Weekly RoundUp August 06, 2020

Financial Services Weekly Roundup: A Fintech First – Varo Money Granted a Charter to Launch Full Service National Bank

Editor's Note

OCC In the News. The Office of the Comptroller of the Currency (OCC) made headlines this week, announcing that Varo Money Inc. has been granted a charter to launch a full service national bank, a first for fintech companies. In addition, in response to Acting Comptroller of the Currency Brian P. Brooks’ comments that the OCC will unveil a nondepository “payments charter” this fall, several financial services trade groups published a letter to Mr. Brooks expressing concern about the potential charter and stating that they would “strongly oppose” its implementation. Meanwhile, the attorneys general of California, Illinois and New York filed suit to block the OCC’s recently issued Valid-When-Made Rule. In other news, the Financial Crimes Enforcement Network (FinCEN) published three frequently asked questions (FAQs) regarding customer due diligence requirements; the Small Business Administration (SBA) released a new series of FAQs providing guidance to address borrower and lender questions concerning forgiveness of Paycheck Protection Program (PPP) loans; the Federal Financial Institutions Examination Council (FFIEC) issued a statement on additional loan accommodations related to COVID-19; and the Financial Industry Regulatory Authority (FINRA) issued an FAQ regarding the permissibility of certain business entertainment activities at a virtual event or meeting. These and other developments are discussed in more detail below.

We also invite you to visit Goodwin’s Coronavirus Knowledge Center and Consumer Financial Services Industry COVID-19 Hub, which are updated regularly, to learn how cross-industry teams at Goodwin are helping clients to fully understand and assess the ramifications of COVID-19,  navigate the potential effects of the outbreak on their businesses and evaluate whether and how to safely reopen.

Editor's Note
Editor's Note
Editor's Note

Regulatory Developments

OCC Grants National Bank Charter to Fintech Company

On July 31, the OCC granted a national bank charter to the fintech company, Varo Money, Inc. Varo’s new national bank, Varo Bank, N.A., opened on August 1. This event is significant because it represents the first major fintech company to be granted a national bank charter and demonstrates what many believe to be a convergence of the fintech and banking industries. There are many reasons a fintech company might seek a banking charter and, despite uncertainty surrounding the OCC’s nondepository “Fintech Charter,” a number of fintech companies are seeking depository charters instead. As Acting Comptroller Brooks, who formerly served as Chief Legal Officer of Coinbase Global, Inc., remarked in a statement, Varo Bank’s chartering “represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.” Other federal banking agencies have also signaled that their doors are open to fintech applicants. Earlier this year, the Federal Deposit Insurance Corporation (FDIC) released guidance for deposit insurance applications from non-bank and non-community bank applicants, such as fintech companies. The FDIC also approved two deposit insurance applications by industrial loan companies for the first time in recent history—both sponsored by fintech companies—and issued proposed regulations for the holding companies of similar institutions.

Trade Groups Raise Concerns About Potential OCC Payments Charter

On July 29, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Independent Community Bankers of America, National Association of Federally Insured Credit Unions, and The Clearing House published a letter to Acting Comptroller Brooks expressing concerns about the OCC’s plans to move forward with a narrow-purpose payments charter, noting that they would strongly oppose efforts to do so. The letter came after the Comptroller disclosed that the OCC will unveil a charter this fall that would essentially be a “national version of a state money transmission license,” offering nonbank payment providers “a national platform with preemption.” The Comptroller also indicated that the OCC would seek to allow firms operating successfully under this charter to be granted direct Federal Reserve access after a certain time period. The associations urged the OCC to proceed carefully and emphasized that existing rules and oversight should be applied consistently with those adhered to by national banks.

FinCEN Issues FAQs on Customer Due Diligence Requirements

On August 3, FinCEN issued three FAQs regarding customer due diligence requirements for covered financial institutions. The FAQs clarify the regulatory requirements related to obtaining customer information, establishing a customer risk profile, and performing ongoing monitoring of the customer relationship in order to assist covered financial institutions with their compliance obligations in these areas. Among other things, FinCEN noted that covered institutions may take a risk-based approach, based on established policies and procedures, in determining a customer’s risk profile and the amount of customer information that should be collected, as well as how frequently such information should be updated. FinCEN also noted that a financial institution’s program for determining customer risk profiles should be sufficiently detailed to distinguish between significant variations in the risks of its customers. These FAQs supplement those that were previously published by FinCEN on July 19, 2016 and April 3, 2018.

