On July 22, 2020, the Office of the Comptroller of Currency (“OCC”) proposed a new rule in the federal register, concerning when a bank or savings association is a “true lender,” when the loan is sold or assigned to different entities. The comment period for the OCC’s proposed rule ended on September 3, 2020, with mixed results.

In its proposed rule, the OCC interpreted the National Bank Act, Federal Reserve Act, Home Owners’ Loan Act and propounded a test to determine when a bank makes a loan and may be considered the true lender in a loan transaction. The OCC stated that “a bank makes a loan when, as of the date of origination, it (1) is named as lender in the loan agreement or (2) funds the loan.” The OCC further considers a true lender to “[have] a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.” The OCC reasons that such an interpretation would provide regulatory clarity and certainty that would enable banks and their partners to lend a manner consistent with their business objectives. The OCC contends that identifying the true lender would enable the OCC to directly supervise lending activities of banking entities and clear up any confusion as to which legal framework applies when a loan is originated as part of a lending relationship between a bank and a third party.

The proposed rule was met with a mix of comments. For instance, the New York Department of Financial Services (NYDFS), an ardent critic of the OCC’s recent attempts at streamlining the application of national banking regulations, submitted a critical comment letter stating that the proposed rule would “gut state usury laws and state licensing requirements with respect to unregulated lenders.” Similarly, 24 state attorneys general, including from New York and California, submitted a joint letter urging that the OCC rescind its proposed rule as it would only perpetuate “rent-a-bank” schemes where non-bank lenders use national banks as the delivery vehicle to charge interest at rates the non-banks could not charge on their own. Supporters of the proposed rule contend that such a bright-line rule would clarify when a bank is a true lender in a loan at the time of origination, eliminating confusion and promoting uniformity in banking operations. Supporters also believe the rule would encourage banks to obtain assistance from fintech or other non-bank entities to offer bank loans to a wider array of consumers or small businesses.

Ultimately, the reaction to the OCC’s proposed rule is a preview to the litigation that will likely commence if this rule becomes, much like the litigation surrounding the OCC’s similar clarification of the “valid-when-made” principle. For previous coverage about the litigation surrounding the “valid-when-made” principle, click here and here.

McGuireWoods boasts a nationally recognized fintech practice with lawyers in offices across the country, including offices in the most active fintech hubs. Our clients benefit from lawyers with a keen understanding of a broad array of emerging technologies and deep experience serving the financial sector. We are well equipped to handle shifting legal, commercial and technical challenges. The firm’s decades of experience representing financial institutions, including each of the top 10 U.S. banks ranked by assets, provide us with the deep industry insight and broad capabilities to help companies thrive.

California’s financial services regulator soon will likely have a new name and a significantly expanded mission after state lawmakers passed legislation on August 31, 2020 that would revamp the agency in the image of the U.S. Consumer Financial Protection Bureau, signaling an increased focus on fintech in particular.

In a last-minute push before adjourning for the year, the California legislature sent the California Consumer Financial Protection Law (“CCFPL”) to Governor Gavin Newsom for his approval, which is expected.  The CCFPL would change the name of the state’s current financial services regulator, the Department of Business Oversight (“DBO”), to the Department of Financial Protection and Innovation (“DFPI”). The reorganization of the California regulator under the CCFPL includes greatly expanded jurisdiction, rule-making authority, and enforcement resources to prosecute unfair, abusive, or deceptive acts or practices (“UDAAP”). The bill would take effect on January 1, 2021.

Focus on Fintech:

The legislation would fold the DBO’s existing licensing and prudential regulatory functions over state-chartered banks, mortgage lenders and others into the DFPI, which would then have authority over all “covered persons.”  The law defines that term to mean persons engaged in offering or providing consumer financial products or services, affiliates that act as service providers, and any service provider that engages in offering or providing its own consumer financial product or service. As in Title X of the Dodd-Frank Act, which created the CFPB, a “service provider” is any person that provides a material service to a covered person in connection with the covered person’s offering or providing of a consumer financial product or service.

