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.

Fintech companies Intuit, PayPal and Square have officially been approved to participate in the U.S. Small Business Administration’s (SBA) $349 billion 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, which loans may be used for payroll and other expenses. These fintech companies are now accepting loan applications.  Other fintech companies, including Funding Circle, are awaiting approval to follow suit.

As we reported last week, initially there was uncertainty about whether nonbank fintech companies would be able to participate in the PPP, as the Treasury and SBA were in a time crunch to get the PPP up and running, and Treasury’s application for lenders did not initially include fintech lenders – only federally insured depository institutions, federally insured credit unions, and certain farm credit institutions. The rules that Treasury issued on April 2, 2020  preapproved traditional banks to make PPP loans as long as they were in good financial condition and not in trouble with any federal regulators. The rules stated that non-banks were required to meet other standards, including compliance with the Bank Secrecy Act.

These three fintech approvals are a step in the right direction, as many fintech lenders are well-positioned to extend loans to the small businesses with which they have relationships, as well as to new borrowers.  The approvals come several days after incumbent SBA lenders were able to start processing applications, which could reduce the pool of funds available for new lenders entering the PPP market, given the $349 billion cap on the funds available for this first-come, first-served program.  But some traditional banks have limited their own participation in the PPP, which may leave a lot of borrowers in need of alternative sources of funding through fintechs.  Further, there is talk of increasing the funds available for the PPP through additional legislation.  We will continue to provide updates as the PPP is expanded to other non-bank lenders, as well as any increases in funding available for this vital small business loan program.

The latest regulations coupled with the Treasury Department guidance have left many scratching their heads as to whether fintech companies will be able to provide small business loans under the recently enacted Paycheck Protection Program (PPP), a crucial part of the U.S. legislature’s latest attempts to address the serious economic impacts of the COVID-19 pandemic.  While the landscape is shifting daily, and sometimes hourly, as regulators fight the clock to roll out the program fast enough to help keep many small businesses afloat – regulators should not lose focus on the important role that fintech lenders can play. Given their existing relationships with sole proprietorships and smaller-business customers along with their strong ability to deliver services through robust online platforms, fintech lenders are particularly well placed to fill emerging gaps arising from the overextension of many traditional lenders’  and their resulting reluctance to extend PPP loans to new customers, particularly smaller business and sole proprietors.

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) into law. Title I of the CARES Act establishes the PPP which is tasked with providing up to $349 billion in funding for loans to small businesses and other qualified applicants, using the existing Small Business Administration (SBA) 7(a) loan guaranty program, but with key differences intended to expedite the intended relief. 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.

On March 31, 2020, the U.S. Department of the Treasury released guidance on various aspects of the PPP, including guidance relevant to lenders under the program.  And on April 2, 2020, the SBA enacted interim final rules.

The guidance explicitly provides that the PPP loans may be made by existing section 7(a) SBA qualified lenders, federally insured depository institutions, federally insured credit unions, and farm credit system institutions.  According to the guidance, loans can also be made by “Additional Lenders” that the Administrator and Secretary of the Treasury determine are qualified. Treasury has announced that a “broad set of additional lenders can begin making loans as soon as they are approved and enrolled in the program.”  Along with their announcement, Treasury included an Application for New Lenders.  According to the Application, however, eligible applicants appear to be limited to:

  • A federally insured depository institution; OR
  • A federally insured credit union; OR
  • A Farm Credit System institution (other than the Federal Agricultural Mortgage Corporation) that applies the requirements under the Bank Secrecy Act and its implementing regulations as a federally regulated financial institution or functionally equivalent requirements.

Requiring a new lender to fit into one of these three categories – without offering another category for qualification – would exclude a host of potential fintech companies, who are very well positioned to provide PPP loans to a pool of customers that may not be reached by traditional 7(a) SBA lenders.

