The recent final rule (the “Rule”) implementing the Fair Debt Collection Practices Act (“FDCPA”) only directly governs parties defined as “debt collectors” by the FDCPA, principally meaning those who collect delinquent debt for others. However, this Rule from the Consumer Financial Protection Bureau, accompanied by a 560-page Preamble, will also likely influence the collection activities of “creditors” — i.e., those collectors that fall outside that “debt collector” definition — in various ways. The Rule also will affect how creditors should work with the debt collectors they hire. In this Alert, we focus specifically on these different impacts of the Rule on creditors. The Rule will take effect one year from the date it is published in the Federal Register.
On October 27, the North American Securities Administrators Association held its 2020 symposium on Fintech and Cybersecurity. A key theme of the symposium was the impact that the pandemic has had on fintech, cybersecurity, and regulating the financial markets – given that regulators and securities industry professionals are largely working from home. The panelists also discussed new technological innovations that are likely to impact both the fintech industry and cybersecurity.
On October 27, 2020, the Office of the Comptroller of the Currency (OCC) issued its final rule setting the test for determining who the ‘true lender’ is in a loan transaction, including in the context of a lending partnership between a federally-chartered bank and a non-bank third party. The final rule adopts the two-pronged test set forth in the OCC’s proposed ‘true lender’ rule issued in July of this year – a bank is the ‘true lender’ if, as of the date of origination, the bank (1) is “named as the lender in the loan agreement,” or (2) “funds the loan.” The rule further clarified that if one bank funds the loan but another bank is named as the lender in the loan agreement, the bank identified in the loan agreement will be considered the ‘true lender’ of the loan. That clarification is consistent with the fundamental rule of the Truth-in-Lending Act, which always makes the party on the loan agreement the “creditor” on that loan.
Announcements Mark Out a Clearer Path, but MSAs and Gifts Still Require Careful Review
Last week, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) announced significant changes to how it will view the legality of Marketing and Services Agreements (“MSAs”) under the Real Estate Settlement Procedures Act (“RESPA”). Most strikingly, the Bureau formally rescinded its controversial Compliance Bulletin 2015-05: RESPA Compliance and Marketing Services Agreements (Oct. 8, 2015) (“2015 MSA Bulletin”). MSAs historically have been used as a way for settlement service providers to gain access to additional potential customers via paid advertising and marketing services. But the 2015 Bulletin, issued after a string of Bureau RESPA enforcement actions, expressed the view that virtually all MSAs should be scrutinized and pose a high risk of violating RESPA’s prohibitions on paid referrals and/or the splitting of unearned fees.
In addition to rescinding the prior guidance, the Bureau last week also released a slew of new “Frequently Asked Questions” (“FAQs”) on the legality of MSAs, gifts and promotional activities, and other RESPA matters. In all, the Bureau’s actions last week on MSAs in particular amount to a further repudiation of aggressive RESPA interpretations that the agency advanced during the last decade.
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.
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.
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.
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.