The new statute, importantly, exempts virtually all entities operating under a license issued by the DBO / DFPI, such as finance lenders licensed under Division 9 of the Financial Code, residential mortgage lenders licensed under Division 20 of the Financial Code, and depository institutions. However, the CCFPL would apply to a great number of entities not previously subject to oversight by a primary regulator, including debt collectors, consumer reporting agencies, and certain fintech companies.

Expanded Enforcement and Rulemaking Authority:

The Legislature intends that the DFPI will have broad authority to protect vulnerable California consumers from abuse and protect California businesses from having to compete with unscrupulous providers. The Legislature also emphasizes that technological innovation, while offering great promise, poses risks to consumers and challenges to law enforcement.

California’s new law gives the DFPI the same UDAAP authority that Dodd-Frank Title X gives the CFPB: the authority to bring enforcement actions and write rules defining UDAAPs. Importantly, the CCFPL not only gives the new DFPI the authority to prevent unfair and deceptive practices (consistent with Business and Professions Code § 17200), but the DFPI will have the authority to declare an act “abusive.”  Such abusive practices are those that materially interfere with a consumer’s ability to understand the terms or conditions of a consumer financial product or service; or that take unreasonable advantage regarding: (i) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service; (ii) the consumer’s inability to protect the consumer’s own interests in selecting a product or service; or (iii) the consumer’s reasonable reliance on a covered person to act in the consumer’s interests.

The arrangement signals that the DFPI will have a sharper consumer protection focus on financial products and services offered by previously less-regulated nonbank players in the industry, namely fintech companies. On the other hand, in recognition of the importance of the industry’s innovative focus, the legislation would requires the DFPI to establish a “Financial Technology Innovation Office.”

Registration and Resources:

 The DFPI also would be authorized to require any “covered person” to file a registration, pay a fee, file annual or other special reports with the agency, and submit background checks for principals, officers and other key personnel. The registration fees will help fund the DFPI’s operations, as supplemented by additional moneys provided to the agency by the Governor’s 2020-21 Budget.

An Example for Other States:

The CCFPL’s passage comes at a time when many other states are also bolstering their consumer financial protection capabilities, particularly as federal oversight has relaxed.

Pennsylvania, New Jersey and New York have all formed versions of “mini-CFPBs” within existing state agencies in recent years.  And as we have covered previously, New York Governor  Andrew Cuomo has also been working on plans to institute licensing requirements for debt collectors and equip his financial services regulator with abusiveness enforcement authority.

The DFPI would likely overshadow these other efforts in size and scope, creating an agency that merges expanded statutory authority with increased funding and additional dedicated resources to exercise it, such as the power to hire in-house counsel to prosecute enforcement actions and defend the agency in court.

What’s Next

Governor Newsom has until September 30, 2020 to sign the CCFPL, which he is expected to do. After that, the CCFPL would as noted become effective on January 1, 2021.

On July 31, 2020, Varo Money Inc. announced that it was granted a national bank charter by the U.S. Office of the Comptroller of the Currency (OCC).  The charter will allow Varo, a mobile banking fintech, to launch a national bank and offer a range of financial services and products that are backed by the Federal Deposit Insurance Corp (FDIC).

The announcement marks a historic moment for fintech companies, as Varo will become the first fintech company to obtain a national bank charter with the OCC.

A national banking charter has a strong appeal to fintech companies.  With a charter, a fintech can lower its funding costs, gain access to Federal Reserve payments systems, and operate more uniformly on a nationwide basis with federal preemption of many state laws, including state licensing requirements. Since most fintech companies comply with a patchwork of state licensing requirements and regulations, or opt to partner with state or federal banks who hold banking charters, a national bank charter would better enable a fintech company to chart its own course with more regulatory clarity.

While Varo may be the first fintech company to obtain a national banking charter, it won’t be the last. Social Finance Inc. submitted an application in early July. Relatedly, Square Inc. has received conditional approval from the FDIC to launch an industrial loan company.

While the national bank charter market warms for fintech companies willing to offer deposits, the same has not been true for the OCC’s special purpose national fintech charter.  The special purpose charter, initially proposed in 2016, would have permitted non-depository fintech companies to operate under a federal charter overseen by the OCC. However, the program faced criticism and lawsuits from state regulators, which continue to plague the special purpose charter. Click here for our prior coverage of the litigation.

