When the US Court of Appeals for the Second Circuit issued its decision in Madden v. Midland Funding in 2015, it sent shockwaves through the financial community for its unexpected ruling that nonbank assignees of a national bank did not get the benefit of National Bank Act “preemption” permitting lenders to charge any interest rate provided it does not exceed the rate permitted in the bank’s home state. After an unsuccessful attempt to get the US Supreme Court to review the decision, the Second Circuit’s decision remains binding precedent in federal courts sitting in New York, Connecticut, and Vermont. The case returned to the district court and has quietly been litigated over the last two years. On March 1, the final chapter began when the parties filed a motion for preliminary approval of a settlement of the action, as described below.
Arizona has become the first state in the United States to enact a law to create a “Fintech Sandbox” – a safe zone for fintech startups to test new applications and financial services otherwise subject to state money transmitter, banking, and similar licensing requirements without having to obtain a state license. Although other countries, such as the United Kingdom, Singapore, and Australia, have created similar fintech sandboxes, similar legislation or regulations thus far have not been adopted in the United States at the federal or state level.
The Fintech Sandbox idea was promoted by the Arizona attorney general and will be administered by the Arizona Office of the Attorney General (AZ OAG). However, the Fintech Sandbox does not mean that fintech companies will be unregulated in Arizona. There will be a substantive application and oversight process.
The Consumer Financial Protection Bureau (CFPB) has issued its first No-Action Letter under the final policy on No-Action Letters that it released in early 2016. The No-Action Letter was requested by and issued to Upstart Network, Inc., an online marketplace lending platform. Under the No-Action Letter, the CFPB states that it “has no present intention” to recommend an enforcement or supervisory action against Upstart with regard to its compliance with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. Like many marketplace and other new online lenders, Upstart uses alternative lending criteria in its underwriting process in order to expand access to credit for borrowers who might not otherwise qualify for loans or can only qualify for loans with higher interest rates.
The Office of the Comptroller of the Currency (OCC) has released FAQs to supplement its 2013 guidance on risk management of third-party relationships. The FAQs specifically address bank relationships with fintech companies and marketplace lenders, relationships that were not necessarily an OCC focus when the 2013 guidance was issued.
As with its 2013 guidance, the FAQs focus on managing risk through a bank’s adequate due diligence and ongoing monitoring of third-party service providers such as fintech companies, and places ultimate responsibility for risk management with the bank’s management and board of directors. The FAQs recognize that the levels of due diligence and ongoing monitoring may differ based on the risk and complexity presented by specific third-party relationships.
Notwithstanding objections from both parties of the US Congress and state banking regulators, the Office of the Comptroller of the Currency (OCC) is moving forward with its proposal to accept applications from financial technology companies for a special purpose national bank charter (FinTech Charter) and has issued draft guidelines (FinTech Charter Guide) for its evaluation of FinTech Charter applications.
We have previously discussed the OCC’s FinTech Charter proposal and its somewhat rocky path (read our previous posts on the topic here and here). The OCC is inviting comments on the draft through April 14, 2017, although we do not expect the final version of the guide to deviate significantly from the current draft.
In the closely watched case of Madden v. Midland Funding, LLC, on which we have reported here and here, the US Second Circuit Court of Appeals ruled that federal preemption principles generally applicable to national banks under the National Bank Act did not extend to nonbank assignees of a bank loan where the bank no longer held an interest in the loan, and federal law therefore did not preempt New York state usury limitations. In turn, the Second Circuit declined to rehear the case, and the US Supreme Court declined to grant certiorari to review the case.
In its decision, the Second Circuit remanded the case to the US District Court for the Southern District of New York for the resolution of remaining state law questions, including whether Delaware law (which has no usury limitations) governed the account agreement. On February 27, 2017, the district court issued an opinion addressing these issues in response to the defendants’ motion for summary judgment and the plaintiff’s motion for class certification.
In a significant decision, on August 31, the US District Court for the Central District of California held that a tribal bank originating loans for a non-bank lender was not the “true lender”—making the loans subject to state usury limits.
In December 2013, the Consumer Financial Protection Bureau (CFPB) commenced litigation against CashCall (a payday lender in a partnership with a tribal bank) and other defendants, claiming that they had violated the federal law prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) for financial services providers by servicing and collecting on loans that were wholly or partially void or uncollectible under state law.
