FinTech Law TL;DR (April 5)
EWA Deep Dive - Repeat Offenders - FDIC's Climate Principles
Hi all 👋
I spent last week working IRL at Lithic’s NYC office and had a blast! I forgot how energizing it can be to riff on ideas in person… including all the office buzz when we announced the launch of Auth Rules last week.
Also, Argyle is looking for a head of legal. If you’re interested, let me know and I’ll put you in touch.
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EWA Deep Dive
After CA’s recent Earned Wage Access (EWA) opinions, I had an excuse to chat with Ben LaRocco, the head of policy at Earnin, one of the bigger US EWA providers.
I’m personally pretty interested in how EWA companies are regulated because our existing regs weren’t written with EWA in mind. Plus, we work with EWA providers at Lithic, and I’ve talked with several subscribers that are as interested in it as I am.
Ben was kind enough to do a deep dive for us on the current state of EWA regs and where he and other EWAs would like to see the regs go. Without further ado, here are Ben’s thoughts:
After several years of twists and turns through the courts and the Trump Administration, the CFPB Payday Loan Rule is finally set to take effect June 13. The rule generally adds more guardrails on payday lending. But it’s relevant for EWA companies because it contained a specific exemption for both employer integrated (B2B) and direct to consumer (D2C) companies who are non-recourse (no collections, no credit reporting, etc.). It also is one of the few times that anyone has formally weighed in on the voluntary tip model that many EWA companies (Earnin included) use to generate a portion of their revenue, calling it “likely to benefit consumers.”
President Biden’s budget recommends clarifying the tax treatment of on-demand pay (p. 106). The proposal recommends Congress clarify when wages are in “constructive receipt” by an employee, when a pay period is, etc. as this means less in a world where employees can choose when to be paid, rather than relying on their employer's pay cycle. It also explicitly calls for EWA to be exempt from being loans for tax purposes.
California DFPI made EWA news on two fronts in the last couple of months. First, in late 2021 they released rulemaking under the California Consumer Financial Protection Law (CCFPL) (not to be confused with CDDTL or CFL) requiring EWA providers, among others, to register with the state. Of note, CCFPL states that anyone licensed by the DFPI under another law (such as CFL) doesn’t have to register under the CCFPL.
DFPI also released an advisory opinion for Flexwage, an integrated provider, that stated that they are not subject to the CFL. There is much to decipher in this opinion, but it is hard to make too many broad conclusions because Flexwage has a different business model than most EWA providers. Most EWA providers advance their own funds to workers, then get paid back on payday. Flexwage works with employers to pay employer funds to employees, with Flexwage as the facilitator.
Earnin has been working with a number of stakeholders on a model bill for states that would like to regulate EWA. We based the bill on the Payday Rule from the CFPB and CA DFPI rulemaking, so that EWA providers do not face an overly onerous multi-state regulatory patchwork. If you want to offer a compliant EWA product, the bill requires:
The product must be non-recourse
The product can’t have mandatory fees, such as interest payments
The EWA provider must register and share data with state financial regulators.
If you have any questions on the effort, or would like to provide input on this legislation, please reach out.
Wisconsin was the first state where the bill was introduced, but it did not see any action before the legislature adjourned for the year.
New York was the second state where the bill was introduced (thank you @SenatorCooney!). A second bill focused on the employer integrated model was also introduced. Unfortunately that bill would essentially ban D2C companies from operating in New York. After asking around about it, we were told it was supported by another EWA company hoping to increase their market share.
Finally, after narrowly failing to pass the legislature last session, a bill that regulates employer integrated only EWA was re-introduced in New Jersey for the 2022-2023 session.
No legislation introduced in any other state has seen any further action.
Thanks so much to Reggie for allowing me to share a little more information on the EWA legislative and regulatory landscape. I’m based in Washington, DC, if you are working on FinTech policy, and want to chat, please reach out! Ben.LaRocco@earnin.com or on LinkedIn here.
Rohit Chopra, the director of the CFPB, gave a speech targeting offenders who repeatedly violate consumer financial services laws. Some highlights:
The CFPB plans to establish units focused on supervision and enforcement of repeat offenders.
Chopra referenced the CFPB’s authority to limit a business’s or someone’s activities by, e.g., capping their assets, restricting product lines, terminating a business, revoking government-granted privileges like FDIC insurance.
Chopra also indicated that regulators should consider imposing more penalties on individual officers and directors where they played a role in repeat offenses.
This all brings us back to a common theme over the past year: whether the CFPB actually has these powers may not be as straightforward as Chopra implies. But it won’t stop the agency from trying. TBD if it’ll hold up.
PAVEing the Way
This one’s more relevant for real estate fintech folks, so feel free to skip ahead if that’s not you.
One of the ways racial discrimination happens is via home appraisals. In 2021, 12.5% of home purchases in majority-Black neighborhoods and 15.4% of majority-Latino neighborhoods had undervalued appraisals, per Freddie Mac.
Undervalued home appraisals have several knock-on effects:
Lower return when homeowners sell.
Less accumulated equity that homeowners can turn to for a cushion in hard times.
Less collected property taxes for community purposes like schools, libraries, parks, etc.
In mid-2021, President Biden launched a task force of 13 agencies targeting discriminatory home appraisals, known as PAVE (Property Appraisal and Valuation Equity). And they just released their first action plan.
