KT Fintech Blog

The KT Fintech Blog provides insights into how the emergence of fintech is fundamentally changing virtually every aspect of the financial services landscape and how traditional businesses navigate this rapidly evolving industry.

Archive for September 2017

Posted on Tuesday, September 26 2017 at 9:00 am by -

Acting Comptroller of the Currency Discusses Marketplace Lending and Responsible Innovation

Written by Eamonn Moran

Acting Comptroller of the Currency Keith A. Noreika discussed online lending and responsible innovation at the 2017 Online Lending Policy Summit in Washington, D.C. on September 25, 2017. His remarks shared his perspective on the opportunities and challenges facing online lenders and efforts to promote economic opportunity.

With respect to the emergence of online lending, Mr. Noreika observed that he sees the growth of online lending and marketplace lenders as “the natural evolution of banking itself,” rather than a response to the nation’s banking industry not being sufficiently agile to fully meet lending needs. He noted that online lending a certain entrepreneurial spirit to seize economic opportunity that begins with a new idea (such as leveraging the lending power of groups, using new data to assess creditworthiness, finding a way to make decisions faster, or giving consumers more control of their financial lives), which in turn becomes a business through “[s]weat and talent” and product delivery.

In terms of the growth of marketplace lending, Mr. Noreika noted that over the last decade, “marketplace lenders have originated about $40 billion in consumer and small business loans in the U.S.,” and that “[o]nline lending has doubled every year since 2010.” There remains a difference of opinion within the analyst community in terms of how large this market will grow – some analysts suggest that the market will reach nearly $300 billion by 2020, and others suggest as much as $1 trillion by 2025 (which, according to Noreika, “would be a substantial piece of all outstanding unsecured consumer credit in the United States, which alone was $3.7 trillion at the end of 2016”).

While Noreika observed that overall delinquency rates in the country have declined “steadily since 2012, with minor increases in credit card, auto, and student lending delinquencies in the last year, and the consensus expects the economy to expand through 2018,” he cautioned that there has been an increase in consumer unsecured charge-offs for marketplace lenders since the fourth quarter of 2015. “It remains to be seen how online lending companies and loans originated using new models will perform under stress,” he commented.

Regarding “regulatory sandboxes” and bank pilots, Noreika stated that the OCC “generally supports agency participation in bank pilots as a useful way to gain valuable regulatory insight and to provide banks a better means of developing products and services in a controlled environment. However, any program we pursue will be voluntary for banks and cannot provide a safe harbor from many compliance requirements. We are still in the early stages of developing our approach and will share additional details as we make progress.”

In addition, he stated that the OCC remains undecided as to whether it will use a particular statutory authority to issue special purpose national bank (SPNB) charters to nondepository fintech companies engaged in the business of banking, but the agency will continue to defend its authority in any litigation challenging such.

Noreika remains “very optimistic about the power of innovation to improve banking, expand access, and deliver better products and services in more affordable and sustainable ways.” He credited the innovation as coming from both within the banking system itself, and from outside the system (including from marketplace lenders). As the marketplace lending industry continues to grow, Noreika noted that some companies would like to become a bank and many others are choosing to partner with banks, while others are pursuing different paths. “Whatever business model and long-term path you choose to achieve your business goals, the future is bright. You are changing how financial services are delivered, and in some ways, you are raising the bar for what consumers of financial services should expect. The market domestically and internationally has plenty of room to grow, and today in Washington there is real energy around reducing unnecessary regulatory burden and promoting economic opportunity. Those are good reasons to be optimistic,” he stated.

Posted on Monday, September 25 2017 at 9:00 am by -

CFPB Arbitration Agreements Rule Takes Effect Pending Legislative Showdown

Written by Maureen Sheehy

The Consumer Financial Protection Bureau (CFPB or Bureau)’s Arbitration Agreements Rule (“the Rule”) took effect on September 18, 2017. The Rule, which bans class action waivers in arbitration agreements in contracts for consumer financial products applies, to pre-dispute arbitration agreements entered into on or after March 19, 2018. On September 15, 2017, just prior to the rule taking effect, the CFPB issued a Small Entity Compliance Guide to assist companies to comply with the Rule. The guide includes a summary of the Rule and information to assist in implementation, including examples to illustrate components of the Rule and records required to be submitted to the CFPB. It also outlines who is and is not covered by the Rule, including those categories of entities exempted from coverage.

What You Need to Know Now

The Rule governs agreements that provide for arbitration of future disputes between consumers and providers of specified covered consumer financial products and services. It does three things:

  • prohibits “providers” (as defined in the Rule) from relying on pre-dispute arbitration agreements to block class actions concerning consumer financial products and services covered by the Rule;
  • requires providers to include specific language in pre-dispute arbitration agreements they enter into concerning covered consumer financial products and services stating that the agreement may not be used to block class actions and/or provide required notifications to consumers that are parties to these agreements; and
  • requires providers who use pre-dispute arbitration agreements to submit to the Bureau certain arbitration-related records. The Bureau will publish these records on its website in redacted form.

The Rule applies broadly to providers of most consumer financial products and services, meaning that they are offered or provided for use by consumers primarily for personal, family or household purposes. For a more detailed description of the scope and coverage of the Rule, please click here. If a covered provider offers or provides a broad range of products or services, only some of which are covered by the Rule, then the covered provider will need to comply with the Rule’s requirements only with respect to those products or services covered by the Rule.

Legislative Showdown Looms

Republicans are trying to repeal the Rule under the Congressional Review Act (CRA). The House voted 231-190 on July 25 to pass a measure repealing the Rule. Under the CRA, the Senate can repeal the Rule with a simple majority. But the Senate has to act within 60 legislative days of the Rule’s July 19 publication. No vote is yet scheduled in the Senate. In addition, there are indications that recent data breaches might impact congressional appetite to attempt to repeal the Rule.