It did not take long for the Office of the Comptroller of the Currency’s (“OCC”) May 29 Final Rule codifying the valid-when-made principal to face challenges in court. On July 29, the attorneys general for New York, California and Illinois filed suit in the Northern District of California to block the rule, which extended the National Bank Act’s (“NBA”) preemption of state usury laws to any assignee or transferee of a loan originated by a national bank. The OCC issued the rule to reinforce the long-standing doctrine that the terms of a loan as originated by a bank remain valid even after that loan is sold or transferred to a non-bank entity (“Valid-When-Made” doctrine), after that principle was called into question by the Second Circuit’s decision in Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015). The OCC’s codification of the Valid-When-Made doctrine was an attempt to create legal certainty in the lending industry and has the potential to increase access by permitting non-banks, including fintechs, to acquire loans without worrying that the loan terms will be subject to more restrictive state usury laws.

In their complaint for declaratory and injunctive relief, New York, California and Illinois describe the OCC’s rule as “federal overreach,” arguing that it is “arbitrary and capricious” and beyond the OCC’s powers. They further argue that the rule will foster predatory lending by permitting non-banks to partner with national banks to avoid state interest rate caps.  More specifically, the states argue that the OCC’s oversight is limited to national banks, and thus it does not have authority to extend federal preemption to other entities. They argue that the OCC’s Final Rule does not meet the preemption standard set forth in the Dodd-Frank Act – that only state laws that “prevent or significantly interfere with the exercise by a national bank of its powers” are preempted – because the OCC failed to undertake the required evidence-based, case-by-case analysis in making its preemption determination. 12 U.S.C. § 25b(b)(1)(B). New York, California and Illinois claim that the OCC’s Final Rule harms both the states’ fiscal interests and their quasi-sovereign interests in protecting consumers and promoting fair lending marketplaces. In light of these arguments, New York, California and Illinois ask the court to find that the OCC’s promulgation of the rule violated the Administrative Procedure Act, and ask the court to set aside the OCC’s Final Rule.

By all appearances, the OCC intends to vigorously fight the suit. The acting head of the OCC, Brian Brooks, has argued that there is no merit to the criticisms of the rule as facilitating predatory lending. He defended the Final Rule, explaining that it creates certainty for banks and makes “more credit available to people.”

The case will proceed before District Judge Jacqueline Scott Corley, as the State of California declined to proceed before the Magistrate. Look-out for developments on this case as it proceeds.

On July 23, 2020, the New York Department of Financial Services (“DFS”) filed its appellate brief asking the Second Circuit Court of Appeals to uphold the lower court’s decision to block the Office of Comptroller of the Currency’s (“OCC”)’s special purpose national bank charter (“fintech charter”).

The DFS initially challenged the OCC’s fintech charter in September 2018 in the Southern District of New York (“SDNY”), weeks after the OCC unveiled the charter for certain non-depository fintech companies under the National Bank Act (“NBA”), allowing them to operate as “special purpose national banks” overseen by the OCC without the burdens of state-by-state regulation and licensing. The DFS argued that the NBA only gives the OCC the authority to provide banking charters to depository institutions, not non-depository institutions, like fintech companies. It is worth nothing that there are some fintech companies that do permit customers to “deposit” funds, so the DFS’s argument here may be over-inclusive. Regardless, the DFS argued that an OCC charter for fintech companies would undermine its authority over the approximately 600 such institutions in New York, shrinking the number of fee-paying companies within its jurisdiction. SDNY Judge Marrero agreed, denying the OCC’s motion to dismiss and entering final judgment in favor of the DFS. The order set aside the OCC’s regulations with respect to any fintech charter applications.

The OCC appealed that decision, and filed its opening appellate brief earlier this year, focusing its argument that the DFS lacks standing because its injuries were only hypothetical as the OCC has not received or taken any steps toward approving a fintech charter application in New York. The OCC also noted that the NBA is ambiguous as to whether the “business-of-banking” requires deposit taking.

