FinTech Law TL;DR (Feb 7)
Fee Scrutiny - True Lender - SEC DeFi Proposal
Hi all 👋
First, I joined David Ikenna (of Ponto and If:Then) on his podcast to talk about making this newsletter, in-house life, and probably my best idea yet for a movie script. You can listen on Spotify or Apple Podcasts.
Second, I also recently talked with Liz from Parity AI and they’re building an AI-driven platform to help lenders assess whether their models are fair lending compliant. They’re looking for feedback from legal, risk, and data science folks in consumer lending. Let me know if you’re interested in giving Parity AI feedback; it’s a super interesting product IMO and they’re a delight to chat with.
CFPB’s Eyes on Fees
The CFPB announced an initiative targeting banks and other companies over what it calls “junk fees.” Let’s break it down:
It’s aimed at banks and financial companies that charge unexpected, excessive, or inexplicable fees that can hide the true cost of a product/service, as well as exaggerated fees (beyond what the additional service realistically costs). Think: hidden fees that mean a lender takes home more than the advertised interest rate.
The CFPB’s highlighted two areas: (1) major credit card companies charging late fees, and (2) bank overdraft and non-sufficient funds (NSF) fees.
But they’re casting a broader net. The head of the CFPB, Rohit Chopra, mentioned home buying closing fees, hotel “service” fees that show up only when you try to check out, and concert venue fees. I also expect the FinTech “tipping” practice will be put under the microscope, especially where it’s a default that’s hard to change.
Chopra said he wants to, among other things, “learn what market entrants are doing to be more upfront and honest with prospective customers.” To me, this gives strong “FinTech disrupted overdraft/NSF fees and we want to learn from them” vibes.
But, to me, the most interesting part is who the release covers:
Yes, it names traditional financial institutions (e.g., banks, credit unions, lenders, payment processors).
BUT. Hotel service fees and concert venue fees tell me they’re looking beyond traditional finance players.
FinTech folks often talk about how “every company will become a FinTech company.” Sure, yes, that means Walmart’s One. But also AirBnB, Lyft, and others that bring payments or other financial aspects in-house to, e.g., get more revenue from interchange.
The lesson here is: if every company is becoming a FinTech company, they’ll also be regulated like one. I bet AirBnb’s lawyers didn’t think they’d end up under CFPB scrutiny in the company’s early days.
Mainly I’m just looking forward to actually knowing the price of an AirBnB listing.
True Lender Case
So, if you’re reading this newsletter, you probably already know that many FinTechs partner with banks because…well, they have to for regulatory reasons.
There’s some scrutiny over those partnerships in the context of deposits (see, e.g., Beam’s blow up). But mostly the attention is focused on lending partnerships, and that’s primarily driven by payday lenders who rely on banks to preempt other states’ interest rate caps.
(To be clear, there are plenty of non-payday lenders that partner with banks for (what a reasonable person would consider) non-predatory lending. But the payday ones make policymakers want to undo the arrangement.)
The interesting news here is that, about a month ago, CA’s financial regulator entered a consent order with Wheels Financial, a title loan provider (aka, a loan secured by your car). Title loans are often perceived similarly to payday lenders; Wheels charged >90% APR.
The order mainly says Wheels won’t make new consumer loans in CA that exceed the state interest rate cap (including where they’re partnering with a state bank).
Why is this interesting? Obviously, attacks on the FinTech-bank partner model aren’t something FinTech lenders are going to be happy about. But this order supports the reality, IMO, that attacks on the bank partner model are going to be limited because they’ll come from the states. The federal government isn’t going to blanket-ban loans >36% at the national level any time soon (despite attempts).
Plaid Settlement
Plaid agreed to settle a class action lawsuit that alleged it violated privacy laws by collecting more data than necessary from users. They didn’t admit any wrongdoing, but the settlement includes paying $58M, disclosing more info about what it collects, and providing a portal for users to manage their data.
If you used Plaid anytime between 2013 and today, you may be eligible. But, uhh, based on the estimated number of potential plaintiffs, each would get 44 cents.
Art & Money Laundering
The Department of Treasury released a study on “illicit finance” in the high-end art market. There are some curious bits:
The study found evidence of money laundering in high-value art, but “limited evidence” of terrorist financing.
For context, “money laundering” regulatory concerns actually have two main buckets of requirements, money laundering and terrorist financing, though folks generally use “money laundering” to refer to both.
The release cites “the increasing use of high-value art as an investment class.” See, e.g., Masterworks or Rally.
The study also cites the “emerging digital art market, such as the use of non-fungible tokens” as an increasing risk.
Treasury will be reconsidering how to close some of these gaps, so it’s something FinTechs in the alternative investment space should watch.
SEC Rule Covers DeFi
Generally, if you want to be a platform that facilitates trading securities, you need to register as a “national securities exchange” with the SEC.
There’s a “lighter” version, though, that’s called an “alternative trading system” or “ATS.” But you still need to register with the SEC and jump through hoops. Fewer than a national securities exchange. But still some.