Posted on Wednesday, September 20 2017 at 9:00 am by -

To Charter or Not to Charter: Initial Thoughts on Recent Fintech & Banking Developments

Written by Eamonn Moran

A topic of increasing interest in recent months and weeks has been whether and if fintech companies would seek to obtain a bank charter of some sort. The recent decisions by Social Finance Inc. (SoFi) and Square, Inc. to apply for industrial loan company (ILC) charters with the Federal Deposit Insurance Company (FDIC) have reignited the discussion and debate regarding what a “bank” should be for purposes of a bank charter. These applications also indicate that there is at least some interest within the fintech community for companies to seek a bank charter of some sort for lending purposes and to provide other types of credit and banking services without partnering with a traditional bank.

By way of background, industrial loan companies and industrial banks (collectively, ILCs) are not subject to the Bank Holding Company Act (BHCA). Rather, they are FDIC-supervised financial institutions whose distinct features include the fact that they can be owned by commercial firms that are not regulated by a federal banking agency. An ILC is a bank with FDIC deposit insurance operating under a specific charter whose controlling shareholder may be a nonfinancial corporation. Utah is home to the majority of the commercially owned ILCs. An ILC functions essentially like a commercial bank, can make all types of loans, and gather insured deposits. The main exception is that if an ILC has more than $100 million in assets, it may not accept demand deposits. However, this limitation is basically meaningless since ILCs with assets above this dollar threshold may offer NOW accounts, MMDAs, and time deposits (CDs).

Federal law has expressly permitted any type of company to control an ILC for many years, but the Federal Reserve and, more recently, the FDIC, expressed policy concerns with the control of insured banks by commercial firms. The FDIC implemented a moratorium on approvals for an ILC to be controlled by a non-financial firm in 2006-2008, and this policy continued de facto after it officially ended. As you may recall, in March 2007 WalMart withdrew its ILC application it made in July 2005, following the FDIC’s January 2007 decision to extend the moratorium on a number of pending ILC applications. Congress seemed to agree with such policy concerns by including a provision in the Dodd-Frank Act (section 603), which imposed a moratorium on the ability of “commercial firms” to acquire FDIC-insured banks that are excluded from the definition of “bank” in the BHCA: ILCs and credit card banks. However, this statutory provision expired on July 21, 2013 – three years after Dodd-Frank was passed – which means that it is now again legally permissible for retailers, manufacturers, or any type of nonfinancial firm to seek to acquire or establish an ILC.

In addition to the moratorium, the Dodd-Frank Act mandated that the Government Accountability Office (GAO) produce a report on the regulatory implications of such limited-purpose bank charters. The GAO issued its report in January 2012 and neither recommended that Congress repeal the federal law provisions that allow ownership of ILCs and limited-purpose credit card banks by commercial firms nor endorsed any new supervisory requirements. According to the report, the OCC and FDIC (the primary regulators of ILCs and credit card banks) believed that current law as implemented is sufficient for purposes of providing effective regulation and supervision of these banks and their affiliates. The Federal Reserve and the Treasury Department differed, contending that there are gaps in the current regulatory structure and that no regulator has the authority to oversee the entire corporate structure where the limited-purpose bank is a subsidiary of a holding company or commercial company. Congress has taken no further action since. In fact, the expiration of the temporary moratorium contained in Dodd-Frank provides room for argument that Congress specifically intended for such applications to be considered under applicable federal standards and may be approved.

On the one hand, the SoFi and Square applications raise significant banking and commerce questions, including whether current arrangements for overseeing the relationship between an ILC and its parent would provide sufficient safeguards if such a more extensive mixing of banking and commerce were permitted. According to SoFi, the purpose of the charter is to solely provide customers with an FDIC-insured deposit account and a credit card product. Square would reportedly use the charter to focus on small-business lending and deposit products. Yet Square’s business is broader than financial services, and includes Caviar, its food delivery service, and the sale of credit-card processing hardware like its signature dongles. Rep. Maxine Waters (D-Cal.), ranking member of the House Financial Services Committee, has called for the FDIC to hold at least one public hearing on SoFi’s application. Others have urged the FDIC to reject these applications. The FDIC decisions on both applications remain pending as of the date of this post.

On the other hand, the FDIC’s application approval would subject a financial company such as SoFi to be more regulated than it is now. If an overarching policy interest is to create a level playing field, this strategy might offer some tangible benefits and, at least to some degree, ease concerns that fintech companies would be able to offer services and products in direct competition with full-service banks, but without the same degree of regulatory scrutiny.

These applications also follow recent activity by the Office of the Comptroller of the Currency (OCC) to consider granting special purpose national bank (SPNB) charters to fintech companies. In July 2017, Acting Comptroller of the Currency Keith A. Noreika stated that he thinks granting SPNB charters to fintech companies “is a good idea that deserves the thorough analysis and the careful consideration we are giving it.” He noted that the OCC “should be careful to avoid defining banking too narrowly or in a stagnant way that prevents the system from evolving or taking proper and responsible advantage of advances in technology and commerce.” However, the OCC has not determined if it will actually accept or act upon applications from nondepository fintech companies for SPNB charters, and (as of July) had not received, nor was it evaluating, any such applications from nondepository fintech companies.

In late July 2017, one fintech company – Varo Money, Inc. – a mobile banking startup helping customers solve financial problems, manage money and reach financial goals, decided not to wait for the OCC to finalize its controversial fintech charter plan. Instead, it applied to the OCC for a national bank charter and to the FDIC for federal deposit insurance to form Varo Bank, N.A.

Stay tuned as we will be posting additional insights here once there are further updates or developments.