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To Deposit or Not to Deposit: a Question for Fintech Charters

The fintech industry has justifiably greeted the OCC’s announcement of a national fintech charter with optimism. But one area where we have seen significant confusion is the possibility of the fintech charter being granted without deposit insurance, and the implications thereof.

Background.  On December 2, 2016, OCC Comptroller Thomas Curry announced that the OCC is planning to take applications from fintech companies wishing to obtain a special purpose national bank charter.  These banks would be national banks with the same privileges and obligations as traditional full-service national banks, but with specialized business plans and that may or may not choose to have deposit taking authority.

In his remarks, Comptroller Curry expressed his excitement about the great potential to expand financial inclusion and reach unbanked and underserved populations.  At the same time, clearly recognizing that there are some industry players that are worried about new sources of competition from fintech banks, or that these new banks might otherwise have unfair advantages, Curry took great pains to seek to alleviate those concerns in his remarks and in the OCC’s white paper on the proposal.

Curry acknowledged that it will be difficult for the agency to determine the requirements to charter a fintech bank because of the “diversity of approach” among fintech companies. He noted that, for example, a payments model would be different than a marketplace lending one. However, he said that the OCC is a “firm believer in tailored innovation” and has the existing framework to evaluate these issues in the chartering process.  Consistent with existing OCC regulation, the white paper states that a special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: receiving deposits, paying checks, or lending money.

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Federal Rules Target Student Bank Accounts

As previously discussed on BankBryanCave.com, new Department of Education regulations will impact the terms and conditions of bank accounts that institutions of higher education and postsecondary vocational institutions may offer to students to receive disbursements of Title IV Higher Education Act funds. While the regulations apply directly to colleges, many banks and third-party servicers will need to change their products, services and practices if they want to contract with colleges to offer accounts to students.

The DOE rules require covered colleges to ensure that student account terms are in the best financial interest of students, present Title IV fund disbursement and account options to the student in a fact-based and neutral manner, and ensure that students have access to an appropriate number of surcharge-free ATMs. The rules also prohibit many account fees and impose ongoing monitoring obligations on colleges to ensure that student accounts meet all requirements of the rules.

The CFPB’s new prepaid account rules will further regulate accounts offered to students by imposing Regulation E protections on those prepaid accounts, limiting overdrafts, and highly regulating other credit features on student prepaid accounts. CFPB enforcement actions against colleges relating to consumer financial products and services remind us that even colleges can be subject to their jurisdiction and enforcement efforts.

On November 18, 2016 at 1:00pm EST, Bryan Cave LLP partner, John ReVeal, will be conducting a webinar with Lorman Education Services to summarize the new DOE rules and the key CFPB prepaid account rules as they relate to student accounts.  With John as a faculty member, we are able to offer a 50% discount on the registration fee.  Click here for more information, here for the brochure of the webinar, and here to register.

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Announcing the Consumer Banking Blog

It is with great pleasure that we announce that we have launched a new blog on consumer banking compliance issues.  Authored by Bryan Cave Partner, John ReVeal, the ConsumerBankingBlog provides commentary and perspective on new and proposed consumer compliance regulations, regulatory enforcement actions and trends, and the shenanigans of banking regulators.  With John’s unique, unfiltered, opinions, we think you’ll find the ConsumerBankingBlog to be very different from your typical banking compliance site.

John’s goal for the ConsumerBankingBlog is to foster discussion – an open exchange of ideas between readers and John.  Comments are strongly encouraged… subject to the site’s Rules for Comments, of course.  (We’re still lawyers, after all.)

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Bank Regulators take Aim at Payday Lenders and AML Control

In two recent posts on BryanCavePayments.com, Bryan Cave attorneys have addressed new developments related to the CFPB’s efforts to regulate payday lenders through their banking relationships as well as statements from New York’s top banking regulators suggesting that bank executives should be held personally liable for anti-money laundering violations.

On April 1st (but unfortunately not part of any April Fools joke), John Reveal published a post on the CFPB’s efforts against payday lenders.

