Amid criticism from virtually every possible constituency, on March 15, 2017, the Office of the Comptroller of the Currency (OCC) released a draft supplement  to its chartering licensing manual related to special purpose national banks leveraging financial technology, or fintech banks. As we indicated in our fintech webinar discussing the proposal last December, the OCC is proposing to apply many conventional requirements for new banks to the fintech charter. While the OCC’s approach is familiar to those of us well versed on the formation of new banks, there are a few interesting items of note to take away from the draft supplement.

• More bank than technology firm. Potential applicants for a fintech charter should approach the project with the mindset that they are applying to become a bank using technology as a delivery channel, as opposed to becoming a technology company with banking powers. While the difference might seem like semantics, the outcome should lead potential applicants to have a risk management focus and to include directors, executives, and advisors who have experience in banking and other highly regulated industries. In order to best position a proposal for approval, both the application and the leadership team will need to speak the OCC’s language.
• Threading the needle will not be easy. Either explicitly or implicitly in the draft supplement, the OCC requires that applicants for fintech bank charters have a satisfactory financial inclusion plan, avoid products that have “predatory, unfair, or deceptive features,” have adequate profitability, and, of course, be safe and sound. Each bank in the country strives to meet those goals, yet many of them find themselves under pressure from various constituencies to improve their performance in one or more of those areas. For potential fintech banks, can you fulfill a mission of financial inclusion while offering risk-based pricing that is consistent with safety and soundness principles without having consumer groups deem your practices as unfair? On the other hand, can you offer financial inclusion in a manner that consumer groups appreciate while achieving appropriate profitability and risk management? We think the answer to both questions can be yes, but a careful approach will be required to convince the OCC that it should be comfortable accepting the proposed bank’s approach.

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On Friday, February 10, 2017, Jonathan and I sat down with our partners, Jim McAlpin, head of Bryan Cave’s Financial Services practice, and Dan Wheeler, head of Bryan Cave’s Fintech practice, to discuss the impact of financial technology on retail banking.  Like branching strategies, there isn’t necessarily one universally correct strategy with how community banks should address financial technology, but ignoring fintech completely is unlikely to be a viable long-term strategy.

On this episode of The Bank Account, Jonathan, Jim, Dan and I explore some possible approaches for addressing fintech, and relay some of the reactions that we’ve heard from successful community banks.

In a recent American Banker BankThink article, Partner Dan Wheeler explores the possibility that the OCC could rise in stature, while the other banking regulatory agencies fall out of favor.  By largely staying out of Congress’ scrutiny and taking a lead on fintech regulation, Dan argues that the OCC is well positioned to obtain greater chartering and regulatory responsibility under a Trump administration.

Some regulatory agencies, such as the Consumer Financial Protection Bureau and Federal Reserve Board, appear ripe for more congressional criticism and even curbs to their authority under the incoming Trump administration. But one may be in relatively good position to have its authority expanded: the Office of the Comptroller of the Currency.

The OCC has stayed under the radar and avoided the political backlash aimed at other regulators while also emerging as a new leader in the fast-growing area of fintech regulation. The OCC’s focus on innovation and its largely pristine image among lawmakers could lead to greater chartering authority and — if the CFPB continues to lose favor — more responsibility to oversee consumer rules.

Continue Reading Dan’s position, OCC Could Gain Power as Other Agencies Fall Out of Favor, on AmericanBanker.com.

Banks and credit unions are among the most recent targets of a wave of demand letters and lawsuits alleging violation of the Americans With Disabilities Act of 1990 (the “ADA”). The most common allegations concern inaccessible ATMs and websites, despite the fact that the ADA and its implementing regulations do not yet address website accessibility.

Title III of the ADA prohibits discrimination against individuals “on the basis of disability in the full and equal enjoyment of the goods, services, facilities, privileges, advantages or accommodations of any place of public accommodation,” 42 U.S.C. § 12182(a), which includes banks and credit unions.

In 2010, the federal regulations implementing the ADA were revised, and expressly addressed ATMs for the first time. Banks and credit unions were given until March 2012 to become fully compliant, and most litigation targeted institutions that failed to comply by that date.

