Posts tagged ‘Fintech’

Five Things To Think About On A Monday Morning

Yours truly won’t be blogging tomorrow and there is a bunch of mildly important things I think you should know about, so here it goes.

CIP Exemption Issued By Regulators

Late last week, FinCen joined by the other financial regulators including NCUA issued an executive order exempting financial institutions from having to perform Customer Identification Program (CIP) when they provide loans for businesses entering into premium finance arrangements.

The basic idea is this. Most businesses need property and casualty insurance but many find it easier to spread out the payment for such costs rather than pay a single lump sum premium. When companies enter into agreements with premium finance companies, the finance company advances the cost of the insurance and the company repays for the financing over a set period of time. The regulators agreed that these types of loans are already highly regulated and present a low-risk of money laundering.

First Monday In October Is A Bust

You wouldn’t know it by all the commotion surrounding a certain nomination battle that’s going on but this year’s Supreme Court docket is shaping up to be the lamest – that’s a legal term – in years. I’ve gone over it a few times and I just can’t find anything that will have much of an impact on your credit union. That being said, the court hasn’t decided on all the cases it will review this year so hope springs eternal for legal geeks everywhere.

Equifax Mishaps

With so many talented hackers in so many countries seeking to get so much money from buying and selling our personal identities, I’m occasionally tempted to conclude that there is really nothing anyone can do to prevent data breaches: Then I read up on the post-mortems of so many of these breaches and what I’m reminded of is how sloppy companies still are when it comes to protecting our personal information.

The latest example comes courtesy of British regulators who last week fined Equifax over its data handling process. As explained in this blog, British regulators were particularly flabbergasted by the company’s use of unprotected personal identifiable information in testing new procedures. As explained by the blogger, “Compared to Equifax’s poor information security and patch management practices, which led to the loss of personally identifiable information for at least 145.5 million U.S. consumers, 15.2 million U.K. consumers and 8,000 Canadian consumers, using live data in a testing environment might seem to be a footnote. But it’s not.”

This finding comes on top of this recent report issued by our GAO outlining many basic mistakes made by Equifax by its handling of the data breach.

Remember, these reports are coming out even as companies such as Equifax continue to argue that legally speaking, consumers suffer no real harm from data breaches unless they can actually show that their data was misused. If their argument wins the day, it simply underscores why Congress must do more to hold companies accountable for their inexcusably sloppy handling of consumer identities. Full disclosure: The Association is among a group of plaintiffs suing Equifax over the data breach.

A Level Playing Field for FinTechs?

Speaking of Congressional action, CUNA and NAFCU both weighed in with their thoughts on how FinTechs should be properly regulated as they enter into the financial arena. Here’s how CUNA put it in a letter to a House sub-committee: “A regulatory scheme that ensures consumers receive the same protections and those offering these services are subject to similar regulations and supervision credit unions and banks is important to safeguard consumers and the banking system.” This sentiment is very similar to the concerns that have been expressed by New York credit unions in past discussions with our Government Affairs Committee. No one wants to keep helpful innovation out of the hands of consumers. We just want to provide it to them in a way that protects them to the same extent as they would be protected when they work with credit unions.

Jeffries’ Star Continues to Rise

Back when I used to know something about politics, about two years ago, I used to predict among friends that former Assemblyman turned Congressman from Brooklyn, Hakeem Jeffries would be New York State’s Governor one day. Maybe I had my sights set too low for the Congressman.

He is the subject of this Lexington column in the Economist magazine which argues that Jeffries has been able to position himself as a deal making pragmatist while at the same time attracting large numbers of supporters among the activist class of the Democratic Party. All this suggests that if the gossip about replacing Nancy Pelosi as Speaker if the Dems take the majority in November becomes reality, the Congressman’s name will be on the list of potential replacements.

October 1, 2018 at 9:05 am Leave a comment

DFS Takes On OCC FinTech Charter

Image result for Department of financial services new yorkThey say that the definition of insanity is doing the same thing over and over again and expecting a different result. In my own case, I don’t know if its insanity or stupidity that has lead me to spend decades of beautiful fall Sundays glued to my TV in the hope of watching both the Giants and Jets play good football in spite of the fact that this rarely ever happens. The Giants are starting 0-2 again and the Jets? Well, they are the Jets.

