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On June 10, Senators Elizabeth Warren (D-Mass.) and Doug Jones (D-Ala.) wrote to the Federal Reserve Board, the OCC, the FDIC, and the CFPB requesting information regarding the role the regulators can play in ensuring that fintech companies serve consumers on a nondiscriminatory basis. The letter asserts that ,while the fintech business model—using algorithms to underwrite loans, typically without face-to-face interaction with consumers—has “the potential to expand access to financial services for underserved populations,” it also has the potential to lead to discriminatory results. Based on recent reports cited in the letter, the Senators ask the regulators to, among other things, (i) identify what their agency is doing to combat lending discrimination by lenders using algorithmic underwriting; (ii) explain how the agencies’ oversight of fair lending laws extend to the fintech industry; and (iii) describe any analyses conducted on the impact of fintech algorithms on minority borrowers. The letter requests the agencies respond to the inquiries by June 24.
On May 30, the OCC filed a letter with the U.S. District Court for the Southern District of New York notifying the court that it intends to work with NYDFS to issue a proposed final order to the court in the action challenging the OCC’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, in May, the court denied the OCC’s motion to dismiss, concluding that, among other things, the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, and therefore, the challenge “is ripe for adjudication.” In its letter, the OCC states that while it “disagrees with the Court’s decision, and reserves its right to appeal, it believes that the decision renders entry of final judgment in this matter appropriate.” An entry of final judgment, would allow the OCC to challenge the decision with the U.S. Court of Appeals for the 2nd Circuit.
On May 30, the Commonwealth Court of Pennsylvania reversed an order by the Pennsylvania Department of Banking and Securities Commission (Commission) issued against a mobile giving app and two of its executives (petitioner), holding that the petitioner was not required to be licensed by the Commission because it was not transmitting money under the court’s interpretation of the Pennsylvania Money Transmitter Act (Act). In 2016 the Compliance Office of the Department of Banking and Securities (Department) issued an order to cease and desist against the petitioner for transmitting money in the state without a license as required under the Act. At issue was whether petitioner’s activities constituted “transmitting money” under the Act, or merely involved collecting and supplying information. The Department claimed the petitioner’s app was “an indispensable part of a chain of events through which money was transferred from the donors to the recipients of the donations.” However, the petitioner argued that the app simply connected donors to the recipients, and that the actual transmission of money was outsourced to a payment processor who conducted the actual transactions.
The six-judge majority stated that the Commission’s interpretation of the Act was too broad, holding that “[o]n a basic and critical level, the Commission erroneously interpreted the terminology ‘engage in the business’ in an overly expansive manner and essentially read it as prohibiting any conduct that contributes toward—or has a tangential involvement with—the concrete and real act of ‘transmitting money.’” Moreover, “the key term in ascertaining the defining characteristic of the conduct that is proscribed by the statute is ‘transmitting,’” and while the petitioner’s “software application can be deemed to have acquired and ‘transmitted’ information vital to the donative transactions to [the payment processor], by no means was [the petitioner] ‘transmitting money’ itself, or transmitting some other ‘method for the payment’ of the donation, ‘from one person or place to another.’”
On May 29, the Department of Treasury announced the establishment of a Financial Innovation Partnership (FIP) between the U.S. and the UK. The FIP will focus on expanding bilateral financial services collaborative efforts to study emerging fintech innovation trends and share information and expertise on regulatory practices. Specifically, the FIP will focus on (i) regulatory engagement, including building upon “existing regulatory cooperation by discussing regulatory developments and sharing experiences on technical issues related to innovation in financial services,” and (ii) commercial engagement, such as providing cross-border opportunities for private sector companies to engage with industry associations as well as market participants. The FIP was announced during a meeting of the U.S.-UK Regulatory Working Group, which, a week earlier, held discussions in Washington, D.C. on the outlook for financial regulatory reforms, future priorities, regulatory cooperation, and possible implications of the UK’s exit from the EU on financial stability and cross-border financial regulation.