SBA Releases New FAQs on PPP Loan Forgiveness

On August 4, the SBA released new FAQs providing guidance to address borrower and lender questions concerning forgiveness of PPP loans. The FAQs include information addressing general questions on loan forgiveness, questions related to forgiveness of payroll and non-payroll costs, and questions on forgiveness reductions.

FFIEC Issues Statement on Additional Loan Accommodations Related to COVID-19

On August 3, the FFIEC, on behalf of its members, issued a joint statement outlining prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers as loans near the end of the initial loan accommodation periods provided during the COVID-19 pandemic. The statement also addresses issues relative to accounting and regulatory reporting and internal control systems.

FINRA Issues FAQ on Permissible Business Entertainment at Virtual Events

FINRA has released an FAQ regarding whether an associated person may host a virtual business entertainment event or video meeting with the employees of an institutional customer or third-party broker-dealer and provide food and beverage that is designed to be consumed during that event or meeting. FINRA Rule 3220 prohibits any member or person associated with a member from giving anything of value in excess of $100 per year to any person where such payment is in relation to the business of the recipient's employer. FINRA’s non-cash compensation rules prohibit members and their associated persons from giving or accepting such gifts in connection with the sale of specified products, but permit business entertainment that is not subject to the $100 limit as long as it “is neither so frequent nor so extensive as to raise any question of propriety and is not preconditioned on achievement of a sales target." While the rules permitting business entertainment do not specify whether the entertainment must be in-person, FINRA distinguishes business entertainment from a gift on the basis that business entertainment involves an associated person of a member personally hosting employees of institutional customers or third-party broker-dealers and their guests, rather than simply giving those employees something of value. In the FAQ, FINRA concluded that the provision of reasonable amounts of food and beverage designed to be consumed by the recipient employees and their guests during a virtual event or meeting would not be subject to the $100 gift limit, provided that certain conditions set forth in the FAQ are met.

Federal Reserve Announces Extensions of its Temporary U.S. Dollar Liquidity Swap Lines and the Temporary Repurchase Agreement Facility

On July 29, the Federal Reserve announced the extensions of its temporary U.S. dollar liquidity swap lines and the temporary repurchase agreement facility for foreign and international monetary authorities through March 31, 2021. These facilities were established in March 2020 to ease strains in global dollar funding markets resulting from the COVID-19 pandemic.

SEC Adopts Final Rules Addressing Proxy Advisory Firms

In our previous edition of the Roundup, we discussed the SEC’s finalized amendments to its proxy solicitation rules, which will modify the practices of proxy advisory firms and thus provide them with greater transparency and accountability. Goodwin breaks down the final amendments further, stating that these amendments (1) expand the definition of “solicitation” under SEC proxy rules to specifically include proxy voting advice of the type typically provided by proxy advisory firms and (2) impose additional requirements that proxy advisory firms must meet to avoid subjecting their proxy voting advice to the filing and certain other requirements of the proxy rules. Read the client alert to learn about the key takeaways for public companies, the proxy rule amendments, pending ISS litigation contesting SEC amendments and guidance, and supplemental guidance for investment advisers.

Regulating Unregistered Finders: New York Dips Its Toe in the Murky Waters

In response to the issue of a private company turning to a “finder” to help it raise capital, the New York State Attorney General unveiled a package of reform proposals intended to protect the public from fraudulent exploitation in the offer and sales of securities. Read the client alert to learn more about the process of using unregistered finders, the various risks and considerations, and how recent developments in New York may change private issuers’ approaches in this murky area of the regulatory landscape.

CFPB Symposium Considers Use of Cost-Benefit Analysis in Financial Regulation

On July 29, the Consumer Financial Protection Bureau (CFPB) held a symposium on the use of cost-benefit analysis in consumer financial protection regulation. Based on previous symposiums, the selection of this topic may signal changes in CFPB policies and procedures concerning the use, methodology and reporting of cost-benefit analysis. Panelists from higher education institutions and one financial services company offered varying perspectives on the best use of cost-benefit analysis by the CFPB and how the CFPB can help advance the methodology of cost-benefit analysis for consumer financial regulation. Read the LenderLaw Watch blog to learn more about the key takeaways of the symposium.