In May 2014, the Department of Justice (DOJ) and the FDIC were criticized by the U.S. House of Representatives’ Committee on Oversight and Government Reform in May 2014 Report for using the DOJ’s “Operation Choke Point” to force banks out of providing services to payday lenders and other “lawful and legitimate merchants”. The Committee’s report noted, among other things, that the DOJ was inappropriately demanding, without legal authority, that “bankers act as the moral arbiters and policemen of the commercial world”.

Now the CFPB has announced that it is considering rules that would end “payday debt traps”.  At least the CFPB is following standard regulatory processes in doing so rather than trying to regulate payday lenders by punishing their bankers.  The CFPB’s announcement, published March 26, 2015 (available here), outlines its proposals in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which the CFPB refers to as “the next step in the rulemaking process”.

The CFPB’s proposal considers payday loans, deposit advance products, vehicle title loans, and certain other loans, and includes separate proposals for loans with maturities of 45 days or less, and for longer-term loans.  Broadly speaking, the CFPB is considering two different approaches – prevention and protection – that lenders could choose from.

You can read the rest of John’s post here.

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Media Mentions – August 1, 2014

With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news.  Recent mentions of Financial Institutions group attorneys include:

Jerry Blanchard in the Atlanta Journal-Constitution

Atlanta Partner Jerry Blanchard was quoted July 18 by The Atlanta Journal-Constitution on reasons behind the shrinking number of banks in Georgia. The state, which led the nation in bank failures stemming from the real estate bust, has seen an increase in the number of banks being bought up at a rate of about one a month as healthy banks grow through the acquisition of other healthy banks. Blanchard said the question on many bankers’ minds is, “Can you survive the recovery? It’s hard to make money.” Click here to read the full article.

Rob Klingler in American Banker

Atlanta Partner Robert Klingler was quoted July 1 by American Banker concerning the trend among trust-preferred creditors of telling deadbeat banks that they must negotiate repayment or be forced into liquidation. Trapeza Capital Management filed legal documents recently to force FMB Bancshares in Lakeland, Ga., into involuntary bankruptcy. Trapeza, which manages a collateralized-debt obligation containing FMB’s trust-preferred securities, said in its filing that it is owed $13.6 million in unpaid debt and interest. FMB is the second lender to face involuntary bankruptcy over unpaid trust-preferred dividends. “Involuntary bankruptcies send a clear signal that doing nothing does not appear to be a good strategy,” Klingler said. “When you’re in default and tell your creditors you can’t do anything, you’re asking for an involuntary bankruptcy.”

Walt Moeling in SNL Financial

Atlanta attorney Walt Moeling was quoted July 10 by SNL Financial regarding the increase in bank M&A in Georgia this year. These recent transactions are simply logical, said Moeling, who noted that acquirers today have excess capital and outstanding commitments to put those funds to work, and they often are looking to rationalize fragmented franchises. Moeling agreed buyers are becoming more assertive and attributed some of the increased confidence to the fact that potential sellers are sitting on firmer ground. “They’re picking up a much smaller amount of problem assets and so there is a willingness to be a little more aggressive in doing acquisitions and again that’s only logical,” he said.

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Media Mentions – June 6, 2014

With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news.  Recent mentions of Financial Institutions group attorneys include:

Walt Moeling in American Banker

Walt Moeling was quoted May 8 by American Banker concerning an uptick in interest from outside investors in the Florida banking industry.  A number of banks in the Midwest and elsewhere poured money and resources into Florida a decade ago, only to absorb large losses when the housing market collapsed.  “That was an interesting phenomenon,” Moeling said.  “The theory is that Florida has good deposits and is a good growth market . . . But those who fail to learn from history are doomed to repeat it.  The truth of the matter is it is very hard to be successful in a totally different market where you don’t have a lot of experience.”

Judith Rinearson and John ReVeal in Pay Magazine

Judith Rinearson and John ReVeal authored an article for the spring edition of PayBefore’s Pay Magazine  concerning the importance of crafting agreements between banks and their third-party vendors that will withstand the scrutiny of regulators.  “Recent regulatory publications, examinations and enforcement actions suggest that the standards and expectations by which regulators evaluate banks’ third-party relationships now are significantly more exacting,” they wrote.  “They’re digging deeper on how banks select their third-party vendors, and the scope of their review is extending to more and more vendors. This increased focus makes it critically important for banks and their partners to get their relationships right from the start by setting their own appropriate expectations and establishing standards for oversight, access and follow through.  And, the contract is the key.  Click here to read their full article.

