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  Most strikingly, the Bureau formally rescinded its controversial Compliance Bulletin 2015-05:  RESPA Compliance and Marketing Services Agreements (Oct. 8, 2015) (“2015 MSA Bulletin”).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.[1]

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.

Continue Reading CFPB Rescinds RESPA Bulletin on Marketing and Services Agreements and Publishes Important FAQs

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.

Continue Reading OCC’s Attempt at Clarifying “True Lender” Principle Met 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.

Continue Reading The New California Consumer Financial Protection Law

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.

Continue Reading Mobile Banking Startup Varo Money Becomes First Fintech Company Granted a National Bank Charter

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.