The Consumer Financial Protection Bureau (CFPB) has taken two notable steps that signal a new interest in regulating marketplace, or “peer-to-peer,” lending. The CFPB announced that it will expand its consumer complaint portal to accept complaints about marketplace lenders. Simultaneously, the CFPB released a consumer bulletin containing information and tips for consumers considering taking out a loan with a marketplace lender.
Marketplace lending now joins mortgages, student loans, auto loans or leases, payday loans, bank accounts and services, credit cards, prepaid cards, credit reporting, debt collection, money transfer or virtual currency, and payday loans as categories of financial services for which the CFPB accepts complaints. The consumer complaint portal has been and continues to be controversial in the financial services industry. The complaints are publicly available and not vetted or filtered by the CFPB for accuracy or veracity, although it scrubs personal information from the narrative and takes steps to confirm a commercial relationship between a consumer and a company. The financial services provider receiving a complaint is expected to submit an answer within 15 days if possible, and no later than 60 days.
A recent decision from the US District Court for the Eastern District of Pennsylvania, Kane v. Think Finance, Inc., Civ. No. 14-cv-7139, 2016 WL 183289 (E.D. Pa. 2016), has received a good deal of attention. Although it arises in the context of a payday lender, some market participants have questioned whether the decision is applicable to marketplace lending and other similar financial structures. Marketplace lending involves online platform operators, usually nonbank entities, that partner with a state or national bank, which in turn originates the loans to consumers. After a short holding period, the loans are then sold by the bank to the platform operator, which will subsequently sell the loans to third-party purchasers while retaining servicing responsibilities. Under these facts, the consensus is that such loans should be considered exempt from usury laws in states other than the state where the originating bank is organized due to principles of federal preemption that apply to state usury limits.
The Think Finance case stems from a number of actions filed against Think Finance, Inc. (Think Finance), a payday lender, by the Pennsylvania Office of the Attorney General (OAG). The OAG alleges that Think Finance was the de facto lender for a series of loans made through 2012 in a partnership with the now dissolved First Bank of Delaware and that the loans had interest rates (in the 200% to 300% range) that were usurious under Pennsylvania law. The OAG calls the arrangement with First Bank of Delaware a “scheme to avoid state usury laws” and an impermissible “rent-a-charter” arrangement. In ruling on a motion to dismiss filed by Think Finance, the district court held that federal preemption did not apply to the causes of action against Think Finance arising out of its lending activity because there were no claims against a bank. Therefore, the court allowed the claims against Think Finance regarding whether the loans were usurious under Pennsylvania law to proceed.
In the spirit of the new year, we decided to take our Ouija board out of the attic and venture a few predictions for 2016 in financial services regulation. The financial regulatory agencies have been relatively quiet for the last few weeks, but we expect to see significant regulatory activity in 2016. So, we have consulted the spirit of FinReg Nostradamus and assembled a list of some of the regulatory actions that we expect to see this year.
- Incentive Compensation Rules: The financial agencies’ 2011 proposed rules regarding incentive compensation were never finalized, and the agencies are reportedly engaged in discussions regarding the framework of the incentive compensation rules and intend to release a new proposed rule this year. Key issues that the new proposed rule will likely address include triggers for required clawback of compensation and the scope of clawback powers, mandatory compensation deferral requirements and time periods, and application of the rules to alternative compensation arrangements, such as carried interest.
- Net Stable Funding Ratio: Although the Basel Committee on Banking Supervision (Basel Committee) finalized the net stable funding ratio (NSFR) standards of Basel III at the end of 2014, proposed regulations that implement the NSFR have yet to be issued by the US federal banking agencies. The agencies and industry representatives have been engaged in ongoing discussions with respect to the NSFR regulations. Considering the NSFR standards are required under Basel III to be fully implemented by January 2018, barring any unexpected delays, we should see proposed NSFR regulations in the first half of 2016.
- Consumer Financial Protection Bureau (CFPB): A number of rulemakings from the CFPB are expected this year, including long-awaited rulemakings on debt collection and prepaid accounts. We also expect proposed rules on mortgage servicing and on short-term lending (e.g., payday and auto title loans) based on the framework that the CFPB released in 2015. Also on the CFPB’s regulatory agenda for 2016 are mandatory arbitration clauses, checking account overdraft programs, and larger participants in the consumer installment loan and title loan markets.