Margo Strahlberg in Paybefore News

Margo Hirsch Strahlberg was quoted April 29 by Paybefore News regarding a qui tam action involving the state of Delaware relating to claims that nearly two dozen well-known retailers avoided escheating unused gift card balances to the state through the use of special purpose entities organized in other states. Delaware law enables the state to collect unclaimed property, including gift card funds that have gone unused after five years, from companies incorporated in the state. Strahlberg said Delaware’s pursuit of legal action in this case doesn’t mean other states will follow the strategy of seeking court intervention. “The states will still continue to pursue legislation in their attempt to grab at unclaimed funds,” she told the publication. “Delaware always has been known as an aggressive state with respect to unclaimed property, so its willingness to rely on the courts comes as no surprise.”

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Media Mentions – February 28, 2014

With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news.  Recent mentions of Financial Institutions group attorneys include:

BankBryanCave.com in Banking and Finance Law Daily

Three recent blog posts from BankBryanCave.com were prominently featured Feb. 13 in Banking and Finance Law Daily. The publication’s “Blog Tracker” column, which highlights the week’s “most insightful, intriguing or entertaining blog posts from the banking and financial services community,” included our recent posts “Will 2014 be the year of UDAP and UDAAP?” by DC Partner John ReVeal and Associate Seyi Iwarere; “Should your bank do business with Bitcoin?” by DC Associate Courtney Stolz; and “Five practical tips to manage your vendor risk…,” by Atlanta Associate Karen Neely Louis  Click the post titles to read more.

Klingler in American Banker

Atlanta Partner Rob Klingler was quoted Jan. 28 by American Banker concerning Broadway Financial, which has struggled in recent years but managed to restructure its debt and recapitalize by bringing together the federal government, private equity, nonprofits and local banks. Today, the U.S. Treasury owns 52 percent of Broadway, or about $8.8 million in common stock. Broadway is one of five companies with common stock held by the Treasury as a result of a Tarp exchange, and is the only one majority owned by the government. Klingler said the Treasury typically moves quickly to cash out of such holdings. He said the stake is unlikely to scare off investors (the Treasury has vowed to be hands-off and vote along with the majority) but the government could have trouble finding investors to buy such a large block of shares.

Shumaker in Bank Safety & Soundness Advisor

Atlanta Associate Michael Shumaker was quoted at length in two front-page articles Feb. 17 in Bank Safety & Soundness Advisor concerning third-party vendor risk. Regulators are pushing for higher third-party due diligence standards, particularly the Office of the Comptroller of the Currency (OCC), which now requires banks to manage what it calls the full “life cycle” of a vendor relationship. “The regulators’ expectations are on a sliding scale,” Shumaker said. “The level and depth of risk management and vendor management for a $50 billion bank is not going to be expected necessarily for a $100 million bank.” A small community bank, he explained, may only have one or two material contracts that it needs to be on top of, such as for data processing and a credit or prepaid card program. Still, he said, having a “rational and structured” approach for entering those contracts not only keeps regulators happy but makes business sense.

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ReVeal, Rinearson, Simon to Speak at Money2020 Expo

DC Partner John ReVeal, New York Partner Judith Rinearson and Santa Monica Partner Brette Simon will provide insight at the Money2020 Expo. The conference promises to bring together a global community of innovators in payments and financial services with 400-plus speakers spanning more than 100 sessions and workshops. More than 4,000 attendees are expected.

October 6, 2013 – October 10, 2013
Aria Resort and Casino
3730 Las Vegas Blvd.
Las Vegas, NV 89158

On Oct. 6, ReVeal will moderate a panel on the risks and rewards of credit-based emerging payment products. In addition to discussing what people need to know when launching or distributing credit-based products, this panel will address the current consumer group and regulatory pressure to restrict or prohibit credit as part of emerging payments and financial services solutions.

