variables are reliable proxies “for income, character and reputation and are highly valuable for default prediction.” Furthermore, “variables that proxy for character and reputation are also significantly related to future behavior.” This data set is important because it is information that all but the most technology resistant Luddite is going to generate.

For me, this research crystalizes many of the unique issues involving credit unions and the digitalization of marketing and lending. One of the biggest advantages that credit unions and true community banks have always had: They literally know their members and  have  used anecdotal highly personal information to make judgments about lending decisions which big lenders could never justify based on credit scores alone. Big data wipes out this advantage. It allows the biggest banks to account for character and other intangibles in a way they never could before.

This also  underscores the importance of data access. Imagine if the biggest companies and banks are allowed to maintain a monopoly of the most predictive data? This is a huge barrier to entry and competition. As an industry,  we have to broaden our focus so that we not only have a position on greater data security but on ensuring greater access to data for all institutions.

The final point that comes to mind is how far ahead the computer programmers are  , particularly when it comes to fair lending. Every day, data miners are refining increasingly complex algorithms that will predict precisely who will want and qualify for a loan and under what conditions. Simply put, the days of ecstatic limited set of lending criteria with well understood correlations to race are over. For example, I don’t believe the researchers who discovered a correlation between capitalization and lending are seeking out tricky ways to discriminate but the reality is no one knows if this and similar data will disproportionally exclude otherwise qualified individuals from getting loans on the basis of race. In addition, we certainly don’t know whether more benign criteria could be substituted in its place. For those of you who find this aspect of the debate as interesting as I do, here is another paper that was presented at the conference.

April 26, 2019 at 9:26 am Leave a comment

GAO Report Underscores Need For a National Fintech Framework

Image result for tracy wolfson in crowdTo understand this picture read more of the blog.

A recent report released by the GAO underscores why we need a comprehensive federal framework to regulate Fintech. Without such a framework, there will continued to be too many loopholes to harm competition and a lack of regulation that will ultimately harm consumers.

First we need a definition of what Fintech lending actually is. For the purposes of the report and an accompanying blog post, the GAO points out that Fintech technology refers to the use of technology and innovation to provide financial products and services. It further explains that “Fintech lenders are non-bank firms that operate online and may use alternative data…to help determine” credit worthiness. While the definition is a good start, it could easily be used to describe banks and credit unions as well since all lending institutions are using technology to expand lending platforms and many are taking into account increasingly sophisticated lending algorithms which consider criteria far beyond traditional lending frameworks.

What’s going on here is an amalgamation of lending and technology which calls for a new regulatory framework. Let’s face it, the companies providing alternative lending platforms are doing more than brokering loans and the banks that are increasingly relying on these partnerships are moving beyond the confines of traditional banking. They are more like Apple and less like City Bank every day.

Why does this matter? Why not just let the market evolve to accommodate the structure that best meets the needs of the modern banking consumer? Because there are too many competing interests at stake. Page 9 of the GAO’s report outlines the laws and regulations to which Fintech lenders are potentially subject but there’s no single regulator – including the CFPB – which can exercise appropriate oversight over these institutions. The result is that we are engaging in cutting edge lending practices without adequate regard for whether such practices violate fair lending laws for example or needlessly circumvent the policing of practices traditionally left to the states such as the activities of non-bank lenders like mortgage bankers and payday lenders.

Most Exciting Superbowl Moment

For me, the most exciting moment in last night’s Superbowl was finding out whether CBS sideline reporter Tracy Wolfson would safely get out of the mob surrounding Tom Brady and manage to interview him moments after he won yet another Superbowl. I’m all for a defensive football but I think I’d rather watch replays of Bobby Fisher beating Boris Spassky on the Wide World of Sports. At least then there is no hiding the fact that what we were really watching last night was a chess match between two coaching geniuses in Bill Bellchick and Wade Phillips.

Meet The New Boss

President Donald Trump nominated Democrat Todd Harper to take a seat on the NCUA board. If he is confirmed Harper will have no problem finding his way around the office. According to the CU Times, from 2011 to 2017 he directed the NCUA’s Office of Public and Congressional Affairs.

 

February 4, 2019 at 9:19 am Leave a comment

It’s Back: Beware of the Inverted Yield Curve

One of the many things that spooked Wall Street yesterday was the return of the dreaded inverted yield curve. Specifically, on Monday, Bloomberg reported “the spread between 3- and 5-year yields fell to negative 1.4 basis points , dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed.” Why does this matter?

Well, you folks know a lot better than I do that from a banking perspective as the yield for shorter term bonds rises faster than the yield on longer term bonds, you end up in a classic squeeze of your operating margins making it more difficult to generate money off member funds. In addition,  the yield curve has an uncanny knack foredicting a coming recession, which makes sense because the higher yield being demanded for shorter term investments means that investors would rather put their money where they can lock in returns for the next few years.

Remember there is also a huge safety and soundness/interest rate risk component to all this. I would expect your examiners to be scrutinizing your knowledge of your interest rate risk exposure in the next round of examinations even more so than usual.

By the way, the inverted yield curve is coming at a time when things on the international stage may once again have a potential impact on the American economy. Just as the Greek debt crisis in the fear of that country opting out of the Euro produced economic reverberations throughout the international economy, we will have to wait and see just how big of an impact England’s inability to decide on divorce terms with the European Union will have on world economic growth.

By the way, British Prime Minister Theresa May, may go down as one of the worst politicians ever. A vote on the plan she negotiated with Europe establishing the terms of England’s post-Brexit relationship with Europe is expected next week and has so far been about as well received as year old candy on Halloween. It’s so bad that the one thing opponents and proponents of Brexit agree on is that Britain would be better off with no Brexit deal than the one being offered by May. That’s quite the trick.

New York’s Economy Continues to Grow But Gaps Remain

Closer to home, the New York Federal Reserve Bank released its latest analysis of the New York economy and if you’re a downstate credit union finding it hard to fill positions you’re not alone. According to the bank, “Employment in New York City is up about 25 percent from its trough following the Great Recession, which is considerably more than the nationwide increase. Meanwhile, upstate New York has not fared as well. Albany had seen solid job growth through much of the expansion, but growth has slowed over the past year. In Western New York, after years of modest employment gains, Buffalo and Rochester have seen job growth slow considerably since 2016.” One can only wonder just how much more the Upstate and Downstate economies will diverge once Amazon moves into town.

OCC: New York DFS Jumped The Gun On FinTech Litigation Again, New York Responds “Not So Fast”

In this letter to the court, the OCC explained that DFS’s lawsuit must be dismissed because no harm has been suffered by anyone since no FinTech Charter has been issued. Meanwhile, the CU Times reported that DFS has responded to this allegation by asking the court to block the OCC from approving any FinTech Charters before the litigation is resolved. Stay tuned, at some point we will actually have extremely important litigation defining the parameters of the OCC’s chartering powers and helping to frame an important public policy debate about how best to regulate hybrids of banks and technology companies.

December 5, 2018 at 9:07 am Leave a comment

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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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