Fintech Law TL;DR (June 22)
Crypto Bill - BNPL CRA Reporting - Fintech Registration
Hi all 👋
First, we’ve put out some great Lithic content since the last edition…like a new podcast, Fintech Layer Cake, cohosted by Matt Janiga (Lithic’s GC and CCO) and me! Our first episode breaks down what fintech operators should know about building and scaling a compliance function at a startup.
Matt and I also hosted a webinar on how to use the Lithic Legal Library and tips on building compliant fintech products. If you couldn’t make it, you can find a recording here.
Lastly, a friend of mine, currently head of engineering at a fintech, is looking for their next great gig. If you know somewhere with great culture that’s hiring, let me know!
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Federal Crypto Bill
Senators Cynthia Lummis and Kristen Gillibrand released proposed legislation to create a comprehensive crypto regulatory framework. Some highlights:
The CFTC would have primary authority over crypto assets that aren’t securities, including “ancillary assets” that don’t create rights to profits or other financial interests. The SEC would oversee securities assets.
There are a few bits on stablecoins:
They could be issued by non-banks.
They would need to be 100% backed by liquid assets.
Issuers need to make mandatory disclosures.
Crypto transactions under $200 would be exempt from taxation.
Wallet providers and developers wouldn’t count as crypto brokers and, as a result, wouldn’t face tax reporting requirements.
It would initiate studies on the climate effects of mining, crypto in retirement accounts, and the potential creation of a crypto self-regulatory organization.
This is a CFTC-friendly proposal, and some of the related announcements directly assume most crypto is closer to a commodity (physical gold) than a security (stock in a gold mining company). But…I think lots of well-informed folks would disagree.
It’s a good starting point but it’s just that: a starting point. I wouldn’t hold your breath on the bill becoming law any time soon.
BNPL Meets Rock and Hard Place
CFPB Director Rohit Chopra previously suggested the credit reporting agencies (CRAs) were anticompetitive:
The firms appeared to have made an agreement to decide how they wanted to report medical debt. This raised a key question: are these three firms acting as competitors or as a cartel?
But now the agency is pushing those same CRAs to standardize BNPL credit furnishing. The Bureau is worried that when BNPL providers don’t report a customer’s payments or nonpayments to CRAs there are negative effects like (1) users can’t build credit if they pay on time and (2) creditors don’t get an accurate view of a consumer’s obligations. To be fair to the CFPB, Equifax, Experian, and TransUnion all announced plans to report BNPL data…and they all vary.
The CFPB laid out some of its hopes and expectations:
BNPL providers should furnish positive and negative data.
BNPL providers should adopt standardized codes and formats.
Consumer reporting agencies should incorporate BNPL data into the core credit files ASAP and ensure its reflected on consumer reports.
In sum: CRAs shouldn’t standardize reporting because it raises antitrust issues. But they need to standardize BNPL reporting or they risk creating problems for consumers and creditors.
Also: words matter. I tend to refer to BNPL companies as “BNPL providers” because, depending how they’re structured, the products may not legally count as loans. If they’re loans, that triggers a host of regulations that many BNPLs are trying to avoid.
The CFPB seems to have made up its mind, though:
Fintech Registration?
Back in April we talked about the CFPB announcing it was going to examine “nonbank financial companies that pose risks to consumers.” Aka, fintechs. This isn’t really new. That authority was just dormant.
The bureau has been notoriously aggressive under Director Rohit Chopra, and it published a blog post titled “Rethinking the approach to regulations” last week. The post generally outlines how the agency wants to (1) move from complicated to basic bright line rules and (2) increase the amount of guidance it puts out.
I’m generally skeptical.1
But, more importantly, it, uhh, sounds like the CFPB wants to make fintechs register with the agency?
Registration generally isn’t as robust as licensing. It’s a simpler process of notifying a regulator that you’re doing a thing in their jurisdiction. Still not great if you’re a fintech.