The CARES Act generally directs the Administrator and Secretary of the Treasury to designate as Additional Lenders those that have the “necessary qualifications to process, close, disburse and service loans” made with the guarantee of the SBA.  The Act also provides that “the Department of the Treasury, in consultation with the Administrator, and the Chairman of the Farm Credit Administration shall establish criteria.”  Generally, a lender may not participate in the PPP if doing so would affect its safety and soundness, as determined by the Secretary of the Treasury. In addition, nonbanks must meet certain other standards, including requirements surrounding compliance with the Bank Secrecy Act, a federal anti-money laundering law.  However, the CARES Act does not include any other specific limiting criteria for Additional Lenders which might exclude fintech companies.

Many fintech lenders already meet the general standards and have established relationships with small businesses and sole proprietorships, the intended beneficiaries of the PPP. These fintech companies often also have streamlined systems and online platforms in place to efficiently extend loans remotely.

Moreover, many traditional banks, concerned about risk and the time and expense of underwriting PPP loans for new customers, may limit their PPP offerings to current clients, which will leave a host of small businesses unable to participate in the program absent the ability of other lenders, including fintechs, to participate.

With the $349 billion pool of PPP loans set to be distributed on a first-come, first-serve basis, time is of the essence. Small businesses and sole proprietorship applicants began applying for loans from participating lenders starting Friday, April 3, 2020. Independent contractors and self-employed individuals can begin applying for PPP loans on April 10. Early reports indicate that $38 billion in loan applications have already been approved by the SBA.

Given the scale of the loan program and the pressure that regulators have been under to expedite its launch, it comes as no surprise that there are still kinks to iron out. Based on our work on the PPP since the CARES Act was enacted, we are optimistic that there will be a path forward for fintechs to participate in the program and we will continue to provide guidance on this new law as updates emerge.

McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.

On March 18, 2020, Square Inc., became the first U.S. fintech company to receive conditional approval of an Industrial Loan Company (“ILC”) charter from the Federal Deposit Insurance Corporation (“FDIC”), to pair with its prior charter approval on March 17, 2020 from the Utah Department of Financial Institutions.  It became the first new de novo ILC charter to be approved by the FDIC in over a decade.  This comes just one day after the FDIC codified its approach to managing ILCs generally.  The ILC charter allows non-bank owned companies to provide various deposit and lending services to customers without being subject to federal bank holding company regulations.

Square Inc. was formed in 2009 as a payment services provider enabling businesses to accept card payments.  Since then, the platform has expanded its suite of services to include software and hardware products related to point-of-sale payments, merchant services, money transmission, and business financing.

With the ILC charter approval, in 2021, Square is expected to launch Square Financial Services, Inc., as an independent and direct subsidiary industrial bank, which will provide small-business loans and deposit products to Square’s customers.  According to the company, Square Financial Services will be headquartered in Salt Lake City, Utah.

The road to ILC charter approval has not been easy or swift.  ILCs are required to obtain FDIC deposit insurance.  Applications for deposit insurance are evaluated under a framework of seven factors, including the applicant’s financial history and condition, capital structure, future earnings prospects, general character and fitness of the management, as well as any risks to the Deposit Insurance Fund, the convenience and needs of the community to be served by ILC, and whether the institution’s corporate powers are consistent with the purposes of the Federal Deposit Insurance Act.

While Square received conditional approval of an ILC charter, the decision of the FDIC board was not unanimous, with one dissenter noting Square’s inconsistent profitability since its initial founding in 2009, and potential vulnerability to an economic downturn.

Given that the FDIC last approved a de novo ILC application over a decade ago, the decision signals a potential easing of regulatory resistance towards fintech companies and their mission to increase access to financial services to traditionally underserved consumers.

There are widespread expectations that the Supreme Court, following an oral argument last week, may rule that part of the law that created the CFPB is unconstitutional.  As a result, many business executives, in particular, have been asking their lawyers about the likely impact of such a ruling.  These questions have included ones like:  Could a prior CFPB action, including a settlement punishing the target of an investigation, somehow be annulled and unwound?  And what would need to happen in order to bring a lawsuit (or to take some other action) seeking an annulment like that?

