From Fintech Charters to Sandboxes

Financial Services Law

Financial technology news includes the continuing battle over the Office of the Comptroller of the Currency’s (OCC) plan to issue special-purpose national bank (“fintech”) charters, with the agency seeking to dismiss lawsuits by the Conference of State Bank Supervisors (CSBS) and New York’s Department of Financial Services (DFS).

In other fintech news, states are encouraging innovation and aiding the development of fintech products, with both Wyoming and Washington, D.C., announcing the creation of fintech sandbox programs, while the Consumer Financial Protection Bureau (CFPB or Bureau) faces pushback from state attorneys general over similar plans at the federal level.

What happened

The litigation over the OCC’s decision to issue fintech charters has entered a new phase, with the agency filing a motion to dismiss both the CSBS and DFS actions. Hoping for a repeat outcome, the OCC is reiterating similar arguments from an earlier suit that was dismissed last April.

As the OCC has indicated that it remains several stages away from actually granting a fintech charter and has not decided to grant a charter to any fintech company, the case remains unripe for judicial review, the agency told the court. In its previous dismissal of the action, the court noted that neither the CSBS nor its members would suffer any cognizable harm until the OCC grants final approval of a fintech charter. Thus, as the OCC argued, neither the CSBS nor the DFS will be able to establish standing to sue until the OCC actually approves a charter.

The CSBS countered that dismissal is inappropriate because the facts demonstrate that injury is “certainly impending.” The OCC’s position “disregards its own actions and public statements,” the group argued, such as Comptroller Joseph Otting’s comments that the agency has held “hundreds” of meetings with fintechs considering the new charter and his prediction that the first charter will be issued in the coming months.

The group also asked the court to allow discovery to resolve factual disputes concerning the status of the OCC’s implementation of the charter program (such as how many companies the agency has met with and the status of any draft applications).

“Taking all of this into account, and because the Nonbank Charter Program process allows for submission of ‘draft’ applications for [the] OCC’s review and input, it is clear that [the] OCC has already made significant progress toward vetting (and ultimately approving) nonbank charters,” according to the CSBS’s opposition to dismissal.

In a reply brief, the OCC objected to the discovery motion, arguing that allowing the CSBS access to such information was “entirely unnecessary” and would have a chilling effect on fintech companies, discouraging them from even exploring whether to pursue a charter.

The cases are the second attempt by the CSBS and the DFS to halt the OCC’s fintech charter program, with their prior lawsuits dismissed as unripe last year.

Rulings from the courts overseeing both cases are expected in the coming months.

In other fintech news, regulatory sandboxes continue to gain favor. Following in the footsteps of Arizona, Governor Mark Gordon of Wyoming signed HB 57, which will allow innovative financial products and services, such as those that use new or emerging technology or a new or innovative business model, to be offered by domestic companies to Wyoming consumers for up to three years (including a discretionary 12-month extension) if the provider applies for and is granted a waiver of specified statutes or rules that would otherwise prohibit the product or service from being offered. The new law takes effect on January 1, 2020.

Washington, D.C.’s Mayor Muriel Bowser created a 21-member council to consider how to attract innovators and new participants in the financial services industry to serve residents of the District of Columbia, study how sandboxes may help or harm consumers, and review what other jurisdictions are doing in this area.

The new District of Columbia Financial Services Regulatory Sandbox and Innovation Council is composed of professionals from the insurance, securities, banking and lending industries, as well as consumer representatives, technology industry members, and individuals specializing in financial services regulation and the captive insurance industry. The council will report back to the mayor six months after its first meeting with legislative, programmatic and policy recommendations.

The CFPB also announced plans for a proposed “Disclosure Sandbox” last October. Amending a policy established in 2013, the proposal would foster innovation by allowing the Bureau to issue waivers to applicants that will permit them to conduct trial disclosure programs without violating existing laws or rules.

But the Bureau is now facing pushback from a group of 22 state attorneys general, who submitted a comment letter expressing concern about the unknown risks posed by emerging technologies and advocating for “a cautious and deliberative regulatory approach.”

The CFPB’s sandbox proposal does not reflect such an approach, according to the attorneys general of California, Connecticut, Delaware, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, Washington, D.C., and Wisconsin. Instead, they wrote, the proposal “would permit the CFPB to exempt—in some cases indefinitely—companies and even entire industries from certain consumer protection laws and regulations through a process designed to value speed over careful decision-making.”

Further, the proposal completely fails “to consider our interest in protecting our states’ consumers from abuse in the name of innovation,” according to the letter, which argued the Bureau lacks the authority to issue sweeping immunity from state regulations and private actions absent formal rulemaking.

“While we share the CFPB’s goal of fostering innovation in the consumer financial sector, we respectfully submit that innovation should not come at the expense of consumers or the stability of the U.S. financial system,” the attorneys general concluded. “Unfortunately, [the sandbox proposal] embod[ies] precisely the type of blind faith in industry and regulatory diffidence that the CFPB was created to correct, and we urge you to rescind them.”

To read the OCC’s motion to dismiss the CSBS lawsuit, click here.

To read the CSBS response to the OCC’s dismissal motion, click here.

To read the CSBS motion for jurisdictional discovery, click here.

To read the OCC’s opposition to the CSBS motions, click here.

To read HB 57, click here.

To read Mayor Bowser’s order, click here.

To read the letter from the state AGs, click here.

Why it matters

Fintech continues to make headlines and raise issues for regulators at both the state and federal levels. Also continuing is the litigation over the OCC’s decision to issue fintech charters, although it remains to be seen whether CSBS and DFS cases, now facing motions to dismiss, are yet ripe for adjudication by the court. There does seem to be quite a bit of state and federal jawboning over turf issues, but very few cases of actual harm being done by fintech companies. The environment for fintech has been marked of late by an absence of any calamity, and even the “regulation by class action” approach seems to be losing steam as regulators and consumers grow accustomed to a diverse lending environment.

The CSBS had previously joined with the Colorado attorney general in a pending case against WebBank and Cross River Bank, and their respective fintech platforms, Avant and Marlette, over whether a bank partnership program implicated certain “true lender” rules. The banks have countersued on behalf of the platforms. Those cases are being closely watched and are still pending.

It is important to note that Maria T. Vullo has stepped down as head of the New York DFS as of February 1. Linda A. Lacewell has been nominated to succeed Vullo. She is a longtime aide to Governor Andrew Cuomo and prior to that was a federal prosecutor. In Colorado, Democrat Jared Polis took office as governor in January. As a congressman, Polis was a leader in advocacy for crowdfunding reform. It remains to be seen what these two high-profile seat changes will mean for the CSBS and DFS cases, and whether the environment for regulatory sandboxes will spread.

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