Upstart Stops Its NAL
Per Upstart’s request, the CFPB terminated the company’s no action letter. The company is known for being one of the few fintechs to actually get a no action letter from the Bureau over its use of education and employment history in underwriting.
The CFPB release focused on how Upstart wanted to add new variables to its underwriting model. But the order itself reads more like Upstart was trying to adapt its underwriting model to the current credit market volatility and the CFPB’s process would have been too slow. 🤷
Elsewhere:
The CFPB is facing heat over tactics in its suit against Fifth Third over allegedly opening phony customer accounts, per American Banker. The Bureau apparently sent Fifth Third customers an email asking for feedback for the lawsuit.
The CFPB asked the public for information on employer training programs that leave employees in debt. This follows the Bureau’s March blog post on the topic.
The Fed revoked master account access for Reserve Trust, the first fintech to get a master account at the Fed, per Banking Dive.
CA finalized its commercial disclosure regulations, which go into effect December 9, 2022.
Charles Schwab agreed to pay over $186M to settle SEC allegations it didn’t adequately disclose how its robo-advising service kept a share of customer assets in cash in a way that could hurt returns while Schwab lent the cash out, per WSJ.
A plaintiff kicked off a class action suit against OppFi based on claims the lender charged interest that exceeded state usury laws. This follows on-going claims between OppFi and CA’s financial regulator over the same issue.
The head of the SEC previewed coming proposals that have the potential to drastically change public market trading, including requiring brokerages to route individual orders to an auction instead of to wholesale trading firms (aka, ending payment for order flow).
Banks are facing class action lawsuits from users who say they don't do enough to prevent fraud over Zelle, per American Banker. The NYT also published a piece covering how banks are refusing to pay when customers say funds were stolen via Zelle.
Apple is offering BNPL services, but, to cover when the product would count as a loan, Apple will act as its own lender, per WSJ.
CFPB Deputy Director Zixta Martinez said the CFPB is scrutinizing bank partner lending arrangements in a recent speech.
The CFPB asked for public input on credit card companies’ penalty fees. They’re focusing on a 2010 Fed rule that gives companies immunity if set at a particular level. Since that rule was set, Congress transferred the relevant fee rule setting authority to the CFPB.
In the last edition, we talked about how the CFPB scrapped its sandbox and no action letter programs. The relevant press release implied that was the case, but the Bureau has since said it actually has not closed those programs, per Ballard Spahr.
Elsewhere (crypto):
Holland & Knight got a court order to serve notice of a court order to an Ethereum wallet via airdrop, the first time such an approach is used.
A crypto IRA provider is suing Gemini based on claims Gemini didn’t have sufficient safeguards in place to protect against the theft of $36M from the IRAs.
New York’s financial regulator published its first-ever stablecoin guidance.
The SEC is investigating whether Binance’s 2017 ICO of its Binance coin was an unregistered securities offering, per Bloomberg.
Avanti is suing the Federal Reserve for dragging its feet on Avanti’s application for a master account with the Fed, which has been pending for over 19 months, per Forbes. No crypto bank has a master account yet.
Coin Center is suing Treasury over the tax reporting requirement in last year’s infrastructure bill, per CoinDesk.
A class action suit against Binance.US (the subsidiary of Binance) accuses the exchange of misleading investors over Terra via advertising, and of operating as an unregistered broker-dealer or exchange.
Several states are investigating Celsius after the lending platform froze withdrawals, per CoinDesk.
The SEC is investigating whether crypto exchanges have sufficient insider trading protections, per CoinDesk.
Terraform Labs, its founder Do Kwon, and the company’s VC investors are being sued by investors over claims they were misled and that the tokens were securities, per CoinDesk.
Sui Generis (Fun Finds)
Ford is nicely trolling Tesla by including a Tesla adapter charger in its F-150 Lightning pickup.
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.
This could just be a euphemism for “we’re switching to bright line rules that are actually just vague standards that we can interpret however we want to maximize regulatory pain.”
Super-useful and insightful as usual. Why this website is free? LOL