Financial Services Weekly News: FDIC Releases Guide To Connect Fintechs With Banks

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[co-author: Nikhil Sethi, Law Clerk]

Regulatory Developments

FDIC Releases New Guide to Help Fintechs Connect with Banks

On February 24, the FDIC’s technology lab, FDiTech, released a new guide to help financial technology companies and others partner with banks. The guide, entitled Conducting Business with Banks: A Guide for Third Parties, is designed to assist third parties understand the environment in which banks operate and includes the following:

  • A discussion of the risk management and due diligence factors that banks consider when deciding which third-parties to use;
  • A discussion of the general factors that fintech companies should consider to prepare them for a bank’s third-party selection process;
  • A list of materials and terms that bank management may request from fintech companies as part of its due diligence and contract management process; and
  • A list of FDIC resources that may be useful to fintech companies that do business with, or wish to do business with, banks.

The guide indicates that FDiTech is working to develop additional tools and resources to increase opportunities for bank/fintech partnerships and eliminate unnecessary burdens and costs associated with third-party risk management.

FINRA Announces Targeted Examination of Firms Offering Zero Commissions

On February 20, FINRA announced that its Trading & Financial Compliance Examinations (TFCE) of the Market Regulation Department is conducting a review of broker-dealers concerning a firm’s decision not to charge commissions for customer transactions, the impact that not charging commissions has or will have on the broker-dealer’s order routing practices and decisions, and other aspects of the firm’s business. TFCE’s examination letter lists 26 request items covering the period from January 1, 2019 to present. In its request letter, TFCE generally requested information related to, among other things:

  • Whether or not a firm effects customer transactions without charging a commission and the dates on which a firm began not charging the customer commissions;
  • The types of securities in which the firm effects customer transactions without charging the customer a commission;
  • Factors or limitations, if any, that determine whether or not a firm effects a customer transaction without charging the customer a commission, including but not limited to the liquidity or availability of the security, primary market center of the security, price of the security, type of order, type of account or account balance;
  • Whether or not a firm charges customers any fees, expenses or costs, exclusive of commissions, in connection with brokerage accounts;
  • Disclosures made to customers concerning any fees, expenses or other costs, exclusive of commissions charged to brokerage accounts;
  • “Payment for order flow” arrangements between the firm and any other broker-dealer or alternative trading system;
  • Whether or not the firm offers a sweep program or programs in connection with customer brokerage accounts and related disclosures to customers, the terms of the sweep program, including availability of alternatives and interest rate offered, and “a detailed explanation concerning any and all changes to the sweep program or programs upon introducing a zero commission program to customers”; and
  • Written supervisory procedures concerning best execution and FINRA Rule 5310 and written supervisory procedures regarding “payment for order flow” arrangements in effect during the review period.

CFPB Supplements Proposal on Time-Barred Debt Disclosures

On February 21, the CFPB published a Supplemental Proposed Rule to supplement its May 2019 proposed rule (May 2019 Proposed Rule), as discussed in more detail in the May 9, 2019 edition of the Roundup, prescribing rules governing the activities of debt collectors, as that term is defined by the Fair Debt Collection Practices Act (FDCPA). The Supplemental Proposed Rule, which is being proposed in response to public comments received on the May 2019 Proposed Rule, would require debt collectors to make certain disclosures when collecting time-barred debts (debts for which the applicable statute of limitations has expired). Specifically, the Supplemental Proposed Rule would require a debt collector collecting a debt which it knows or should know is time barred to disclose: (1) that the law limits how long the consumer can be sued for a debt and that, because of the age of the debt, the debt collector will not sue the consumer to collect it; and (2) if the debt collector’s right to bring a legal action against the consumer to collect the debt can be revived under applicable law, the fact that revival can occur and the circumstances under which such revival can occur. The CFPB believes the Supplemental Proposed Rule will provide clarity about the FDCPA’s requirements to debt collectors and consumers as well as help ensure that the features of debt collection are fully, accurately, and effectively disclosed to consumers. Comments are due within 60 days of the Supplemental Proposed Rule’s publication in the Federal Register.

FDIC and OCC Announce Extension of Comment Period for Proposed CRA Changes

On February 19, the FDIC and OCC announced a 30-day extension of the public comment period for proposed changes to the regulations implementing the Community Reinvestment Act (CRA) until April 8, 2020. As discussed in the December 18, 2019 edition of the Roundup, on December 12, 2019, the FDIC and OCC proposed the first substantive amendments to regulations implementing the CRA in nearly 25 years. The regulators initially had resisted extending the comment period but, possibly due to significant public pressure, “have now determined that a 30-day extension is appropriate.”