Community banks have recently been on the receiving end of demand letters from plaintiffs law firms alleging that the banks’ websites are in violation of the Americans With Disabilities Act of 1990 (the “ADA”).  Interestingly, there are currently no specific federal standards for websites under the ADA. The Department of Justice (“DOJ”) is in the process of developing regulations for website accessibility, but has announced it will not finalize these regulations until 2018 at the earliest. Even so, the DOJ has emphasized that businesses should make websites accessible to the disabled. While the regulations are being developed, many businesses have been applying the Web Content Accessibility Guidelines (WCAG) 2.0 Level AA with the understanding that the DOJ has made clear that it considers a website accessible if it complies with these guidelines.

When a bank receives a demand letter the first thing they need to do is hire counsel to advise them about their various options, including mitigating any damages by curing website defects, litigation or settlement. As a practical matter, the best defense to such claims is making sure that the bank’s website is compliant with the WCAG 2.0 Level AA Guidelines. That may involve the use of internal resources as well as external consultants.  While it is impossible to tell whether suit will be filed in any given situation, banks should take note that the firms sending demands have previously been engaged in filing over 100 of these types of suits against various non-financial defendants over the past year.

Bryan Cave has put together a resource that provides generally accepted recommendations for website accessibility and federal ADA standards for ATM accessibility to help you review how your banks stands.

In a blow to banks and the marketplace lending industry, on June 27, 2016, the U.S. Supreme Court denied the petition by Midland Funding to hear the case Midland Funding, LLC v. Madden (No. 15-610).  That case involves a debt-collection firm that bought charged-off credit card debt from a national bank.  The borrower’s uk debt help team argued that a buyer of the debt was subject to New York interest rate caps even though the seller of the debt, a national bank, was exempt from those state law rate caps due to preemption under Section 85 the National Bank Act.  The borrower won on this startling argument and the debt collector appealed to the Supreme Court.  The Office of the Comptroller of the Currency (the regulator for national banks), the U.S. Solicitor General and various stakeholders in the banking and lending industries vigorously argued that the 2^nd Circuit’s decision contravened established law.  The fear was that, if preemption strips loans of their usury-exempt status when the loans are sold, then banks’ ability to sell consumer loans, including the common practice of banks originating and quickly selling those loans to investors and marketplace lenders, would be significantly limited, if not curtailed.

The Supreme Court denied the debt collector’s appeal without explanation, which means the 2^nd Circuit’s ruling is binding law in that Circuit, which includes New York, Connecticut and Vermont.  However, the 2^nd Circuit’s ruling is not the law outside of the 2^nd Circuit.

As of today, these are some of the key takeaways for banks and the lending industry:

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.

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

Rinearson in AFP Exchange

New York Partner Judith Rinearson authored an article on the future of bitcoin and virtual currency for the April edition of AFP Exchange magazine, by the Association for Financial Professionals. Her article was part of the publication’s annual payments issue. “Can virtual currencies be regulated in a manner that protects consumers, merchants, our payment systems and national security, while at the same time not ‘killing the golden goose’ through overly burdensome or unfeasible regulatory requirements?” Rinearson wrote. “I believe the answer is yes….However, such regulation should be imposed with a light hand and reasonable steps must be taken quickly.”

Shumaker in Bank Safety & Soundness Advisor

Atlanta Associate Michael Shumaker was quoted extensively April 14 by the Bank Safety & Soundness Advisor concerning top misconceptions in vendor management. After all the talk from regulators over the growing risks and expectations of managing third-party relationships, some banks still seem to think the guidance does not apply to them. “Probably the most important thing for banks to recognize is that things have changed, and that the regulatory expectations of banks with respect to the integration of risk associated with vendor contracts, those expectations have changed,” Shumaker said. “You can outsource the activity, but you cannot outsource the risk. Banks need to recognize that having a vendor conduct the activity does not change their obligation to manage the risk of the activity.”

