FinTech Law TL;DR (Oct 17)
Reg CF Action -- CA Lending Data -- FCRA Suit -- PPP Study
Hi all 👋
Before we dive in, the legal and compliance teams at BlueVine are growing, growing, growing — come work with me! We’re looking for a corporate director, product marketing counsel, BSA manager, and senior banking compliance manager (all based out of Redwood City or Jersey City).
First Crowdfunding Action
One sign of a more aggressive SEC is recent charges against two cannabis/hemp companies, their owners, and the crowdfunding platform they used.
The TL;DR is:
The founders hid one of their criminal convictions from investors and diverted raised funds for personal use. So they’re getting hit with fraud charges.
But the crowdfunding platform itself is getting hit, too, for failing to address red flags (like the founder’s history) and otherwise failing to “reduce the risk of fraud.”
Here’s the fun bit: these are the first SEC charges under Regulation Crowdfunding, the law that created the crowdfunding regulatory framework.
Two thoughts:
These actions are another sign Gensler’s SEC is willing to wade into new territory where the agency historically hasn’t, even if they’ve had authority.
Crowdfunding portals should now be on notice that the SEC may increasingly scrutinize them.
CA Lending Report
California’s financial regulator released a report on 2020 lending trends. Some highlights:
Total consumer loans decreased 41% from 2019 to 2020, not counting BNPL products.
The top six BNPL lenders accounted for 91% of total consumer loans originated in 2020.1
The number of online consumer loans increased almost 1,600%.
The number of online commercial loans increased 23% from 2019 to 2020, but total commercial loans decreased 22%.
FCRA & Section 230
Ok we’re going to geek out for a second on two laws:
The Fair Credit Reporting Act: This law regulates consumer reports (e.g., Experian). Part of it says if you provide consumer reports to others, you have “procedural obligations” like investigating and correcting consumer report data that’s inaccurate.2
Section 230 (of the Communications Decency Act): This is the “backbone of the internet” law that says platforms/publishers that host third-party content (like Twitter) aren’t liable for the content (with some exceptions).
Well, there’s an interesting 4th Circuit appeal brewing on a class action right now:
PublicData.com is a site that compiles public records from local, state, and federal agencies.
PublicData is being sued on the grounds it’s a consumer reporting agency that doesn’t comply with the “procedural obligations” of FCRA (see footnote for case details↗️3).
But a lower court sided with the view PublicData is a publisher of third-party information on the internet and protected under Section 230.
This is the kind of situation law school exams are made.
The CFPB and FTC filed “amicus briefs” (aka, “hey judge, we’re not part of this case but here’s how you should rule”). They argue:
PublicData doesn’t just publish third party info like Twitter would; it does something to that info by creating reports.
Even if PublicData is protected by Section 230, that doesn’t make it immune under other laws.
IMO, the CFPB/FTC view should probably win, otherwise the “Section 230” argument creates a gaping hole in FCRA.
PPP Bias Study
Sabrina Howell from NYU released a working paper on PPP showing it was harder for Black-owned small businesses to get PPP loans from smaller banks than from larger banks or FinTechs.
The study largely attributes this difference to the automated loan processing that was used more by FinTechs and big banks.
Aka, it’s an instance where automation helped fight bias rather than cause it. It’s an interesting instance where “AI” (used very loosely) led to better outcomes.
Howell is excellent at framing the issue:
“The human brain is a much scarier black box than any machine-learning algorithm,” [Howell] said. “You can constrain an algorithm to meet fair-lending standards, and you can ensure the data it trains on isn’t biased. That may be hard to do, but it’s a clear and objective possibility. Whereas when you have a human loan officer who is in front of someone and making a decision, you can never do that.”
Elsewhere (TradFi)...
📝 The OCC released its 2020 supervision plan, outlining its top 11 priorities. FinTech, crypto, and bank partner oversight got specific mentions.
🕵️ FINRA is investigating SPACs and issued broad requests for info from FINRA members.
🤓 The Fed is seeking public input on using ISO 20022 for Fedwire.
📝 The CFPB issued Reg F debt collection FAQs.
🏦 Oportun pulled its OCC bank charter, but plans to resubmit it. This follows Monzo’s withdrawal after it was told its app likely wouldn’t be approved.
😡 Banks are unhappy with Apple Pay’s fees and want Visa to change how it processes certain Apple Pay transactions to cut banks’ fees.
🌎 Treasury released its Climate Action Plan to “bolster adaptation and increase resilience” of Treasury’s facilities and operations in light of climate change.
🕵️ The Department of Ed will re-establish an Office of Enforcement.
⛔ A new CA law prevents nonbanks from charging overdraft fees on certain accounts if public assistance funds are deposited there. For the regulatory dorks: the law is meant to target payday lenders who tried to get around the Prepaid Rule by shifting funds from prepaid “cards” to bank accounts.
🏦 CA’s governor signed a law into effect that requires the state to study creating a public banking option, the “CalAccount Program.”
📫 The US Post Office quietly launched a banking pilot program that allows customers to buy gift cards up to $500 using payroll or business checks for $5.95.
🤓 Plaid released its annual consumer FinTech report for 2021.
Elsewhere (crypto)...
📝 Coinbase released its crypto regulatory proposal: (1) a new, sole crypto regulator, (2) industry-specific rules, (3) crypto-specific fraud and disclosure requirements, and (4) promote interoperability.
₿ The SEC approved (well, technically they “didn’t object”) to a ProShares Bitcoin ETF, which launches Monday.
🕵️ The DOJ is creating a crypto enforcement unit, with a focus on exchanges, mixing and tumbling services, and money laundering.
🤔 The FDIC is having preliminary discussions about whether stablecoins may be eligible for FDIC insurance.
⚖️ The CFTC recently filed 14 complaints against crypto platforms on the grounds they offered crypto options trading without being registered as Futures Commission Merchants.
⚖️ Tether will pay $41M to settle CFTC charges it mislead users by claiming USDT was 100% backed by fiat assets.
⚖️ Bitfinix will pay a $1.5M to settle CFTC charges that it operated as an unregistered futures commission merchant. This follows a Kraken settlement a few weeks ago over the same issue.
🤔 Circle disclosed the SEC subpoenaed the company in July 2021 over its holdings, customer programs, and operations. The disclosure is scant on details, but my best guess is the SEC’s investigating Circle’s high interest-yielding product as an unregistered security offering.
Sui Generis (Fun Finds)
Tired of all the paper junkmail you get and the waste it creates?
About
Hi. I’m Reggie. I’m a lawyer at BlueVine.
If you want to connect, are raising pre-seed rounds, or are on the FinTech job hunt, come say hi on Twitter or send me an email at: 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.
Here are the foundational FinTech laws and regs if you want a closer look at anything.
Whether CRAs actually correct disputed info is, of course, a different story (fairy tale?).
PublicData reported inaccurate criminal history records about the plaintiffs. The plaintiffs representing the class asked for copies of those reports, and PublicData failed to provide them.