These are a valid questions.  In our view, the analysis to answer them begins by focusing on what, exactly, is claimed to be unconstitutional about the CFPB.

What is the Constitutional Problem with the CFPB?

The parties challenging the CFPB’s constitutionality are focused specifically on one provision of the Dodd-Frank Act, which created the agency.  That provision insulates, to a large degree, a Senate-confirmed Director of the CFPB from removal by the President.  It does so by permitting removal only “for inefficiency, neglect of duty, or malfeasance in office,” a legal term of art often abbreviated as “for cause,” which as a practical matter makes removal by the President very unlikely.  This protection from removal makes the CFPB Director different from Cabinet secretaries, for example, whom the President may terminate at will and for any reason.

The Supreme Court has historically allowed Congress to similarly insulate the members of multi-member, staggered commissions that run agencies (like the FTC), largely on the theory that if a President disapproves of such an agency’s policy direction, he or she can soon influence the agency when the next commission spot opens up, and in any event can often designate who chairs the commission.  But challengers to the CFPB have pointed out that, where a regulator is run by a single person — which is the case with the CFPB’s Director — Congress has never tried to insulate that individual from removal at the will of the President.  And they argue that Congress’ decision to do so is an unconstitutional infringement on the President’s authority under the Constitution to direct the operations of the Executive Branch.  That is, in the case of any President who dislikes the policy or enforcement positions of a CFPB Director, the law would unduly inhibit the President’s power to influence the agency.

In the case before the Supreme Court (Seila Law), the target of a CFPB investigation has argued — and the CFPB under the Trump Administration agrees — that the limit on removal is indeed unconstitutional.  We and many other observers agree that their argument is strong.

How is the Supreme Court Likely to Remedy this (Claimed) Violation?

To date, the only appellate opinion to find the CFPB’s removal provision unconstitutional (authored by now-Justice Brent Kavanaugh) went on to hold that the proper remedy was simply to strike the provision — making the Director removable at will — without otherwise disturbing the law or the agency.

We find the reasoning of that opinion to be persuasive.  Justice Kavanaugh (then a federal appeals court judge) explained that in deciding the remedy for a constitutional violation like this, courts should begin by asking:  Is there an alternative that Congress would have preferred if it had known that the passage at issue was unconstitutional?  Justice Kavanaugh reasoned that, in the case of the Dodd-Frank Act, Congress effectively answered that question by including a “severance” provision.  The “severance” provision states that if a court finds any passage of the law to be unconstitutional, it should leave the rest of the law in place.

We think that this same remedy is the most likely outcome at the Supreme Court, if the Court in fact finds that the removal provision is unconstitutional.  The target of the CFPB investigation has argued for broader remedies — such as striking the entire law creating the CFPB and putting the agency out of business — but we think the chance the Court will do something like that is rather low.  As Justice Kavanaugh has pointed out, courts have preferred narrow remedies for constitutional violations like these, even when the law does not contain a “severability” provision.  And it is unlikely that Congress would have preferred no CFPB at all to a CFPB with a Director removable at will.  In the prior case before Justice Kavanaugh, his opinion allowed the CFPB to continue the enforcement action that generated the constitutional challenge, albeit after correcting several errors in the agency’s interpretation of an important consumer-financial law.

But What About Past CFPB Actions?

If the Supreme Court’s remedy is merely to strike the removal clause, it is fair to ask whether that result still calls into question the validity of past CFPB actions.  After all, in this scenario, prior actions would have been directed and finalized by a CFPB Director who was unconstitutionally protected from dismissal by the President.

There have been cases where courts ruled, after striking part of a law as unconstitutional, that the proper result was to invalidate prior agency actions.  However, this has not yet happened where the constitutional problem involved only the President’s power to remove an official.  And we think it unlikely that such a result would obtain here.