In response, the DFS’s appellate brief focuses on the specific nature of the “business-of-banking” within the NBA historically, the OCC’s practice over the years, and the preemptive impact of a broad reading of the OCC’s jurisdiction. The DFS’s brief includes an analysis of the founder’s understanding that banks are depository institutions combined with the OCC’s otherwise limited practice in extending its reach under the NBA. The DFS points out that the OCC fails to invoke a single instance in which a court found an institution that does not take deposits, among its other activities, to be a bank under the NBA’s business-of-banking clause. The DFS further emphasizes the imminent injury to DFS’s regulatory and pecuniary interests if the lower court’s decision were overturned.

SDNY Judge Marrero’s decision and the OCC’s appeal come at a time when other courts have reached different conclusions on the general issue of standing. For instance, Judge Friedrich of the U.S. District Court of the District of Columbia twice struck down the Conference of State Bank Supervisors’ (“CSBS”) similar challenge to the OCC’s fintech charter because CSBS lacked standing and the claims were deemed unripe because no company had applied for the OCC’s fintech charter. Notwithstanding the uncertainty for non-depository fintech firms, the OCC, under the leadership of the acting Comptroller of the Currency Brian Brooks, continues to lend its support for expanding and updating its rules on banking under a modern financial system, emphasizing how the business-of-banking has changed in recent years. We can expect that any such modernization of OCC regulations will presumably also include similar expansion of the OCC’s application of the NBA’s charter.

The case is Lacewell v. Office of the Comptroller of the Currency, case number 19-4271, in the U.S. Court of Appeals for the Second Circuit. Click here and here for our prior coverage of this lawsuit.

 

This week’s U.S. Supreme Court opinion in Seila Law v. CFPB reached its most widely expected conclusion, ultimately allowing the CFPB to continue to operate. But the opinion also raises questions about previously initiated CFPB enforcement actions, and arguably raises constitutional issues about the many other federal agencies whose leaders are insulated from removal by the President.

Download this new McGuireWoods white paper, which addresses those open questions and issues, and the future implications of Seila Law.

In a landmark case last week, the Supreme Court held in Bostock v. Clayton Co., Ga. that the prohibition on sex-based discrimination in employment is violated when an employee is fired on the basis of homosexuality or transgender status.  This article briefly explains why that decision, based on Title VII of the Civil Rights Act of 1964 (“Title VII”), very likely means that the federal fair lending laws, too, will be read to protect homosexual and transgender individuals — specifically, loan applicants.   The federal fair lending laws are the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act (the “FH Act”).  Indeed, Justice Alito’s dissent in Bostock predicts that the Court’s decision “is virtually certain to have far-reaching consequences,” pointing to specifically to ECOA and the FH Act.  Slip Op. at 44.

This article also sketches out the probable impact of this expansion of fair lending coverage, on both consumer and business lending practices (ECOA’s anti-discrimination provisions apply equally to business-purpose loans, and the FH Act applies to loans for multi-family housing).  That impact could be more significant depending on the outcome of the election this fall, and on who thereafter is in charge of the Consumer Financial Protection Bureau (“CFPB”) and other federal agencies.

A.        Bostock

In Bostock, the Court held that because Title VII outlaws sex-based discrimination, “employers are prohibited from firing employees on the basis of homosexuality or transgender status.”  The Court explained that:

An employer who fires an individual for being ho­mosexual or transgender fires that person for traits or ac­tions it would not have questioned in members of a different sex.  Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.

Slip Op. at 2, 30.

The Bostock Court’s reasoning in reaching this result under Title VII strongly indicates that courts may reach the same result under the two fair lending laws.  This is not only because the one, statutorily protected characteristic at issue in Bostock under Title VII — “sex” — is also present in the fair lending laws.  In addition to that, both ECOA and the FH Act also contain each of what Bostock called “Congress’ key drafting choices” in Title VII, i.e., the two “drafting choices” in Title VII that drove the Court’s holding (Slip Op. 30):