Well, the SEC proposed new rules that cover, among other things, who counts as an ATS. And they added some cute language: “communications protocol systems” are covered.1
Most, myself included, read this to mean decentralized finance exchanges.
Aka, the SEC just proposed rules that would explicitly put DeFi exchanges under SEC purview.2
DeFi’s image, of course, is “we’re outside of traditional finance,” so being forced to register with the SEC is, uhh, not exactly aligned with their mission.
But if a DeFi exchange is practically decentralized, then SEC requirements are…kind of moot. That is, the SEC won’t be able to shut down DeFi exchanges if they’re actually decentralized. BUT they could go after the exchange creators or other identifiable individuals.
The SEC gave an inexplicably short amount of time for input; 30 days for 650 pages of new rules. So if your Twitter feed isn’t already filled with efforts to flag this, it will be.
Elsewhere:
🏦 The Congressional Research Service (CRS) recently published a great paper on various bank charter options and policy issues. If you’re looking for a well-written, not-too-legalese primer on the nuts of bolts of bank charters, ILCs, and trusts, I highly recommend it.
📝 The CFPB released a report on the financial difficulties faced by folks who go through the criminal justice system, calling out excessive fees, lack of consumer choice, and government’s shifting the cost of incarceration to the incarcerated and their families.
⚖️ The FTC is returning more than $3.7M to Avant users after the lender falsely claimed it accepted credit/debit cards, charged accounts and cards without authorization, failed to process check payments, provided deceptive quotes to customers, and tried to collect more money than quoted payoff amounts.
🧐 Experian plans to let consumers that don’t have credit reports their own credit by adding info that might not usually be included (e.g., recurring bills).
🔨 The CFPB released its annual updated list of consumer reporting companies, and encouraged consumers to file lawsuits. This follows the Bureau’s recent report that the big three credit bureaus fail to respond to complaints, and their post encouraging consumers to hold credit reporting co’s accountable.
📝 The CFPB released its semi-annual agenda. It’s mostly what we already know about (e.g., open banking rules).
🌍 Here’s a great Politico piece on how federal financial regulators are diving headfirst into climate change-related requirements, and what obstacles they face.
⚖️ The Fourth Circuit Court of Appeals held that mortgage servicers can’t charge fees for users making online payments.
🎉 The FDIC is collaborating with Operation HOPE to promote financial literacy for minority- and women-owned businesses, using the FDIC’s Smart Money resources.
📝 The CFPB released a report on diversity and inclusion resources that financial institutions provide. Spoiler alert: payday lenders provide the least, while banks provide the most.
Elsewhere (crypto):
🧐 The SEC is scrutinizing Celsius, Voyager, and Gemini over whether their products (high interest bearing accounts) are securities.
📝 Treasury released its semiannual agenda, including (1) a proposal to clarify that “money” under the Bank Secrecy Act includes crypto with legal tender status and (2) potential re-introduction of KYC requirements for unhosted wallets.
🧐 The IRS tried to refund a couple for taxes they paid on staking rewards, but the couple rejected the offer. They want to push for a court ruling so the taxation of staking rewards isn’t left in limbo for everyone.
📝 The Fed released a stablecoin research paper, examining use cases and banking system impact. “Our research suggests the broad adoption of . . . stablecoins can potentially be supported within a two-tiered, fractional reserve banking system.”
🧐 Alexis Goldstein, a crypto-skeptic, is joining the CFPB and will work on crypto issues.
📝 The Fed and MIT released a white paper of their initial CBDC research, mostly focused on technological aspects.
💪 A bill introduced last week (America Competes Act) would have included provisions that would give Treasury powers to surveil, condition, or prohibit certain concerning transactions, including crypto. But crypto lobbyists effectively got it removed.
🤷 The SEC approved a new exchange, BSTX, that plans to use a market data feed operating on a private blockchain. Seems more of a “crypto-for-marketing” purposes play to me, but 🤷. They originally wanted to offer exclusively tokenized securities but the SEC wouldn’t let them. Interestingly, they’ll offer T0 settlement option.
💰 DeFi is increasingly being used for money laundering, per a Chainalysis report. It’s estimated to have grown 30% in 20201, though it’s estimated to be around 0.5% of crypto transaction volume.
👏 Gemini was approved for FINRA membership so it can operate as a broker-dealer that offers digital asset securities trading.
💸 The IMF is urging El Salvador to abandon BTC as legal tender.
Sui Generis (Fun Finds)
Legos are better investments than gold (duh).
About
Hi. I’m Reggie. I’m a lawyer at Lithic (we’re hiring!). If you’re interested in issuing cards to send $, spend $, sponsor your own card program, or anything else, get in touch (fintechtldr@gmail.com).
Also, if you want to chat FinTech, are raising pre-seed rounds, or are on the FinTech job hunt, come say hi on Twitter or send me an email (fintechtldr@gmail.com).
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.
The release describes a communication protocol systems as “a system that offers protocols and the use of non-firm trading interesting to bring together buyers and sellers of securities.”
Technically, the exchanges would need to offer securities. But a lot of what’s available on DeFi would likely be considered securities by the current SEC.