On May 24, the FTC announced the launch of a dedicated fintech resource page hosted on the agency’s business center website. The fintech page contains the following materials: (i) guidance, including Safeguards Rule and Privacy Rule compliance information; (ii) videos that will be regularly rotated discussing topics such as artificial intelligence and blockchain; (iii) related posts containing relevant information on small business financing and recent fintech enforcement actions; and (iv) legal resources, including relevant cases and staff reports.
On May 24, the Financial Crimes Enforcement Network (FinCEN) announced a new program that will provide opportunities for fintech/regulatory technology companies and financial institutions to showcase new and emerging innovative approaches for combating money laundering and terrorist financing and to demonstrate how other financial institutions could use similar technologies. The FinCEN Innovation Hours Program will accept meetings once per month, with primary consideration given to entities that are already operational. According to FinCEN, the program is part of a broader initiative introduced last year (previously covered by InfoBytes here and here) that encourages banks and credit unions to explore innovative approaches such as artificial intelligence, digital identity technologies, and internal financial intelligence units to combat illicit financial threats, as well as collaborative arrangements to share resources and enhance the effectiveness and efficiency of Bank Secrecy Act/anti-money laundering compliance programs.
On May 23, the Florida governor signed SB 1024, which establishes the “Florida Blockchain Task Force” within the Department of Financial Services to “explore and develop a master plan for fostering the expansion of the blockchain industry in the state, to recommend policies and state investments to help make this state a leader in blockchain technology, and to issue a report to the Governor and the Legislature.” Within 90 days of signing, the bill requires that a majority of the 13 required members of the task force must be appointed and the task force must hold its first meeting. The task force is required to, among other things, study blockchain technology and submit a report to the Governor and the Legislature with recommendations for implementing blockchain technology in the state and recommendations for specific implementations to be developed by relevant state agencies. The bill took effect on May 23.
On May 20, the OCC released its Semiannual Risk Perspective for Spring 2019, identifying and reiterating key risk areas that pose a threat to the safety and soundness of the federal banking system, focusing on the following risk areas: credit, operational, compliance, and interest rate. The OCC noted that rapid growth within the fintech and regulatory technology space impacts each of these risk areas, which the agency is monitoring closely in order to implement necessary actions to address concerns. Overall, although the OCC acknowledged that the health of the federal banking system remains strong, specific risk areas of concern include (i) the need to have in place appropriate risk management practices as well as methods for assessing “the quality and timeliness of credit risk identification, risk mitigation, and loan loss reserve methodology”; (ii) elevated operational risk as banks adapt to a changing and increasingly complex operating environment, including cybersecurity threats, fintech innovation, and a reliance on third-party providers; (iii) high compliance risk related to Bank Secrecy Act/anti-money laundering (BSA/AML), as well as challenges facing banks to “effectively manage money-laundering risks in a complex, dynamic global operating and regulatory environment”; and (iv) potential challenges to earnings due to interest rate risk and liquidity risk, which lead to increased difficulties when forecasting liability costs.
Concerning BSA/AML risk, the OCC specifically noted that AML-related deficiencies “stem from three primary causes: inadequate customer due diligence and enhanced due diligence, insufficient customer risk identification, and ineffective processes related to suspicious activity monitoring and reporting, including the timeliness and accuracy of Suspicious Activity Report filings. Talent acquisition and staff retention to manage BSA/AML compliance programs and associated operations present ongoing challenges, particularly at smaller regional and community banks.” The report reminded banks that necessary training, quality assurance, independent testing, and control updates are expected to be implemented during the FY 2019 examination cycle as required under the Financial Crimes Enforcement Network’s customer due diligence rule (previously covered by InfoBytes here).
“Innovation can enhance a bank’s ability to compete by introducing new ways to meet customer product and service needs, improve operating efficiencies, and increase revenue,” the OCC noted, but changing business models or offering new products and services can “elevate strategic risk when pursued without appropriate corporate governance and risk management.”