The agencies will come up with ways to monitor appraisal proceses for discrimination based on protected attributes (e.g., race, religion, gender, sexual orientation, and others).
The report calls for increased oversight of the Appraisal Foundation, which is a non-profit that sets standards and fees for the industry.
The report calls for reforming the process to become an appraiser. Per the American Banker, nearly 98% of appraisers are white and almost 70% are male, making it “one of the least diverse professions in the country.”
The CFPB released a post celebrating the report. Of note: the agency said it’ll use supervisory exams of banks and their service providers, as well as enforcement actions, to combat appraisal discrimination. So if you work in the real estate FinTech space and deal with appraisals, take note.
FDIC Climate Principles
The FDIC released draft principles for banks with >$100B in assets to deal with the “effects of climate change and the transition to a low carbon economy” that create risks for banks.
Governance: A bank’s board and management need an understanding of climate-related risks.
Examples: allocating specific resources and responsibilities for climate-risk, and understanding ways climate risk could evolve over time horizons that may “extend beyond the [bank’s] typical strategic planning horizon.”
Policies, Procedures, and Limits: Banks need to incorporate climate risks into policies, procedures, and limits.
Strategic Planning: Climate risk should be incorporated into overall business strategy, risk appetite, and financial plans, capital reserves, and operations.
Banks should consider how climate change will impact geographic locations and disadvantaged groups.
Banks should ensure that any public statements about an institution’s climate-related strategy are consistent with internal strategies and risk appetite.
Risk Management: Banks should have processes to identify, measure, monitor, and control climate-related risks.
The proposal says banks should use “tools and approaches” for measuring and monitoring exposure to climate risks, including “exposure analysis, heat maps, climate risk dashboards and scenario analysis.” This could potentially lead to interesting opportunities for tech companies who want to build Watershed-like products for banking risk management.
Data, Risk Measurement, and Reporting: Banks should incorporate climate-related financial risk into their internal reporting, monitoring, and escalation processes.
Scenario Analysis: Banks should run scenario analyses to assess potential impacts of climate-related changes to, e.g., the bank’s strategy and business model, physical and carbon transition risks, and associated costs and losses.
Martin Gruenberg, the acting director of the FDIC, released a statement noting that the release is focused on big banks to alleviate the costs on small ones…but his statement suggests these principles may trickle down in due time.
For FinTechs that partner with banks, some of these principles may spill over (especially if/once the principles get extended to small- and medium-sized banks). E.g., bank partners may start asking more about a FinTech’s climate-related risks.
The FTC is suing TurboTax over its ads that claim the product is “free” when it wasn’t for millions of consumers.
The CFPB released a report on credit card late fees that strongly suggests the agency is going to put downward pressure on the fees, particularly in the subprime and private label card markets.
The SEC released its 2022 exam priorities (aka, what is the SEC going to be looking into the most?). Some highlights: accurate ESG disclosures, broker-dealer and fund manager advice to retail investors, IT security, and funds using new tech (like algorithms) or investing in crypto.
The OCC is overhauling its supervision of community and mid-sized banks, including a designated deputy controller who will oversee “novel banks and technology service providers,” per the American Banker. The changes will put more emphasis on supervising fintech and crypto.
Utah became the fourth state to enact a law requiring standardized disclosures for commercial financings.
The CFPB released guidance on how certain practices (contracts that forbid posting honest reviews, generating fake reviews, and manipulating or suppressing reviews) violate consumer financial services laws.
Per American Banker, a TransUnion South Africa server with millions of personal records was hacked…hackers claim the company used the password “password.” 🤦
The SEC proposed rules to close SPAC loopholes by, among other things, getting rid of the SPAC safe harbor for forward-looking statements, and expanding who can be liable for misleading disclosures.
Michael Hsu, the head of the OCC, published an op ed in American Banker about bank overdraft fees. He described the recent trend of banks removing fees as “just the start,” and wrote “[b]anks that hesitate to adopt pro-consumer overdraft programs will soon be negative outliers.” The implication of that statement is up for debate, but could mean banks that don’t get rid of overdraft fees might face more aggressive supervision.
Per American Banker, the CFPB has been sending questionnaires to banks recently that seem to focus on fair lending issues (e.g., asking how customers with limited English proficiency are handled, and whether same-sex and opposite-sex couples are asked different questions about their income).
Seven states are scrutinizing Voyager over whether its crypto interest-bearing accounts are unregistered securities, per CoinDesk.
The SEC proposed rules that would make DeFi exchanges securities “dealers.” Dealers must register with the SEC, something that may not be possible for DeFi exchanges since there are no central actors.
The Fed launched a resource center for service providers that want to connect to FedNow, listing over 70 service providers that help banks connect with FedNow. One of them is a crypto company (Cypherium) that offers “interoperability” among FedNow and crypto.
Four House Democrats introduced the ECASH Act, which would direct Treasury to issue a central bank digital currency (though not blockchain based), per Coindesk.
The DOJ charged two people in connection with an NFT money laundering “rug pull.”
The White House is seeking public input on crypto’s energy and climate impacts.
The American Bankers Association granted Kraken a routing number, bringing it one step closer to potentially accessing a Federal Reserve Master Account, per Coindesk.
Sui Generis (Fun Finds)
Hi. I’m Reggie. I’m a FinTech product lawyer at Lithic
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Any views expressed are my own (well, sort of? I mean, they’re based on laws and regulations, so they’re not really “mine”?). Nothing here is legal or financial advice.