  1. The choice to “hold employers liable whenever sex is a [mere] but-for cause of the plaintiff’s injuries,” as opposed to prohibiting only discrimination based “solely” or “primarily” on a person’s sex. Slip Op. at 30.
    • According to Bostock, if Congress had chosen a causation standard weaker than “but for,” then then discrimination primarily (or “only”) based on an individual’s sexual orientation or gender identity could have been permissible. Under the “but-for” standard, however, such discrimination is prohibited because a necessary, even if subordinate, basis of such a decision is the individual’s sex.  g., Slip Op. 5-6, 30.
    • Bostock found the “but-for” causation standard in Title VII’s prohibition on discrimination “‘because of … sex,’” Slip Op. at 5-6 (quoting 42 U.S.C. § 2000e–2(a)(1)), statutory language found verbatim in the FH Act, § 804(b).  The language in ECOA is slightly distinct — “on the basis of … sex,” § 701(a)(1) — but it is hard to see how that would make a difference, particularly when the Bostock opinion repeatedly uses the very phrase found in ECOA (“on the basis of”) interchangeably with the Title VII language before it (“because of”).  g., Slip Op. at 2, 3.  And like Title VII, neither ECOA nor the FH Act use an intensifier like “primarily because of” or “solely because of” sex.
    • Note: A short table at the end of this article provides the relevant language in each of the three statues.
  1. The choice to “focus on discrimination against individuals and not merely between groups.” Slip Op. at 30.
    • If instead Congress had intended to prohibit merely categorical discrimination — “treat[ing] women generally less favorably than” men, for example — then the law might not be violated by an employer who fires all male and female homosexuals alike, the Court explained. But Bostock found that reading foreclosed by Title VII’s prohibition on discrimination “‘against any individual,’” Slip Op. at 7-8 (quoting  42 U.S.C. § 2000e–2(a)(1)).
    • Again, both ECOA in § 701(a)(1) (prohibiting discrimination “against any applicant,” rather than disfavoring one gender overall), and the FH Act in § 804(b) (prohibiting discrimination “against any person”) seem to mirror the statutory “drafting choice” that the Court found significant.

The upshot is that the Supreme Court’s reasoning under Title VII implies the same result under ECOA and the FH Act, namely that discrimination against an individual based on his or her sexual orientation or gender identity equates to sex-based discrimination, as Justice Alito’s dissent predicts.

B.        Implications

As with employment discrimination, a minority of states have explicitly prohibited discrimination on the basis of sexual orientation and gender identity in recent years.  Nonetheless, an extension of those prohibitions to all states, combined with the far greater enforcement resources available to the federal government, indicate that companies covered by the fair lending laws should begin — or continue — to enhance their policies, employee-training materials, and internal fair lending analyses.

There could be a difference in private-plaintiff claims very soon.  However, given that the Executive Branch argued against the result reached in Bostock, it is hard to predict how much federal enforcement will change for so long as President Trump is in office.  It may be worth noting, however, that the current CFPB’s Web-page on fair lending laws has included a footnote explaining that even before Bostock, caselaw “supports arguments that the prohibition against sex discrimination also affords broad protection from discrimination based on a consumer’s gender identity and sexual orientation.”

Looking ahead, if the federal Administration changes hands based on this fall’s election, the enhanced enforcement capability at the federal level could have a significant impact.  Indeed, in August 2016, President Obama’s CFPB Director, Richard Cordray, concluded in an unpublished, open letter in 2016 that ECOA did in fact outlaw sexual-orientation and gender-identity discrimination, drawing on the same lines of lower court cases under Title VII that signaled the outcome of Bostock.  He went further, opining that the prohibition included but was “not limited to discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes as well as discrimination.”

There was not an obvious enforcement impact from that opinion during the one year remaining in Director Cordray’s tenure.  But this issue continues to interest congressional Democrats, as evidenced just last fall when the House held a hearing titled “Financial Services and the LGBTQ+ Community: A Review of Discrimination in Lending and Housing.”  In their view, discrimination against homosexual and transgender persons is widespread.  E.g. id. at 4 (“same-sex mortgage co-applicants” under a recent study “were 73.12% more likely to be denied a loan than different-sex co-applicants with similar characteristics”).  The staff memo for that hearing is also a reminder of just how much federal enforcement of fair lending laws can change depending on which party holds the White House.  According to the staff, for example, there were zero ECOA enforcement actions in 2018, versus 26 actions brought in 2013.