Enforcement & Litigation

California, Illinois, and New York Sue to Block OCC’s Valid-When-Made Rule

In May of this year, the OCC provided clarification on the 2015 Second Circuit’s decision in Madden v. Midland Funding by issuing a final rule that interest rates established on bank-originated debt remain valid after the debt is transferred to a nonbank partner. In response to this final rule, the attorneys general of California, Illinois and New York sued the OCC, challenging the rule and alleging that the OCC ignored procedure by failing to assess whether any of the state laws facing preemption would interfere with the powers of a federally chartered bank and also that the OCC lacks authority to issue the rule because it does not have jurisdiction over what non-banks may do, and court precedent dictates that interest-rate preemption does not extend to non-banks. The case can be tracked in the U.S. District Court for the Northern District of California as the People of the State of California, Illinois and New York v. The Office of the Comptroller of the Currency and Comptroller Brian Brooks, case number 20-cv-5200.

Federal Court Refuses to Vacate Ruling Precluding Fair Housing Act Damages

On July 17, a federal judge in Guam refused to vacate her ruling in U.S. v. Government of Guam, et al., Case No. 1:17-00113, which held that sovereign immunity prevented the U.S. government from seeking damages under the Fair Housing Act (FHA) for Guam’s alleged violations of housing rights for the island’s indigenous Chamorro people. U.S. v. Government of Guam, et al. was filed by the Department of Justice in September 2017 against the government of Guam and its Chamorro Land Trust Commission (CLTC), claiming that the CLTC’s program granting residential leases to the Chamorro violated the FHA. U.S. District Judge Susan Oki Mollway, however, ruled in April 2019 that the U.S. government may not pursue damages for individuals claiming to have been victims of housing discrimination by the Territory of Guam pursuant to 42 U.S.C. § 3614 of the FHA. Read the LenderLaw Watch blog to learn more about the Court’s decision.

CFPB Announces $1.1 Million Settlement with California-based Lenders to Resolve Allegations of Unfair and Deceptive Practices

On July 24, the CFPB announced that it had entered consent orders (here and here) against two California-based mortgage lenders, resolving allegations that the lenders violated the Truth in Lending Act, 15 U.S.C. §§ 1601–1667f, and its implementing regulation, Regulation Z, 12 C.F.R. § 1026.24; the Mortgage Acts and Practices—Advertising Rule (MAP Rule or Regulation N), 12 C.F.R. § 1014.3; and the Consumer Financial Protection Act, 12 U.S.C. §§ 5531(a) and 5536(a)(1)(B). Read the Consumer Finance Enforcement Watch blog to learn more about the settlement.

Goodwin News

What’s Next? A Path Forward in Uncertain Times

In light of the recent global pandemic, Goodwin’s interdisciplinary team of lawyers presents various types of financings and investment structures applicable in current market conditions in a new webinar series, “What’s Next? A Path Forward in Uncertain Times.” This multi-part series explores the financing transactions and topics that are most relevant for companies and investors at a time where valuations are uncertain and companies across industries need capital. Visit the website to learn more, register for upcoming webinars and access previous events.

Growing TCPA Litigation Trends in the Cannabis Industry

August 6th 2:00 pm – 3:00 pm EST

The cannabis industry is growing rapidly and with that, so too is the threat of litigation. Specifically, fast-emerging litigation threats are class actions and other lawsuits against cannabis companies alleging that outbound calls and text messages to clients and potential clients violate the Telephone Consumer Protection Act (TCPA), a federal law that imposes restrictions on certain outbound calls and texts to consumers. These emerging lawsuits pose a significant threat because companies have few defenses and the penalties for violations of the TCPA are significant — ranging from $500 to $1,500 per violative call or text message.

Join Jennifer Briggs Fisher, a partner in Goodwin’s Cannabis practice, as she leads a conversation with Goodwin partners Brooks Brown and Kyle Tayman, leaders of the firm’s TCPA defense practice. They will discuss the growing TCPA litigation trends in the cannabis industry and use their extensive TCPA litigation experience to provide practical tips to help your company comply with the TCPA. Register for the webinar here.

This week’s Roundup contributors: Andrew Bastnagel, Josh Burlingham, Alex Callen, Laura Craven, Patrice Hendriksen and Mac Laban.