Cases invalidating prior agency actions have generally involved two other types of constitutional violations.  First, there have been cases where the law gave power to a government official who did not have the constitutional authority to exercise that power in the first place.  The best example is a law that directed an official under Congress’ control to exercise Executive Branch functions.

The second type of violation involved actions by government officials who were appointed to their jobs in a manner inconsistent with the Constitution.  Examples include officials appointed without Senate confirmation where the Constitution required confirmation.

What these cases have in common is that actions were taken by officers who never should have had the power to take those actions.  But that is not the case where the flaw is in a removal provision like the one involving the CFPB.  Moreover, as a practical matter, most CFPB enforcement actions – and subsequent settlements – have taken place during periods when the CFPB was led by a Director selected by the then-current President, with no indication that the President was unhappy with the Director he chose.  Thus, in opposing an argument to invalidate one of these settlements, the government would argue that the President had as much control over the CFPB Director as the Constitution provides for.

Indeed, one court remarked, in considering a similar issue involving an invalid removal provision, “We should not invalidate” the actions of a President’s own nominee by invoking that President’s “need to exercise executive authority.”  However, there was a period of about 10 months in 2017, following President Trump’s inauguration, when the CFPB was led by an Obama appointee, Richard Cordray, whom President Trump no doubt would have promptly dismissed (or whom would have resigned early) if not for the obstacle of the removal provision.

Nonetheless, the government would also have other, more basic arguments for opposing the invalidation of a past settlement, including ones based on policies against disturbing agreements on which parties have relied.  In the case of many CFPB settlements, the affected parties would include the consumers who received restitution.

In sum, we think that even if the Supreme Court finds a constitutional violation, it is unlikely that the decision will provide a basis for disturbing past agency actions (especially those from periods other than the window of Director Cordray’s work during the Trump Administration).  But we are closely monitoring the case and, in the event that the Court’s opinion does open a window to challenge prior actions, our consumer-finance and appellate teams stand ready to assist.

McGuireWoods’ CFPB and consumer-finance practitioners provide risk-based advice to large and small financial industry clients on a wide range of legal and compliance matters, defend clients subject to investigations and lawsuits, and guide FinTech and other innovators as their products and services approach the market.

McGuireWoods’ appeals and issues team works with all of the firm’s litigation and investigations departments to shape appeal strategies and responses government investigations and submissions. We develop innovative approaches to appeals and develop broader efforts to shape the law to benefit our clients over the long term.

For the first time, a U.S. fintech company is acquiring a regulated U.S. bank, which will give it access to a stable and cheaper source of funding – as well as a national bank charter.

On February 18th, LendingClub, one of the largest providers of personal loans in the U.S., announced that it will pay $185 million in cash and stock to acquire Radius Bancorp, an online bank with about $1.4 billion in assets.  The deal will allow LendingClub to offer an array of new products and diversify its revenue stream, by combining one of the leading digital loan providers with one of America’s fastest growing digital banking platforms.

LendingClub is the first fintech company to acquire a chartered bank as an entry into banking, instead of applying for a national bank charter.  Given the murky regulatory landscape, it may be a smoother path.

On July 31, 2018, the OCC announced that it would start accepting applications for special purpose national bank charters (“SPNB Charters”) from non-depository fintech companies engaged in the business of banking. The goal was to streamline the licensing process, by allowing the OCC to regulate fintech companies with a SPNB Charter.  That way, fintech companies would not have to opt between existing in the gray area where it is unclear whether they need a license, or being bogged down by the process of obtaining licenses from regulators in every state where the company operates.

