FinTech Law TL;DR (May 15)

True Lender, Durbin, and Mutual Funds, Oh My!

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Reggie @ReggieCYoung

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This week’s top updates:

1. The Senate voted to repeal the OCC’s true lender rule.

2. The Fed has proposed clarifications to the Durbin Amendment.

3. The SEC put out a fun warning to mutual funds looking at Bitcoin.

True Lender Repeal Passes Senate

We talked about true lender in detail two weeks ago. Well, this week, the Senate voted to unwind the OCC’s true lender rule.

I’ve seen a lot of misguided commentary on the implications, so let’s spend a little more space than I normally would…

Why it’s not the end of the world:

• Common Law: True lender is a doctrine that comes from court cases. Not OCC rules. The OCC’s rule created a sort of “safe harbor” of sorts. Now that safe harbor is gone. But the case law is still there.

• Valid When Made: There’s a second case law doctrine (Valid When Made) that FinTechs can also rely on.

• It Didn’t Even Apply to Everyone: The OCC regulates nationally-chartered banks, so its rule didn’t apply to state-chartered banks.

• It Was Controversial: It’s not clear the OCC had authority to pass the rule. States were actively suing over it, and the FDIC¹ (which regulates state banks) didn’t think it had authority to issue a similar rule.

Why it’s not great:

• Trend: It’s a continuation of the increased scrutiny that FinTechs are already seeing under a Biden administration.

• Locked-in: For administrative reasons, the OCC can’t pass a substantially similar rule, even if it were tweaked to allay legislators’ concerns.

• Madden: Madden v. Midland Funding, a 2015 case, introduced similar uncertainty on the Valid When Made doctrine (the second doctrine mentioned above).

• Hurting Low-Income Folks: Madden created a natural experiment for comparing lending before and after bank partnership uncertainty happened:²

  • It turns out that Madden led to a 64% decrease in lending to low-income households, with little change for high-income households.

  • Banks don’t charge lower rates; they just stop offering credit to applicants they see as higher risk. 

Dems see the repeal as a way to attack payday lending, but it’s not that simple. If you want detail on the nuances in payday lending policy, I highly recommend Mehrsa Baradaran’s book How the Other Half Banks.³

Fed Proposes Durbin Changes

Quick background:

• Banks charge merchants an “interchange fee” for processing debit transactions.

• FinTech folks mostly know the Durbin Amendment because it capped the interchange fee banks with >$10B in assets can charge.

• But the amendment also requires that merchants have a choice or at least 2 unaffiliated debit networks for routing their debits transactions. The idea is to promote competition that leads to efficient pricing.

Now, the Fed has proposed rules that clarify the “choice of 2+ unaffiliated networks” applies to card-not-present (CNP) transactions (aka, online, over the phone, and mail-order purchases…where the card is not physically present).

Apparently, not all issuers have given merchants this option for CNP transactions, and the timing is likely driven by the surge of CNP purchases during COVID, when everyone was buying online.

If you want more nuance, Brandi Gregory wrote a great breakdown, suggesting this change would mostly affect card issuers that use Interlink (Mastercard) and Maestro (Visa) as one of their two debit network options.

SEC Warns Mutual Funds About Bitcoin

The SEC’s Investment Management Division warned mutual funds that the agency will scrutinize mutual funds that hold Bitcoin.

It looks like the agency sees BTC-holding mutual funds as a way to learn about the crypto, and they’ll come knocking to ask about things like:

• How the fund will meet liquidity needs

• BTC valuation methods

• How the fund will handle market disruptions

• If holding BTC aligns with the fund’s investment strategy

As Matt Levine points out, this continues a theme of Biden’s SEC regulating in its early days through the use of warnings rather than writing new rules. 

Practically, this release (1) may make some mutual funds think twice about holding crypto and (2) could be a hint that a BTC ETF may not be approved this year, based on the release’s scrutinizing tone.

Elsewhere…

• JPMorgan, Wells Fargo, Bancorp and other big banks will share customer deposit data as part of a government-backed plan to expand credit access to folks who don’t have credit scores. And data aggregators like Plaid may be added later, to facilitate using rent and utility bill payments.

• Colonial Pipeline paid hackers around $5M in ransom. Reminder: last year, OFAC⁴ issued guidance saying you shouldn’t pay ransom to hackers, and you can face civil penalties if you do. 

• Binance is under investigation by the DOJ and IRS.

• Plaid and US Bank have entered a partnership to integrate their tech.

• Following Chime’s settlement with CA over how the company referred to itself as a bank, Chime entered another settlement with Illinois over the same issue.

• The Fed is working on a central bank digital currency white paper with MIT.

• Brain Armstrong (Coinbase CEO) spent most of this week talking to members of Congress and heads of federal agencies about how crypto regulation can be fixed and improved.

• The market cap of crypto crossed USD in circulation.

Sui Generis (Fun Finds)

In April, Apple rolled out its newest iOS 14.5 update. And it’s a beautiful example of a behavioral psych nudge.

For an app to track your behavior for ad-targeting purposes, you now have to affirmatively opt in. Previously, you were defaulted in, but could opt out.

This “out opt” to “opt in” default change has had a big impact: only ~4% of U.S. users have opted in. Previously, around 70% of iOS users shared this data. 

I think it’s safe to say Zuckerberg isn’t a fan of this change.

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About

Hi. I’m Reggie. I’m a lawyer at BlueVine. Come say hi.

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.

1. The FDIC regulates state banks. If you wanted the OCC’s true lender rule to apply to everyone, you needed the FDIC to issue a similar rule so that both national and state banks were covered.

2. For the curious, Madden was a Second Circuit case, which covers Connecticut, New York, and Vermont. So the natural experiment research looks at those jurisdictions.

3. TL;DR: payday lending users are financially savvy; they just don’t have other options. It’s also worth noting that Baradaran leans left; she was rumored for a while to be a potential Biden nominee for head of the OCC.

4. OFAC handles economic and trade sanctions to combat, e.g., terrorists and other criminals.