Table:  Comparison of Statutory Language

Title VII ECOA Fair Housing Act

“It shall be … unlawful .  .  .  for an” employer “to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual’s … sex … .”

42 U.S.C. § 2000e–2(a)(1)

 

“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction … on the basis of … sex … .”

15 U.S.C. § 1691(a)(1).

“[I]t shall be unlawful … To discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith, because of … sex … .”

42 U.S.C. § 3604(b)

Note:  The table above provides only the most relevant language, for comparison purposes.  The fair lending laws contain certain additional prohibitions on credit- and housing-related discrimination.

On May 29, 2020, the Office of the Comptroller of the Currency (OCC) issued a long-awaited final rule to clarify and underscore the ‘valid when made’ principle in which the interest rates permissible before a bank transfers a loan continues to be permissible after the transfer to a non-bank.

Generally, under the National Bank Act (NBA), national banks chartered by the OCC have the power to make contracts, lend money, and all incidental powers necessary to carry out the business of banking. Regarding interest, the NBA requires a national bank to comply with the interest rate caps of the state where the national bank is located. Under the longstanding ‘valid when made’ rule, upon the transfer or assignment of a loan, the terms of the debt, including the interest rate and any preemption protection under the NBA, remained intact and valid through maturity no matter who the purchaser was or where the purchaser was located.

However, in 2015, the Second Circuit invalidated the ‘valid when made’ principle when it came to non-bank purchasers of debt from national banks. In Madden v. Midland Funding LLC, 786 F.3d 246 (2d Cir. 2015), the Second Circuit held that, upon transfer to a non-bank third party debt collector, loans originated by a national bank were not entitled to the NBA’s preemption protections. Instead, Madden effectively invalidated the ‘valid when made’ rule so that purchasers of debt from national banks were exposed to state-law usury claims where interest rates on purchased debt exceeded state law usury limits with other implications on the transfer of debt between national banks and other entities.

At the urging of Congress, U.S. Department of Treasury, and U.S. Department of Justice to codify the ‘valid when made’ rule, the OCC issued a notice of proposed rule on November 19, 2019 in an effort to clear up confusion following the impact of Madden even in states where the decision did not directly apply. In a letter to the OCC, members of the House Financial Services Committee noted the uncertainty caused by Madden on national banks who partner with non-bank fintech firms to provide credit to consumers and the risk to liquidity of financial institutions if other circuits followed suit. Similarly, in its 2018 report to the President, the Treasury Department discussed that Madden’s implications could reach beyond non-depository marketplace lenders and possibly diminish access to credit.

Accordingly, the OCC issued a final rule interpreting the NBA to include loan transfers as within the fundamental aspects of the business of banking so that interest rates are valid regardless of whether the loan is sold or transferred to a non-bank purchaser. The rule clarifies the legal uncertainty created by Madden where non-banks would have been subject to usury regulations on a state-by-state basis and attempts to reverse any adverse effects of Madden on financial institutions’ access to liquidity and alternative funding. Notwithstanding this legal clarity, Rep. Maxine Waters (D-CA) expressed her concern in a statement of the final rule’s authorization to export high interest rates across the country without state oversight. However, the OCC’s Final Rule notes that national banks are still subject to the usury regulations of the state in which they are located. Ultimately, the OCC’s Final Rule is aimed at resolving the legal uncertainty following Madden and should ease pressure on national banks to originate loans without ambiguity about whether the loans may be transferred or assigned with the same terms to non-bank entities, particularly as economic growth remains uncertain.

The rule will take effect after 60 days of publication in the Federal Register.

 

Update: On July 23, 2020, the New York Department of Financial Services (“DFS”) filed its appellate brief asking the Second Circuit Court of Appeals to uphold the lower court’s decision to block the Office of Comptroller of the Currency’s (“OCC”)’s special purpose national bank charter (“fintech charter”). Please see our July 28 post for more details.

On April 23, 2020, the Office of the Comptroller of the Currency (“OCC”) filed its opening brief defending its special purpose fintech charter in the U.S. Court of Appeals for the Second Circuit.