Conversely, even though the DFS had an earlier lawsuit seeking to block the approval of FinTech Charters by the Office of Comptroller of the Currency thrown out as premature, the DFS did the right thing Friday when it once-again sued the OCC for seeking to charter FinTech bank charters. This time the OCC has issued a draft licensing manual and the time seems to be ripe for the court to consider fundamental legal questions, the answer to which will radically reshape the landscape in which your credit union operates.

First, what is a FinTech charter? As conceived by the OCC, it is a non-depository federally chartered institution which pays checks or lends money. Specifically, 12 CFR 5.20(e)(1) has permitted the OCC to charter special purpose national banks that conduct one of three core banking activities: taking deposits, paying checks or lending money. The OCC anticipates that FinTech charters “will elect to demonstrate that they are engaged in paying checks or lending money.” (See Pg. 5 of the Controller’s Licensing Manual Draft Supplement)

So what has New York’s Department of Financial Services so upset? First, the definition of a FinTech could potentially cover virtually every institution with an app that does not accept deposits and as such is subject to state level licensing requirements. For example, check cashers don’t accept deposits and neither do money transmitters. In other words, from the perspective of state regulators, the FinTech charter amounts to nothing less than a federal power grab which would largely make them obsolete.

Second, consumer advocates and state regulators argue that this new charter will provide a means to allow institutions to circumvent state level consumer protection laws. For example, in its complaint, the DFS argues that approval of a FinTech charter could lead “in New York to the proliferation of prohibited payday lending by out-upstate OCC chartered entities seeking to import their usurious trade into the state to exploit the financially vulnerable” because it would give them a means to easily circumvent the state’s interest rate cap.

But as these policy issues get debated, the actual issue to be considered in this lawsuit is a straight forward one: does the OCC, which is empowered under the National Bank Act to charter and oversee national banks, have the authority to extend its charter to non-depository institutions so long as they engage in other core banking activities? In other words, what is a bank? Does anyone really know what time it is? Does anyone really care? Just wanted to see if you’re still paying attention.

Do credit unions have a stake in this fight? You bet they do. The competitive pressures that the industry faces are already enormous. But can you imagine how those pressures are going to grow if you suddenly find yourself competing directly against Facebook and Apple with immense capital at their disposal? It gets even worse when you consider that these institutions will not be subject to capital requirements similar to your credit union’s – because they won’t take deposits – or a fraction of the consumer protection laws which make your life so much fun.

 

September 17, 2018 at 8:55 am Leave a comment

The fintechs are coming…Why you should care

You may have seen the news earlier this week that a federal court in Washington, DC dismissed a lawsuit brought by the Conference of State Bank Supervisors alleging that the OCC overstepped its boundaries in publishing a white paper explaining that it had the authority to issue national bank charters to fintech banks (CONFERENCE OF STATE BANK SUPERVISORS, Plaintiff, v. OFFICE OF THE COMPTROLLER OF THE CURRENCY, et al., No. CV 17-0763 (DLF), 2018 WL 2023507).

The ruling was not surprising; after all, good cases, like good wine, have to ripen, and the OCC has yet to issue any formal guidance, let alone a fintech charter.

But don’t be fooled by this minor opening skirmish. The issues that will eventually be litigated are among the most important with which the courts, regulators and ultimately Congress have to deal. Just as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 fundamentally altered the banking landscape in which you operate, the issues that are raised by this lawsuit and the policy debate surrounding it will have a profound impact on the competitors you face, the products you offer, and how you offer them for decades to come.

In 2016, the OCC announced in a white paper that it had the authority to issue national bank charters to so-called limited purpose banks. Under a little used 2003 regulation, the OCC had the authority, it argued, to provide national charters to non-depository corporations which offered banking products, such as providing loans or check processing. If the OCC is correct, all those vendors that approach you about using their platform to benefit your members will instead have the option of chartering their own bank and competing against you. Since they wouldn’t have to build branches, they would become national competitors overnight.

