Our overview of the Top 10 Considerations for Financial Institutions in 2020 series noted that financial institutions will continue to face challenges in a number of corporate, compliance, and risk areas, especially in light of COVID-19 and a potentially slowing economy in 2020. Our sixth consideration is fintech, or financial technology, which is the use of technology in the provision of financial services and describes a multitude of businesses, activities, and delivery systems.
As financial services offerings expand in the digital environment, traditional financial services firms continue to seek partnerships with, or acquire, financial technologies and the companies developing them. However, financial institutions will first need to conduct robust due diligence and understand the products and services themselves, as well as the relevant limitations or restrictions on activities and investments. Fintech engagement requires consideration of not only your institution’s strategy and culture, but also licensing regimes, consumer protection laws and regulations, and third-party vendor risk management enhancements, among other things.
Regulatory agencies have been issuing a myriad of bulletins, advisories, and other guidance documents that have focused on the use of technology and implementation of digital activities to provide products and services to consumers and businesses. Many of the most recent pronouncements have been focused on operating in the remote working environment due to COVID-19 and maintaining product and service offerings in an accelerated digital ecosystem. Significantly, the new Comptroller of the Currency, Brian Brooks, who has extensive experience in both the traditional banking and financial technology industries, has focused his attention on the digital activities of national banks.
For example, in the Office of the Comptroller’s (OCC) recent Advanced Notice of Proposed Rulemaking (ANPR), the OCC indicated that it was reviewing its regulations on digital activities of banks “to ensure that its regulations continue to evolve with developments in the industry.” The ANPR describes the evolution of digital activities of banks and invites public comments on 11 different questions related to digital activities including blockchain technologies, cryptocurrencies and cryptoassets, artificial intelligence, and payments technologies and regtech, among others.
Additionally, the OCC and the Federal Deposit Insurance Corporation (FDIC) have each issued final rules focusing on the interest rate authority of national and state banks, respectively. These final rules have been adopted in light of the Second Circuit’s decision in Madden v. Midland Funding, LLC. In that case, the Second Circuit determined that the authority of a national bank to charge interest at the rate permitted by the state in which the national bank is located—Section 85 of the National Bank Act—did not permit a national bank to transfer the enforceable rights in the loans that were made under the preemptive authority of the National Bank Act.
This case and its lingering implications have created confusion for both lenders and non-bank third parties acquiring such loans as part of a marketplace lending, or similar, platform. The final rules were issued by the OCC for national banks and the FDIC for state-chartered banks, with the goal of providing clarification in the regulations regarding the banks’ interest rate authority. While perhaps not a clear “fix” to the Second Circuit’s ruling in Madden, regulatory clarification of the “valid-when-made” doctrine is welcomed by the secondary credit markets.
On July 20, 2020, the OCC followed up its final rule on interest rate authority by publishing a Proposed Rule to determine when a national bank or federal savings association is the “true lender” of a loan in the context of a partnership with a non-bank third party, such as an online lender. The rule was proposed to address the uncertainty that has developed regarding what entity is actually making the loan—the “true lender” —and therefore, what legal framework applies to the loan. Under the proposal, “a bank makes a loan whenever it, as of the date of origination, (1) is named as the lender in the loan agreement or (2) funds the loan.” We expect that these regulatory clarifications by the OCC and FDIC on interest rate authority and a “true lender” test will accelerate relationships with online lending platforms.
Finally, just last week we saw the announcement that the OCC granted a full-service national bank charter to Varo Money, Inc., a consumer fintech company. This is the first national bank charter to be granted to a fintech company by the OCC. Varo Bank, N.A. launched August 1, having already received approvals from the FDIC and Federal Reserve. Social Finance, Inc. has also applied for a full-service national bank charter, and Square, Inc. previously received FDIC approval to launch an industrial loan company in 2021. Again here, banks and other traditional financial institutions will be watching these developments closely to see how digital activities and the associated oversight evolve.
1. What is your institution’s technology or fintech strategy?
2. Have you considered gathering information, via survey or otherwise, from your retail and business customers to learn what technology improvements are desirable?
3. Regardless of your fintech strategy, a myriad of compliance issues emerge based on the specific activities. For example, consider fair lending, vendor management, anti-money laundering, and unfair and deceptive acts and practices compliance issues.
Howard & Howard has a dedicated team of financial services attorneys with deep experience handling complex transactional, regulatory, and litigation matters. Our attorneys regularly advise clients on M&A, strategic transactions, third-party engagement, enforcement matters, and regulatory compliance. For more information, or for questions related to this Financial Institutions Advisory, please contact the author(s), your Howard & Howard attorney, or visit us at https://howardandhoward.com/services/financial-banking/.