Later in the afternoon, Rinearson will moderate the panel “Money Transmitter Licensing: Kafka Revisited,” which will offer insight on how to manage the ambiguities of state money transmitter licensing laws.

Simon then will join a panel on how to prepare in advance of raising capital from institutional investors. Topics will include getting your legal and business house in order to maximize value upon a capital raise and avoid the “10% valuation haircut;” due diligence and the risks of having the wrong investors; and structuring investment to avoid “change of control” regulatory issues.

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Media Mentions – July 24, 2012

With attorneys and staff worldwide, Bryan Cave attorneys are often quoted in the news.  Recent Media Mentions of Financial Institutions Group attorneys include:

Achenbach in American Banker

Ken Achenbach was quoted in a July 2 article in American Banker regarding the decline in FDIC Loss-Sharing Deals for failed-bank buyers as the economy improves. Achenbach said “If the FDIC loss share backstop is there, it certainly mitigates the risks involved in taking the portfolio . . . Given the limited amount of diligence you’re able to do in these deals, and particularly earlier in the economic cycle where there was much more price uncertainty in the real estate markets, people actively wanted that safety net. Over time, however, bidders may be becoming more comfortable with asset pricing and may be assigning less value to the protections of loss-sharing. In addition, the FDIC is now encouraging banks that are comfortable doing so to make non-loss share bids.”

Hightower in Bank Safety & Soundness Advisor

Jonathan Hightower was quoted July 2 by the Bank Safety & Soundness Advisor concerning new Basel III capital rules, and how community bankers might need to prepare for the changes sooner rather than later.  Hightower said the new rules probably won’t change acquisition, development and construction (ADC) lending behavior now, when so few banks are making ADC loans.  But he said it will impact future lending plans.  “Where you’ll really see a difference is when the market  comes back and banks get more comfortable thinking about reentering this market,” he said.  “there are lenders out there who know the business and have done this kind of lending for a long time.  But now, unless those loans meet some focused requirements, they’ll be subject to those higher risk weights.”

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Media Mentions – December 2, 2011

With offices all over the world, Bryan Cave attorneys are often quoted in the news.  Recent Media Mentions of Financial Institutions Group attorneys include:

McAlpin on BankDirector.com

Atlanta Partner Jim McAlpin authored the first in a series of articles concerning best practices of bank boards Oct. 25 for BankDirector.com. McAlpin said “there has never been a greater need for well-functioning, informed and courageous boards of directors of banks and bank holding companies. There has also never been a more important time for board members to keep in mind that their responsibilities can be boiled down into one simple goal: the creation of sustainable long-term value for shareholders.” This also was the lead article in the BankDirector November e-mail newsletter.  Click here to read the full text.  The second installment in the series will be published by BankDirector in early December.

Moeling in American Banker, Atlanta Journal-Constitution

Atlanta Partner Walt Moeling was quoted at length Nov. 17 by American Banker regarding the new perception businesspeople have toward serving on a bank board. “Most of them joined because it is one of the great clubs in an area and there is an opportunity to help people in your community. But after four years of foreclosing on your neighbors, watching your friends lose their jobs and seeing your investment lose its value, you’re done,” said Moeling, adding that banks still can find local people to serve, but those directors will have to be prepared to roll up their sleeves a lot. “The compliance burden is huge. Regulators are going to expect directors to be on top of things. The meetings will be longer and more detailed. It will be a lot more demanding than it ever was in the past and it is not going to be as much fun.” He also was quoted Nov. 7 in The Atlanta Journal-Constitution concerning the reasons for the failure of Decatur First Bank in Decatur, Ga. The bank’s quest for growth (it opened subsidiary banks in the mid-2000s in the once-booming Lake Oconee area, about 80 miles east of Atlanta) provided a windfall for a few years until the housing market crashed.

ReVeal on BankDirector.com

DC Counsel John ReVeal was interviewed for two videos now being used on the BankDirector.com Web site. One video focuses on the Bank Secrecy Act (BSA) and how violations are perceived today by regulators. The other, which outlines what a bank board should know about BSA, has become the group’s official training piece concerning BSA and is located in a password-protected section.  Click here to view ReVeal’s video on BSA and regulators.

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