FinTech Law TL;DR (June 5)
Elon Has a GC Problem
Hi all 👋
I took last week off since I was busy as Acting Comptroller of the Daily Utah Picture Tweet. So this one covers two weeks and is longer than usual.
I’m looking to chat with folks in the InsurTech space, as well as in-house FinTech lawyers who may be interested in switching jobs. If you know any, let me know.
OCC FinTech Charter Hope (Sort Of)
Traditionally, bank charters are associated with a trio of activities: taking deposits, lending, and handling payments.
The OCC has proposed a FinTech charter that would enable FinTechs to lend and handle payments, but not take deposits.
NY’s financial regulator has been suing the OCC over the FinTech charter, claiming the OCC doesn’t have authority to offer it.
Well, this past week the 2nd Circuit Court of Appeals reversed an earlier decision by a lower court that said the OCC didn’t have authority.
Seems like good news for a FinTech charter, right?
Sort of.
The reason the appeals court reversed the ruling is because there’s no harm yet; no one has applied for one of these charters!
So state financial regulators will need to wait until the OCC actually approves a FinTech charter application. At that point, you can expect they’ll sue again.
But this is all against a backdrop of an OCC that is switching from FinTech-friendly to FinTech-skeptical. So it’s unlikely an OCC under Biden would approve a FinTech charter app, anyway.
Valid When Made OCC
We recently talked about the Senate’s vote to repeal the OCC’s true lender rule1 (that repeal still needs to pass in the House).
But in addition to “true lender,” there’s also the “valid when made” doctrine (VWM). VWM says a bank partner can rely on the interest rate laws that applied in the bank’s state if the loan was…well, valid when made.
Well, the OCC didn’t only issue a true lender rule last year. It also issued a rule that affirmed the VWM doctrine.
So if Congress is repealing the OCC’s true lender rule…they’d probably repeal the OCC’s VWM rule, right?
Well, it turns out Congress missed the window to repeal the OCC’s VWM rule.
Not only that, but this week, Acting Comptroller of the OCC Michael Hsu said the OCC itself has no plans to review the VWM rule.
The OCC regulates national banks, so its VWM rule only affects FinTechs that partner with national banks, not state ones. Regardless, Hsu’s comments are promising for the bank-FinTech partnership model at a time when it’s otherwise being attacked.
MSB Licensing Reform
Non-banks that do things like transmit money, cash checks, exchange currency, or perform other services related to money are in a legal category called “money service businesses” (MSBs).
MSBs must be licensed in most US states, and those licenses are currently all separate processes; you have to apply and keep up in every state!
The most common type of MSB is a “money transmitter,” which includes companies like MoneyGram and PayPal. It also covers crypto platforms like Coinbase that handle USD.
Sidenote: money transmitter licenses are why many crypto platforms (e.g., Celsius, BlockFi) don’t offer USD accounts/wallets.
Well, the CSBS2 recently asked for feedback on a new MSB licensing regime.
Under the new regime, it seems like you would run your application through a set of “core” requirements that cover most states, while also being able to add on state-specific info for states that require more than the “core” application.
TL;DR: it would streamline getting MSB licenses for payment FinTechs (including crypto platforms) that want to handle USD.
This is good news!
I often hear folks complain about how burdensome the MSB/money transmitter licensing system. So it’s due for a simplification, and this would make the process much less expensive.
CFPB Payment Processor Suit
The CFPB recently filed a UDAAP3 suit against a payment processing company, BrightSpeed Solutions, and its founder.
The CFPB claims the company knowingly processed payments for companies that offered technical support services, but actually deceived consumers into buying unnecessary software and services.
For example:
NACHA4 sets a threshold of 15% return rates as an indicator of legitimate business transactions. BrightSpeed allegedly had return rates 22-24%.
The CFPB claims the company ignored red flags of fraud, failed to monitor and suspend fraudulent clients, failed to vet its clients, and rarely investigated disputed transactions.
I find this one particularly interesting because (1) it puts payment processors on notice that the CFPB can hold processors liable for failing to catch bad actors on their payment systems and (2) its part of a starting trend where a CFPB under Biden will get more aggressive bringing UDAAP suits.
Elsewhere…
🏦 The Fed released proposed rules for governing transfers on its real-time payments service, FedNow. The service is set to be available in 2023 and is already being beta-tested ahead of schedule. For context, the UK released its real-time payment network in 2008.
📉 The House released a draft bill to eliminate the SPAC safe harbor that allows SPACs to disclose statements about future earnings (which issuers normally can’t do in traditional IPOs).
🏀 Dapper Labs (the creator of NBA Topshot) is being sued on the grounds Topshot NFTs are securities and were sold in an unregistered securities offering.
₿ The Federal Reserve Board plans to publish a paper and seek public input on Central Bank Digital Currency policy this summer.
🎉 A FINRA5 vice president mentioned that the organization will be seeking comments on regulating gamification practices soon.
🤔 The head of CA’s financial regulation, Manny Alvarez, department is unexpectedly stepping down after a short stint.
🏦 The Fed approved Adyen’s application to establish a branch in San Francisco.
Sui Generis
Elon Musk has a GC problem; OpenAI and SpaceX lost their GCs recently, and Tesla has gone through four GC departures in 4 years. Too many letters from the SEC, maybe?
In 2019, there were $1.5 trillion Reg D private offerings and $1.2 trillion public market offerings.
Research showed that the growth non-bank mortgage lenders was ~60% due to regulatory arbitrage and ~30% due to their “superior” tech.
Apparently, federal agencies have been buying data about Americans from data brokers as a way to sidestep needing the court order typically required by the Fourth Amendment. Senators have introduced a bill to close this loophole.
About
Hi. I’m Reggie. I’m a lawyer at BlueVine. Come say hi on Twitter or respond here if you want to chat.
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.
Here are the foundational FinTech laws and regs if you want a closer look at anything.
TL;DR: the true lender doctrine allows bank partners to rely on the interest rate laws of the bank’s state, because the bank is the “true lender.” E.g., you can rely on Utah’s interest rate cap (none) if you’re making a loan to someone in Idaho. Also, the bank holds ultimate liability for the partner’s actions.
The Conference of State Bank Supervisors (CSBS) is a nationwide org of state bank regulators. They’re pretty influential.
For background on UDAAPs, see this post.
NACHA = org that sets the rules governing ACH transfers.
FINRA regulates broker-dealers like Robinhood.