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Federal agencies seek comments on third-party relationships
On July 13, the Federal Reserve Board, FDIC, and OCC announced a request for public comments on proposed guidance designed to aid banking organizations manage risks related to third-party relationships, including relationships with financial technology-focused entities. The guidance also responds to industry feedback requesting alignment among the agencies with respect to third-party risk management guidance. The proposed guidance provides “a framework based on sound risk management principles for banking organizations to consider in developing risk management practices for all stages in the life cycle of third-party relationships that takes into account the level of risk, complexity, and size of the banking organization and the nature of the third-party relationship.” The proposal addresses key components of risk management, such as (i) planning, due diligence and third-party selection; (ii) contract negotiation; (iii) oversight and accountability; (iv) ongoing monitoring; and (v) termination. Comments on the proposal are due 60 days after publication in the Federal Register.
CFPB settles with fintech over loan scheme operation
On July 12, the CFPB announced a consent order against a Georgia-based fintech company for allegedly enabling contractors and other merchants to take out loans on behalf of thousands of consumers who did not authorize them. According to the CFPB, the respondent allegedly violated the CFPA’s prohibition against unfair acts or practices by (i) servicing and facilitating the origination of unauthorized loans to consumers and (ii) enabling unauthorized loans by, among other things, failing to implement appropriate and effective controls during the loan application, approval, and funding processes. The CFPB noted that over 6,000 complaints were filed between 2014 and 2019 about the respondent, with some consumers claiming to have no prior involvement or knowledge of the respondent before receiving billing statements and collection letters. Under the terms of the consent order, the respondent must verify consumers’ identities and confirm their authorizations before activating loans or disbursing loan proceeds and implement an effective consumer complaint management program, exercising oversight of third-party merchant partners, and implementing uniform standards regarding the write-off of illegal loans. The respondent is also ordered to pay up to approximately $9 million in redress to its victims and a $2.5 million civil money penalty.
FINRA reminds firms to disclose digital asset involvement
On July 8, FINRA issued Regulatory Notice 21-25, reminding firms to notify their FINRA risk-monitoring analysts if they currently engage in, or plan to engage in, activities regarding digital assets. The notice discusses the types of activities of interest to FINRA, which include, among other things: (i) transactions in digital assets; (ii) pooled funds investing in digital assets; (iii) derivatives associated with digital assets; (iv) engagement in an initial or secondary offering of digital assets; (v) participation in cryptocurrencies and other virtual coins and tokens; (vi) acceptance or mining of cryptocurrency; and (vii) “recording cryptocurrencies and other virtual coins and tokens using distributed ledger technology or any other use of blockchain technology.” The notice encourages firms to promptly notify their risk monitoring analyst in writing on an ongoing basis.
FDIC Chairman discusses innovation in banking
On June 29, FDIC Chairman Jelena McWilliams spoke at the “Fintech: A Bridge to Economic Inclusion” conference on technology’s role in creating and facilitating a more inclusive financial system. McWilliams noted that while the proportion of U.S. households that were banked in 2019 was 94.6 percent, 7 million households still reported no banking relationship. Moreover, she noted that “the rates for Black and Hispanic households who do not have a checking or savings account at a bank remain substantially higher than the overall ‘unbanked’ rate.” McWilliams discussed the FDIC’s multi-pronged approach to tackle the issue of financial inclusion, which includes: (i) looking at financial innovations in the private sector; (ii) taking steps, including hosting tech sprints, to identify solutions; (iii) coordinating with Minority Depository Institutions and Community Development Financial Institutions; and (iv) conducting targeted public awareness campaigns on the importance of having a banking relationship. In explaining the initiatives, McWilliams pointed out that encouraging the use of alternative data that is not usually found in consumer credit files can “help firms evaluate the creditworthiness of consumers who might not otherwise have access to credit in the mainstream credit system.” She also discussed the use of artificial intelligence, updating brokered deposits rulemaking, and establishing a public/private standard-setting organization for due diligence of vendors and for the technologies they develop. According to McWilliams, “FDiTech is also leading tech sprints to identify data, tools, and technology to help community banks meet the needs of the unbanked, including how to measure impact.” (Covered by InfoBytes here.) McWilliams concluded her remarks by explaining that “[a]lthough the FDIC has limited ability to address directly the issue of unbanked Americans, there are things that [it] can do – and which [it is] doing – to foster innovation across all banks and to reduce the regulatory cost of and barriers to innovation.”
Biden signs repeal of OCC’s “true lender” rule
On June 30, President Biden signed S.J. Res. 15, repealing the OCC’s “true lender” rule pursuant to the Congressional Review Act. Issued last year, the final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement, or (ii) funds the loan. The final rule also provided that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” (Covered by InfoBytes here.)
