FinTech Charters and Modernization of Financial Services Regulations

Nelson Mullins Riley & Scarborough LLP

The Consumer Financial Protection Bureau (“Bureau” or “CFPB”) Taskforce on Federal Consumer Financial Law (“Taskforce”) released a two-volume report, on January 5, 2021, providing an examination of the existing legal and regulatory environment facing consumers and financial services providers. Within the nearly 900-page report are 102 recommendations by the Taskforce for ways to improve and strengthen consumer financial laws and regulations.

The findings and recommendations within the report are poised to not only reshape Bank-Fintech partnerships but also the scope of competition facing depositories over the next few years. The report states “to facilitate competition and innovation, the Taskforce recommends enabling non-bank institutions to provide a greater array of financial services, including authorizing nonbank payment systems, reducing regulatory obstacles to chartering of industrial loan companies, and expanding the opportunities for credit unions to serve low-income communities.” The Taskforce recommends that “the CFPB be authorized to grant charters to non-depository FinTech companies, payments processors, and other financial service providers that operate in inherently interstate markets.”

This will have a seismic impact on the U.S. financial services landscape while bringing the U.S. more in line with the approach European regulators have taken within the space. The CFPB notes that our current approach in the U.S. leaves some consumers “on the margins of the system, including those who are ‘credit invisible’ or lack the resources or knowledge to navigate the consumer financial system successfully.” The Taskforce urges policymakers to “consciously adopt policies that will facilitate greater inclusion, such as creating a modern regulatory framework for FinTech firms, facilitating use of alternative data, allowing greater use of industrial banking charters for commercial providers of financial services, and adopting a faster payments clearing system.”  Modernization efforts like this would not only open access to a broader array of consumers, but it will also substantially reshape the average customer experience within many U.S. banks, forcing many depositories to adopt similar technologies or begin to lag in customer experience and product offerings.

Key recommendations found in the report include (listed in no particular order):

  1. Congress should authorize the Bureau to issue licenses to non-depository institutions (i.e., FinTechs) that provide lending, money transmission, payment services.

    • This includes a recommendation that licenses should provide that these institutions are governed by the regulations of their home states, even when providing services to consumers located in other states (similar to the National Banking Act’s treatment of federally charted banks).
    • Alternatively, the Taskforce notes that Congress should clarify that the OCC has the authority to issue charters to non-depository institutions engaged in lending, money transmissions or payment services.
  2. Bureau should consider benefits costs of preempting state law in some specific cases in which the potential for conflict can impede provisions of valuable products and services, such as the regulation of FinTech companies engaged in money transmission.
  3. Bureau should continue to identify and focus on opportunities to coordinate regulatory efforts.

    • This includes a recommendation for the Bureau and prudential regulators to eliminate overlapping examination subject areas and reconcile inconsistent examination standards that unnecessarily expend multiple resources and can cause confusion.
  4. Bureau should continue to increase dialogue with state regulators to bridge knowledge gaps and streamline regulation.
  5. The Bureau should work with other agencies to create a unified regulatory regime for new and innovative technologies providing services similar to banks.
  6. The Bureau should work with the FTC to explore opportunities to streamline jurisdiction and enforcement of consumer financial protection regulation of third-party financing offered at automobile dealerships and other retail sellers.

    • The report notes that because the FTC has jurisdiction over both unfair and deceptive sales practices and consumer credit extensions, oversight of retail sellers may be most efficiently handled by the FTC. The agencies should consider an MOU specifically focused on retail sellers to avoid duplicative effort.
  7. The Bureau, Congress, and other regulators should exercise caution in restriction of the use of nonfinancial alternative data.

    • The report notes that this data can be a very useful indicator of creditworthiness, and existing fair lending laws prohibit unlawful discrimination.
  8. Bureau should modernize fair lending laws, including ECOA and Regulation B.

    • This includes a recommendation to conduct research on the propriety of amending ECOA to include disability as a prohibited basis group and, if warranted, potentially recommend its inclusion to Congress.
    • The report also goes on to recommend that the Bureau should address any future concerns about credit discrimination in pricing by auto dealers through its ECOA enforcement powers with auto dealerships under its jurisdiction, rather than through enforcement actions against the banks and other creditors that take assignment of these contracts.

Given the OCC’s pushing of its own agenda over the past 5 years, it was unsurprising to see the Acting Comptroller of OCC, Brian P. Brooks, issue a statement in response to the CFPB’s Taskforce report saying:

The thoughtful report by the task force created by the CFPB concludes that the nation needs federal charters for fintechs to effectively, efficiently, and safely serve the financial needs of consumers across the nation under a single uniform set of rules. We absolutely agree with that conclusion.

Under the law, the agency that grants national charters to companies engaged in lending, payments, or deposit-taking is the Office of the Comptroller of the Currency (OCC), which has the responsibility for prudential supervision to ensure these chartered institutions operate in a safe, sound, and fair manner. In its wisdom, Congress in the Dodd-Frank Act separated chartering and prudential supervision from consumer protection enforcement, assigning chartering authority to the OCC and specific consumer protection enforcement authority to the CFPB.

As is evident with the above statement, we will continue to see interagency conflict as well as disputes between the federal and state regulators as these issues come to the forefront, but what we will not see is the push to modernize our structure subside given the current momentum and the need for the U.S. to compete on a global scale.  While the report is far from binding law, it does shed light on many of the policy issues that industry stakeholders are pushing Congress, the Bureau, and other prudential regulators to consider and provide another glimpse of what the shifting regulatory landscape within financial services may look like over the next 24 months. Depositories should be preparing to compete in a landscape with chartered FinTechs while FinTechs should be preparing for the unmatched regulatory oversight associated with full CFPB, OCC, and/or FRB supervision.   

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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