State regulators responded to the OCC’s announcement with litigation.  The Conference of State Bank Supervisors and the New York State Department of Financial Services both filed lawsuits against the OCC, arguing that the SPNB Charters were beyond OCC’s statutory authority.  In May of 2019, the New York federal district court denied the OCC’s motion to dismiss the lawsuit.  In doing so, the court found that the term “business of banking,” as used in the National Banking Act, meant that only depository institutions were eligible to receive national bank charters from the OCC, and thus the OCC could not issue SPNB Charters to non-depository fintech companies.  In October of 2019, the parties stipulated to entry of final judgment in favor of the New York Department of Financial Services, and agreed to set aside the OCC regulation that would allow non-depository fintech companies to seek a SPNB Charter.  The OCC has appealed the decision, leaving an uncertain federal regulatory future for non-depository fintech companies.

By acquiring Radius Bancorp, LendingClub should be able to avoid the murky waters and sail smoothly into a new position in the marketplace, as an online lender and bank.

California and New York are taking the lead to expand consumer financial protection, in part to smooth out the ebb and flow of federal policy and enforcement at the CFPB.  Within a few days of each other, Governor Gavin Newsom of California and Governor Andrew Cuomo of New York announced proposals to expand regulatory oversight in the financial consumer protection space.

A.  California

On January 10, 2020, California Governor Newsom sent the California Legislature his 2020-21 budget, which includes a proposal to overhaul the state’s Department of Business Oversight (“DBO”), and rename it the Department of Financial Protection and Innovation (“DFPI”). The DFPI, which some observers are describing as a “mini-CFPB,” would have enhanced regulatory powers, as well as responsibility to pursue now-unsupervised financial services providers. The Governor’s Budget Summary cited the reason for the expansion as “[t]he federal government’s rollback of the CFPB,” which leaves Californians vulnerable to predatory businesses and leaves companies without the clarity they need to innovate.” Specific new activities would include, among others:

  • Licensing and examining new industries that are currently unregulated or under-regulated;
  • Protecting consumers through enforcement against unfair, deceptive, and abusive acts and practices (“UDAAPs”);
  • Establishing a new Financial Technology Innovation Office that would cultivate the responsible development of new consumer financial products.

The budget also would provide funding to administer the California Consumer Financial Protection Law. The California Legislature will now begin a detailed review of the budget, a version of which must be passed before June 15, 2020.

B. New York

On January 8, New York Governor Cuomo released his 2020 State of the State address and announced several important measures relevant to fintech and other financial services companies:

  • License requirement for debt collection companies: The Governor will propose legislation giving the New York Department of Financial Services (“NYDFS”) authority to license debt collection entities, and to examine suspected abuses via information requests and books-and-records examinations. The new oversight authority would allow the NYDFS to bring punitive actions against unscrupulous debt collectors, potentially resulting in fines or lost licenses.
  • Strengthen NY’s Consumer Protection Laws: Governor Cuomo also proposed a broad consumer protection agenda aimed at enabling New York to intervene in the absence of federal enforcement in order to protect consumers from new and predatory financial products. The agenda includes:
    • Expanded protection for NY Consumers from UDAAPs: current state law protects consumers from intentional fraud or material misrepresentations regarding financial products or services. The Governor’s proposal would enhance New York law to the level of federal law, which allows enforcement actions for a broader range of UDAAPs.
    • Elimination of exceptions: Although current NY law allows for enforcement actions, many consumer products and services are exempted. The Governor’s proposal would eliminate these exceptions.
    • Closing loopholes: Currently, entities licensed under New York’s Financial Services Law (“FSL”) are not required to pay assessments covering the cost of examinations. The Governor proposed amending the FSL to match the Insurance and Banking Law, which would require these entities to pay for examinations.
    • Fines: To deter illegal conduct, the proposal would amend the state’s law to increase fines. Instead of the current penalty of $5,000 per violation, Governor Cuomo proposed capping penalties at the greater of $5,000, or two times the damages or economic gain attributed to the violation. The FSL would also be updated to include authority for collecting restitution and damages.

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Blending our firm’s nationally recognized financial services practice with our corporate and technology practices, McGuireWoods’ fintech practice provides practical, business-minded counsel on legal and regulatory matters relevant to financial services companies and fintech vendors alike.