U.S.-UK Financial Innovation Partnership reports on progress
On June 24, the U.S. Treasury Department provided an overview of recent meetings of the U.S.-UK Financial Innovation Partnership (FIP) where Regulatory and Commercial Pillars participants exchanged views on “topics of mutual interest in the U.S. and UK FinTech ecosystems and [sought to] deepen ties between U.S. and UK financial authorities.” As previously covered by InfoBytes, the FIP was created in 2019 as a way to expand bilateral financial services collaborative efforts, study emerging fintech innovation trends, and share information and expertise on regulatory practices. The first meeting of the FIP took place in August 2020 (covered by InfoBytes here). Topics discussed in the most recent meeting included digital payments, central bank digital currencies, regulatory and supervisory technology, innovative financial service testing, and the upcoming U.S.-UK Financial Regulatory Working Group meeting. Participants acknowledged “the continued importance of the ongoing partnership on global financial innovation as an integral component of U.S.-UK financial services cooperation.”
House votes to repeal OCC’s “true lender” rule
On June 24, the U.S. House passed S.J. Res. 15 by a vote of 218 - 208 to repeal the OCC’s “true lender” rule. As previously covered by InfoBytes, the U.S. Senate passed S.J. Res. 15 last month by vote of 52-47 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the final rule. The measure now heads to President Biden who is expected to sign it. Issued last year, the final rule amended 12 CFR Part 7 to state that a bank makes a loan when, as of the date of origination, it either (i) is named as the lender in the loan agreement, or (ii) funds the loan. The final rule also clarified that if “one bank is named as the lender in the loan agreement and another bank funds the loan, the bank that is named as the lender in the loan agreement makes the loan.” (Covered by InfoBytes here.) Acting Comptroller of the Currency Michael Hsu issued a statement after the vote saying the OCC respects Congress’ role in reviewing regulations under the Congressional Review Act. He reaffirmed the OCC’s position that predatory lending has no place in the federal banking system and noted that moving forward the OCC “will consider policy options, consistent with the Congressional Review Act, that protect consumers while expanding financial inclusion.”
SEC settles with blockchain company over unregistered ICO
On June 22, the SEC announced a settlement with an intellectual property search software platform provider and its CEO resolving allegations that the company made materially false and misleading statements in connection with an unregistered initial coin offering (ICO) of digital asset securities. According to the order, the company raised $7.6 million from investors by offering and selling digital tokens. In promoting the ICO, the company and its CEO made multiple materially false statements to investors and potential investors, including false statements about the company’s revenues, number of employees, and the platform’s user base. The SEC alleges that the company violated Section 5(a) and 5(c) of the Securities Act because the digital assets it offered and sold were securities under federal securities laws, and the company did not have the required registration statement filed or in effect, nor did it qualify for an exemption from registration. The order, which the company consented to without admitting or denying the findings, imposes a $7.6 million penalty, and requires the company to “destroy all [of the digital tokens] in their possession or control,” publish notice of the order on the company’s social media accounts, request removal of the tokens from trading platforms, and refrain from participating in future offerings of a digital asset security.
District Court stays CSBS’s fintech charter challenge while OCC reviews framework
On June 16, the U.S. District Court for the District of Columbia entered an order staying litigation in a lawsuit filed by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). (Covered by InfoBytes here.) Earlier this year, the OCC responded to CSBS’s opposition to the agency’s alleged impending approval of an SPNB for a financial services provider (proposed bank), in which CSBS argued that the OCC was exceeding its chartering authority (covered by InfoBytes here). The OCC countered that the same fatal flaws that pervaded CSBS’s prior challenges, i.e., that its challenge is unripe and CSBS lacks standing, still remain (covered by InfoBytes here). Moreover, the agency argued, among other things, that the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB (the proposed bank that has applied for the charter would conduct a full range of services, including deposit taking), but that even it if was an application for an SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe.
According to CSBS’s unopposed motion to stay litigation, a “90-day stay would conserve the [p]arties’ and the [c]ourt’s resources by avoiding potentially unnecessary briefing and oral argument.” Further, in referring to acting Comptroller Michael Hsu’s testimony to the U.S. House of Representatives—in which he stated that “the OCC is currently reviewing various regulatory standards and pending actions, including the OCC’s framework for chartering national banks”—CSBS noted that the OCC has represented that it anticipates this review period will take approximately 90 days and that it does not intend to take any action towards granting a charter to the proposed bank during this period. Following the conclusion of the 90-day stay, the parties agreed to confer and submit to the court a joint status report on or before September 27 “addressing the status of the OCC’s plans with respect to processing applications for uninsured national bank charters, including the [proposed bank’s] charter application, and the [p]arties’ proposed schedule for proceeding with or resolving the present case.”
Waters establishes Digital Assets Working Group
On June 16, Chairwoman of the House Financial Services Committee Maxine Waters (D-CA) announced the organization of the “Digital Assets Working Group of Democratic Members” to develop “legislation and policy solutions” on issues emerging in the digital asset space, including those related to (i) the regulation of cryptocurrency; (ii) the use of blockchain and distributed ledger technology; and (iii) the potential development of a U.S. central bank digital currency (see InfoBytes coverage on matters related to a CBDC here). During the first hearing held by the Task Force on Financial Technology, Waters stated that the working group will “focus on making sure there is responsible innovation in the cryptocurrency and digital asset space,” noting that “[a]s cryptocurrencies, central bank digital currencies and other digital assets enter the mainstream, the Committee will look at how digital assets have begun to enter many aspects of our lives—from payments to investments to remittances—and consider how to devise legislation to support responsible innovation that protects consumers and investors while promoting greater financial inclusion.”