The special-purpose charter, initially proposed by former Comptroller Thomas Curry in December 2016, would permit vetted non-depository fintech companies to operate under a federal charter overseen by the OCC without the burdens of state-by-state regulation and licensing. However, the program faced criticism and lawsuits from state regulators.   Click here for our prior coverage on this lawsuit.

The New York Department of Financial Services (“DFS”) led the challenge against the fintech charter in Lacewell v. Office of the Comptroller of the Currency in federal district court action in the Southern District of New York.  In May 2019, Judge Victor Marrero ruled against the OCC, denying its motion to dismiss and holding that the DFS had Article III standing to show that OCC’s charter was a threat to DFS’s authority over the nearly 600 non-depository fintechs. In October 2019, Judge Marrero entered a final judgment in favor of DFS and set aside the OCC’s regulations with respect to any fintech charter applications.

On appeal to the Second Circuit, the OCC urges in its opening brief for a reversal of Judge Marrero’s decision.  The OCC first argues that the DFS lacks standing since its alleged injuries are not ripe, premised only on hypothetical because the OCC has not yet received or taken any steps toward approving an fintech charter application.  According to the OCC, a “mere announcement” it will entertain applications “does not cause any concrete harm to DFS.”  The OCC also maintains that the DFS claims fail because the OCC’s interpretation of its authority to issue charters is reasonable and entitled to Chevron deference.  The OCC argues that the National Bank Act (“NBA”) is ambiguous as to whether the “business of banking” requires deposit taking. Finally, the OCC argues that that any relief sought by the DFS should be “geographically limited to New York,” since the DFS “only asserts harm with a nexus to New York.”

While the industry awaits a decision on whether the OCC fintech charter will survive, fintech companies have sought alternative charters.  In March 2020, Square, Inc. became the first U.S. fintech company to receive conditional approval from the Federal Deposit Insurance Corporation’s (FDIC) Industrial Loan Company (ILC) charter to pair with Square’s prior state charter from the Utah Department of Financial Institutions.  Unlike the challenges plaguing the OCC fintech charter, the FDIC’s decision signals an alternative banking pathway for fintech companies. Click here for our prior coverage of Square’s ILC charter.

The case is Lacewell v. Office of the Comptroller of the Currency, case number 19-4271, in the U.S. Court of Appeals for the Second Circuit.

With the help of McGuireWoods, Funding Circle, the leading online small business loan platform in the United States, joins fintech companies Intuit, PayPal, and Square, to participate in the U.S. Small Business Administration’s (SBA) Paycheck Protection Program (PPP), which was enacted as part of the CARES Act last month. To recap, the PPP provides aid in the form of potentially forgivable loans to eligible small businesses. The loans may be used to cover qualified payroll costs, rent, utilities, and interest on mortgage and other debt obligations in order to allow borrowers to maintain pre-COVID-19 employment numbers and compensation levels to their employees.

The coronavirus response landscape is shifting daily, and sometimes hourly, as regulators fight the clock to roll out aid fast enough to help keep small businesses afloat. For example, as we have previously reported, there was initial uncertainty about whether nonbank fintech companies would be able to participate, as the Treasury and SBA were in a time crunch to get the program up and running, and the lender application did not initially include fintech lenders – only federally insured depository institutions, federally insured credit unions, and certain farm credit institutions.

Although fintech lenders have now been approved, the SBA announced last week that the initial $349 billion allocated for the program had already been drained, with many small businesses still without funding.

On Tuesday April 21, the Senate reached an agreement to replenish the PPP with another $310 billion, and the House passed the measure today. While $250 billion of the $310 billion is added without limit, the remaining $60 billion is reserved for small and midsize banks, credit unions and community development finance institutions.

Many fintech lenders already have established relationships with small businesses and sole proprietorships, the intended beneficiaries of the PPP. Also, these fintech companies often have streamlined systems and online platforms in place to efficiently extend loans remotely. Notably, Funding Circle announced it will be providing support to applicants in four languages — English, Spanish, Mandarin, and Hindi, exemplifying just one of the ways that fintechs can make sure money gets to minority communities and smaller businesses, and reach customers that some traditional banks don’t.