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

Rob Klingler in Bank Safety and Soundness Advisor

Atlanta Partner Robert Klingler was quoted Jan. 27 by Bank Safety and Soundness Advisor concerning an eagerly awaited amendment to the Volcker Rule, which will exempt most bank-issued Trust Preferred Securities (or TruPS). The interim final rule, however, does not exempt insurer or REIT-backed TruPS. Klingler said the exemption does not include insurer and REIT TruPS because the Collins Amendment didn’t either, and regulators modeled the Volcker exemption after the Collins Amendment. “They were looking to the Dodd-Frank Act itself for the statutory authority,” he said. “They used the Collins Amendment to form the basis for why they’re able to exempt [these TruPS]. They don’t have a statutory basis for excluding insurer-backed TruPS. They probably wanted to make sure the final rule wasn’t going to be challenged. The way to do that was to lock in the $15 billion bank asset threshold.”

Judith Rinearson in Multiple Outlets

New York Partner Judith Rinearson was quoted a number of times recently in connection with hearings in New York on the future of virtual currency, including the popular Bitcoin. She was quoted Jan. 28 by The Verge, Inc. magazine and IDG News Services (in an article that ran in IT World and CFO World) and Jan. 27 by Upstart Business Journal. Rinearson acted as an expert witness at the hearings, which could lead to the creation of “BitLicenses” to allow the introduction of Bitcoin ATMs and other Bitcoin-related startups in New York. “New York has always been one of the lead states when it comes to money transmitter licenses,” said Rinearson, who is also regulatory counsel for the Network Branded Prepaid Card Association and serves as chair for the association’s Government Relations Working Group. “But I think a lot of other states are going to be watching and a lot of states will be waiting to see what happens.”  Click here to read the full Upstart Business Journal article.

Dan Wheeler in Financial Services Publications

San Francisco Partner Daniel Wheeler authored an article for the January edition of Western Independent Bankers’ Lending & Credit Digest on common regulatory errors in making a commercial loan. Lenders often ignore or misunderstand several regulations and other laws that affect the origination of a commercial loan. Wheeler’s article discussed some surprising aspects of bank regulations and laws that can catch a commercial lender by surprise and result in a compliance violation.  Click here to read the Lending & Credit Digest article.  Dan authored an article for the January edition of Western Independent Bankers’ Directors Digest regarding current opportunities and regulatory issues related to common non-interest income opportunities, including overdraft protection.  Click here to read the Directors Digest article.  Dan also authored a lengthy article for the December edition of Banking & Financial Services Policy Report on basic interest rate swaps, which he said remain a viable and necessary tool for small community banks.  “Despite Congress’ and the regulators’ enactment of thousands of pages of burdensome and frequently counterproductive swap regulation, community banks still have compelling reasons to offer swap capability to their customers,” he wrote.  “Community bank management need not become experts in swap accounting or regulation; they merely need to understand the risks and strategy involved in the swaps they offer.”

With attorneys and staff worldwide, Bryan Cave often makes the news.  Recent media mentions of Financial Institutions Group attorneys include:

Rob Klingler in Dow Jones Daily Bankruptcy Review

Atlanta Partner Robert Klingler was quoted Sept. 26 in the Dow Jones Daily Bankruptcy Review concerning what happens when TARP recipients file for bankruptcy. Congress authorized the U.S. Treasury Department to spend more than $200 billion nationwide as part of the Troubled Asset Relief Program five years ago. Overall, taxpayers profited from the program. But a review of the bankruptcies of TARP recipients shows that Treasury is likely to write off about $2.8 billion invested in banks now filing for bankruptcy. “Any time you make an investment, it’s a risk-reward exchange. The only way you get any reward is to take on risk,” Klingler said. “That means some of the investments aren’t going to work out, and some of the investments didn’t work out.”

Dan Wheeler in Directors Digest

San Francisco Partner Daniel Wheeler published an article in the October edition of Directors Digest regarding the heightened due diligence and oversight requirements regulators are enforcing on banks and their service providers. Wheeler’s article details specific steps banks should take in evaluating and entering into a new relationship as well as best practices in ongoing oversight and accountability. “Regulators have clear expectations about what a bank will do to oversee its existing and ongoing service providers,” he wrote. “Although a few types of providers have gotten the most regulatory attention recently, the guidelines apply across the board to all types of third-party service providers.”  Click here to read his full article.