FDIC Releases Economic Scenarios for 2020 Stress Testing

On February 14, the FDIC released the hypothetical economic scenarios for use in the upcoming stress tests for covered institutions with total consolidated assets of more than $250 billion. The supervisory scenarios include baseline and severely adverse scenarios. Each scenario includes 28 variables—such as gross domestic product, the unemployment rate, stock market prices, and interest rates—covering domestic and international economic activity. The FDIC coordinated with the Board of Governors of the Federal Reserve System (Federal Reserve Board) and the OCC in developing and distributing these scenarios. The 2020 stress test scenarios released by the Federal Reserve Board and OCC were covered in the February 12 edition of the Roundup.

FFIEC Publishes Final Regulatory Changes to Call Report

On January 27, the FDIC, OCC and Federal Reserve Board (collectively, the agencies), operating under the auspices of the Federal Financial Institutions Examination Council (FFIEC), published the final regulatory changes to the Consolidated Reports of Condition and Income (Call Report) and the Regulatory Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101). The FFIEC had previously proposed changes to these reports in October of 2019. After considering the comments received on the October 2019 proposal, the FFIEC is proceeding with the proposed revisions to the reporting forms and instructions for the Call Report and the FFIEC 101, with certain modifications.& The changes to the Call Report and the FFIEC 101 report:

  • implement changes to the agencies' capital rule that the agencies recently have finalized;
  • include a change in the scope of the FFIEC 031 Call Report and instructional revisions for the reporting of operating lease liabilities on the Call Report balance sheet, which would take effect March 31, 2020; and
  • with regard to reporting home equity lines of credit that convert from revolving to non-revolving status, describe instructional revisions and a related new item, both of which would take effect in 2021.

Redlined copies of the Call Report forms and the FFIEC 101 report form showing the proposed reporting changes are available on the FFIEC's Reporting Forms webpage. Redlined draft revisions to the instructions for these reports also are available on these webpages.

FFIEC Issues 2020 HMDA Reporting Guide

The FFIEC has released its 2020 Guide to HMDA Reporting. The 2020 edition reflects updates to incorporate content from the CFPB’s Final HMDA Rule previously covered in the October 23 edition of the Roundup.

Recent SEC MD&A Guidance Becomes Effective

As previously covered in a recent client alert and the February 5, 2020 edition of the Roundup, the Securities and Exchange Commission (SEC) recently issued guidance on key performance indicators and metrics in Management’s Discussion and Analysis. The guidance became effective on February 25, 2020 upon its publication in the Federal Register and applies to Annual Reports on Form 10-K for the year ended December 31, 2019 which have not yet been filed with the SEC.

SEC Commissioner Peirce Proposes Safe Harbor for Blockchain Developers

Speaking at the International Blockchain Congress in Chicago on February 6, SEC Commissioner Hester Peirce proposed a safe harbor from U.S. securities laws so that developers of blockchain protocols could offer and sell tokens for the purpose of developing functioning token networks and creating liquidity for users. Commissioner Peirce’s views are her own, and do not necessarily represent the views of others at the SEC. However, Commissioner Peirce’s speech represents important first steps toward regulatory certainty for blockchain developers and, if eventually adopted, could bridge the gap between existing securities laws and the realities of building successful distributed ledger protocols. Read the Digital Currency & Blockchain Perspectives blog post.

Massachusetts Division of Banks Announces Fintech Innovation Hours for Financial Institutions and Fintech Firms and Formation of New Cybersecurity/Fintech Unit

The Massachusetts Division of Banks (DOB) announced the launch of two new industry initiatives — the debut of Fintech Innovation Hours and the formation of a Cybersecurity/Fintech Unit. The DOB will host an industry Innovation Hours day on April 15, 2020 for financial institutions and fintech firms to meet individually with DOB leaders to discuss financial innovation and technology. The DOB invites community banks, credit unions, non-depository institutions, their potential fintech partners, and emerging fintech start-ups to sign up for a session.

Enforcement & Litigation

Eleventh Circuit Narrows TCPA’s Autodialer Definition

The Eleventh Circuit joined the growing majority of courts in issuing an opinion that significantly narrows the scope of the Telephone Consumer Protection Act (TCPA) and delivers a blow to the plaintiffs’ bar and proponents for an expansive reading of the statue. In addressing a pair of consolidated appeals, Glasser v. Hilton Grand Vacations Co., LLC and Evans v. Pennsylvania Higher Educ. Assistance Agency, the three-judge panel’s ruling tackled the meaning of an automatic telephone dialing system, which is often referred to as an autodialer under the TCPA. The panel held that, because neither phone system in either case used randomly or sequentially generated numbers (and in Glasser’s appeal, the system required human intervention), neither constituted an auto-dialer. Therefore, both claims fell outside the TCPA’s scope and were not viable. Read the LenderLaw Watch blog post.

Massachusetts Division of Banks Releases 2019 Annual Enforcement Report

On February 15, the Massachusetts Division of Banks issued its 2019 Annual Enforcement Report, which highlights enforcement actions, penalties, reimbursements, updates and other actions undertaken by the Division of Banks in 2019.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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