On May 9, the House Financial Services Committee announced the creation of a Task Force on Financial Technology as well as a Task Force on Artificial Intelligence. Representative Stephen Lynch (D-MA) will chair the Task Force on Financial Technology, which will explore the use of alternative data in loan underwriting, payments, big data, and data privacy challenges. Representative Bill Foster (D-IL) will chair the Task Force on Artificial Intelligence, which will focus on understanding ways to utilize AI within the financial services industry. It will also examine issues related to algorithms, digital identities, and combatting fraud. Both task forces will expire on December 9.
On May 8, the FTC held a forum with members of the small business marketplace to discuss the recent uptick in online loans and alternative financing products, and to analyze the potential for unfair and deceptive marketing, sales, and collection practices in the industry. Opening “Strictly Business: An FTC Forum on Small Business Financing,” FTC Commissioner Rohit Chopra expressed broad concerns about the state of entrepreneurship in the U.S. and the barriers small businesses face when negotiating contracts. Three panels discussed topics including (i) recent trends in the financing marketplace and small business financing products; (ii) the impact of fintech in online lending; (iii) an examination of the risks and benefits of the merchant cash advance industry; and (iv) consumer protection risks and legislative, self-regulatory, and educational efforts to help better protect borrowers.
During the first panel, several industry members discussed the importance of credit and financing products in meeting the capital needs of small businesses who often experience challenges with funding operations and cash management. While traditional bank lending and Small Business Administration (SBA) loans often require lengthy, costly underwriting standards, several panelists noted that new marketplace financing options have created opportunities for small businesses that previously did not exist. Among other things, panelists emphasized that there is a big difference between consumer credit and business credit, and that online lenders are leveraging underlying business data, credit card receivables data, and fundamental underlying business transaction data to make sure small businesses can sustain and service their debt. Funding time is also critical to small businesses with many choosing online lenders for faster access to funds. The panel discussed the benefits of online financing products, such as moving away from including consumer credit scores in the underwriting process and examining nontraditional data to look at cash flow, but also cautioned that there can be a lack of transparency around terms and pricing.
The second panel discussed the merchant cash-advance (MCA) industry, which they described as providing an unregulated form of financing for small businesses in the form of factoring future receivables. Recently, the industry has been scrutinized for alleged collection abuses and use of confessions of judgment (COJs). COJs, which allow lenders to legally seize borrowers’ bank accounts and other assets without a judge’s review, have led to a flood of questionable legal actions against small businesses, according to Commissioner Chopra. However, one of the panelists noted that the FTC limited the ban on COJs to consumers.
The third panel discussed consumer protection risks as well as products and information available for small business borrowers. A key concern amongst several of the panelists was whether business borrowers are sophisticated enough to understand the various options and if they are able to receive the necessary information to shop between products, such as APRs, total costs, and average monthly payments. The panel also discussed federal and state law, as well as self-regulatory efforts, that offer protections for small business borrowers. All agreed that there has been significant action taken at the state level to try to standardize and harmonize these types of lending practices, and while there was support for a national standard, they cautioned that a weaker national standard should not preempt a stronger state standard. Transparent disclosure standards, consumer protection oriented issues such as privacy and data security, as well as deceptive practices, were also discussed, with panelists agreeing that outreach and consumer education is vital in helping consumers make informed decisions.
Director of the FTC’s Bureau of Consumer Protection, Andrew Smith, closed the forum by emphasizing that the FTC has broad authority under the FTC Act to tackle unfair and deceptive practices, and stating that the Commission is very concerned about reports of unfair and deceptive marketing, sales, and collection practices in the small-business finance market. He stressed that while financial technologies can evolve quickly, the underlying legal protections for small businesses remain the same.
- APPROVED Webcast: Introducing Mogy — APPROVED’s licensing technology solution
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Christopher M. Witeck and Moorari K. Shah to discuss "The latest in vendor management regulations" at a Mortgage Bankers Association webinar
- Buckley Webcast: Hot topics in debt collection — An analysis of recent federal FDCPA litigation
- Jonice Gray Tucker to discuss "How to succeed in law school" at the SEO Law DC Panel Discussions
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference