Posts tagged ‘Fintech’

When Do State Interest Rate Caps Apply To A Bank’s Loans?

Expect to hear increased grumbling and calls for reform in response to a ruling yesterday by a federal district court in California upholding a regulation promulgated by the FDIC and OCC clarifying that interest rates that exceed state usury caps remain valid even after the loan is sold by a bank to a non-bank.  To be abundantly clear here, nothing I am going to talk about deals directly with credit unions but the issue of interest rates and more generally what happens to loans that are sold to third parties is one that is likely to receive increased scrutiny.  It behooves anyone in banking to have at least a basic understanding of how the law operates for banks.

Under federal law, federally chartered banks are allowed to charge the interest rate permitted by the state in which they are based.  The interest rate is valid even if the loan is made to an individual located in the state which has a usury cap lower than the interest rate charged on a bank’s loans.  Similar protections are extended to state chartered banks by the FDIC.  This “valid where made” rule is why so many credit card banks are located in states that don’t have usury laws.    Incidentally, for federally chartered credit unions, which are already subject to NCUA’s interest rate cap, the law is more clear-cut, authorizing them to make loans without reference to state usury limits.   

But what happens when a loan is sold to a non-bank? In 2015 the Court Of Appeals for the 2nd Circuit created quite the uproar.  In Madden v. Midland Funding, LLC, the court ruled that a debt collector who had bought a package of loans from a federal bank could be sued for violating a state’s interest rate cap because the preemption afforded to banks did not extend to non-bank entities. 

This is not an arcane debate.  Many fintech lending models are based on obtaining packages of loans from originating banks and then selling or participating out portions of these loans.  This entire model is much less attractive if loans purchased by these fintechs are subject to one of the 43 state usury limits.

The OCC responded by promulgating a rule effectively overturning the Midland decision and clarifying that the validity of an interest rate is determined by its legality when it was originally made by a bank.  Debt collectors and other third parties that purchase loans did not have to worry about state lending caps. 

Which brings us to the punchline in today’s blog.  New York and other states brought a lawsuit challenging the new regulations.  They argued that the FDIC and OCC did not have the authority to extend interest rate protections to non-bank entities.  Yesterday, Round 1 went to the national banks.  In a fairly straightforward analysis of administrative law, the district court upheld the new federal regulations.  The case will, of course, be appealed but the issue could be addressed either by federal legislation or if the OCC and FDIC, both of which are under new leadership, withdraw or amend the regulation.

On that note, enjoy your day.

February 9, 2022 at 9:42 am Leave a comment

Meet the New Boss

Yesterday, the New York State Senate Finance Committee squeezed in time before it begins the annual budget hearings to interview and advance the nomination of Adrienne A. Harris to serve as New York’s first African-American Superintendent of the Department of Financial Services.  With her top academic pedigree, her work as a top aide in the Obama Administration helping coordinate financial service issues, including the implementation of Dodd-Frank, and her work as a General Counsel for Fintech Doma, Inc., she is more than qualified for the job.  In fact, New York is lucky that she wants it.  Although state level nomination hearings are nowhere near as politically charged as their counterparts on the federal level, here is what I think we can gleam from yesterday’s discussion. 

Expect state level action on the regulation of Fintechs. Almost all the members who spoke were refreshingly honest in admitting that they are still trying to understand the complexity of issues ranging from crypto-currencies to lending platforms.  Conversely, they all agreed that these trends raise consumer protection and level playing field concerns that New York should not wait for the federal government to address.  This creates a perfect opening for the Superintendent, given her work with a San Francisco based Fintech. 

Get Ready to Hear about Expanded UDAAP Power.  Since the inception of the DFS, there has been a tug of war over precisely how much power the DFS needs to perform its functions, especially when one considers how much authority New York’s AG has to police questionable Wall St. practices (remember Eliot Spitzer?).  Yesterday, the Superintendent made it clear that she will be pushing for the legislature to grant her Department increased powers in this area.  This is something we will have to keep an eye on, particularly since it may come as a surprise to New York State entities that DFS fells it needs more enforcement authority. 

Finally, expect to hear more about cyber security.  New York’s existing cyber security regulations already provide it with a national leadership platform when it comes to this all important issue.  Harris’ extensive federal work in this area will only enhance the state’s credibility when it comes to cyber security.

January 25, 2022 at 8:56 am 1 comment

Are Fintech Lenders Less Biased?

To its supporters, technology has the ability to further egalitize the lending process by using unconventional data to assess the credit worthiness of underserved communities and removing human bias from lending decisions. To its critics, overly complex lending algorithms could further complicate the efforts of regulators to identify and clamp down on bias lending criteria. This debate is likely to have an increasingly large impact on credit unions, banks, and Fintechs as policy makers integrate 21st century technology into 20th century regulations. Recently released research underscores just how volatile this debate is destined to become.

The PPP program is a treasure trove for researchers of potential bias in lending decisions. Since the loans were guaranteed by the federal government, it is easier to evaluate what other factors led to businesses getting loans. Recently, a group of researchers at New York University concluded that: Fintech lenders were responsible for 53.6% of PPP loans to black owned businesses. According to the researchers “black owned businesses exhibit by far the most striking disparity among lender types when it comes to choosing Fintechs”.

In contrast, community banks with $2B or less in assets performed the worst when compared to all other financial institutions including CDFIs, credit unions and the largest banks.  In fact, the researchers conclude that larger banks demonstrated the least lender bias, underscoring their belief that automation contributed to more minority loans. Not surprisingly, this research has already drawn a heated response from community bankers who argue among other things that the research is flawed because it is based on assumptions about the race of borrowers.

Still, yours truly has been watching a lot of baseball recently and it seems to me that every game demonstrates that computer generated strike zones do a better job of calling balls and strikes than do umpires. As much as we like to extol the human element in decision making, common sense tells me that more automation not less can lead to an even fairer system for making lending judgements.

Chart depicting the proportion of PPP loans given to Black-Owned businesses  originated by financial institutions and Fintechs

October 19, 2021 at 10:40 am Leave a comment

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 1 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 2 comments

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

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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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