State regulators are horrified by this proposition. It means, for example, that check cashers and payday lenders could evade state consumer protection laws by getting a federal charter. In addition, they are concerned that large companies such as Apple could compete against traditional financial institutions without having to meet basic regulatory requirements.

This creates a host of legal issues that everyone, including credit unions, have a stake in debating. For example, regulators already have a tough enough time figuring out appropriate capital levels, and lawyers make a living out of making preemption arguments. How do we create an adequate firewall between Apple’s traditional business and an Apple Bank? How do we determine when a computer platform which happens to be available to a consumer in Iowa makes the platform provider subject to Iowa’s laws even if all the processing is done in Washington State? It’s easy to see how credit unions, constrained by field of membership restrictions, and the small independent bank could become obsolete overnight.

May 4, 2018 at 10:49 am Leave a comment

FinTech Is Fundamentally Changing Mortgage Lending Right Now

The digitalization of mortgage lending is not a gimmick to attract millennials but a fundamental shift in the way mortgage lending is done. If you don’t have plans in the works for a fully automated mortgage production process, you should. And if you already do have such plans in the works, you should speed up your timetable for deployment. That is my takeaway from this fascinating bit of research released in February by the Federal Reserve Bank of New York. It’s actually worth reading on your own.

The researchers examined the impact of FinTech lenders. For purposes of their research they defined these companies as lenders employing a beginning-to-end online mortgage application platform with centralized mortgage underwriting and processing augmented by automation. In other words, while aspects of the mortgage origination process have been automated for more than two decades now, what they were interested in examining was the efficacy of Rocket Mortgages of the world. The research looked at some of the most fundamental questions involving FinTech mortgage Lending and concluded that beginning-to-end automation of the mortgage process has so far proven to be not only faster but beneficial to consumers across socioeconomic groups.

The efficiencies speak for themselves. According to the researchers, FinTech lenders process loans 7.9 days faster than non-FinTech lenders. This is true even when FinTech’s are compared to non-deposit taking mortgage lenders suggesting that these results aren’t simply a reflection of fewer regulations.

Critics have suggested that FinTech’s are quicker because they are less careful about who they lend to. Not so the researchers concluded. Loans originated by FinTech lenders are 35% less likely to default than comparable loans originated by non-FinTech lenders.

Does this mean that FinTech lenders are simply picking off the best potential applicants? The researchers found “that the lower default rates associated with FinTech lending is not simply due to positive selection of low risk borrowers.” This is speculation on my part but maybe automation makes it easier for lenders to quickly adjust underwriting standards in response to changing market conditions.

For example, it appears that because the FinTech model is so automated it can more quickly adjust to changes in the interest rate environment. This typically benefits borrowers whose interest rates average 2.3 basis points lower than those offered by brick and mortar lenders.

To sum it all up, if you are a traditional lender, you are competing against a business model which provides cheaper mortgages to a large cross-section of the mortgage marketplace more quickly and efficiently than was conceivable even five years ago. It’s no wonder the market share of FinTech lenders is growing at a rate of 30% annually from a mere 34 billion in originations in 2010 to 916 billion in 2016.

For those of you hoping to be more actively involved in mortgage lending, the writing is on the wall. You better move quickly before your existing approach to lending ends up as an exhibit in the Smithsonian.

March 8, 2018 at 9:50 am 1 comment

The Incredible Disappearing Bank Branch

I know what you are going to tell me; surveys indicate that your members still want their bank branches but let’s face it, they are turning into awfully expensive and increasingly risky security blankets for your aging membership. According to the Wall Street Journal,  the 12 month period ending in June 2017 saw the biggest decline in bank branches in decades. The biggest banks are closing shop in both suburban and rural areas and regional banks are selling property they once were holding for expansion.

In my ever so humble opinion we are seeing the signs of a fundamental shift in the way services are provided. Technology has made it easier to cost effectively provide banking services in underserved areas. In addition, take a look at how Amazon is revolutionizing the food shopping experience and the question is not if, but when that bank branch is going to be obsolete.

This is why I think credit unions are wrong to dogmatically oppose Fintech partnerships where the Fintech is a bank. Technology makes it possible to provide banking services over a virtual community regardless of where a credit union is located. A physical branch just gets in the way.

February 8, 2018 at 9:44 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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