On May 31, 2017, acting through interagency guidance, the federal bank regulatory agencies (the “Agencies”) highlighted two approaches for addressing a perceived scarcity of licensed residential real estate appraisers. Federal law requires use of a state certified or licensed appraiser for most federally related transactions (“FRTs”). For example, federal regulations require appraisals to be conducted for, inter alia, all residential transactions with a value of $250,000 or more, see, e.g., 12 C.F.R. § 34.43(a), and state-certified appraisers are required in certain high dollar value and complex transactions. See, e.g., 12 C.F.R. § 34.43(d). Furthermore, the OCC may require an appraisal whenever the agency believes that it is necessary to address safety and soundness concerns. See, e.g., 12 CFR § 34.43(c). A shortage in appraisers may lead to significant delays in the mortgage loan origination or loss mitigation review process. Therefore, the Agencies’ interagency advisory notes that the use of temporary practice permits and temporary waivers will work to mitigate the shortage of appraisers and allow transactions requiring appraisals to be completed in a timely manner.
On May 19, 2017, at the Annual Meeting of the New Jersey State Bar Association, Travis Nelson was elected Chair of the Banking Law Section. Travis, who is resident in the firm’s Princeton and New York offices, previously served as Vice Chair and Secretary of the Banking Law Section. Upon his election, Travis noted: “I am honored by my peers in the New Jersey banking bar to serve in this unique role. I hope to use this position to build greater partnerships with other sections of the Bar Association, with the New Jersey Bankers Association, and with academic and community groups throughout the state. With the dynamic nature of financial regulatory proposals coming from Congress and from the regulators, both in Washington and Trenton, it is more important than ever that banking attorneys remain vigilant so that they may effectively advise their clients. The Banking Law Section can help.”
Len Bernstein, Chair of Reed Smith’s Financial Services Regulatory Group, and a former Chair of the Banking Law Section, said: “Travis has been a vital member of our banking team, and we look forward to supporting him in his efforts to increase the discussion of emerging issues throughout the New Jersey banking community. From commercial lending, to consumer finance, to bank M&A, to financial technology, the Banking Law Section will benefit from the broad experience and expertise that Travis brings to this leadership role.” Diane Bettino, the Managing Partner of Reed Smith’s Princeton office and a member of the firm’s Executive Committee, remarked: “Travis’ election as Banking Law Section Chair continues the well-established tradition of the Princeton office for providing thought leaders in New Jersey and nationally.”
Travis serves financial institutions, and their directors and officers, in M&A transactions, regulatory compliance, examinations and enforcement, and litigation. Prior to joining Reed Smith, Travis served in the Enforcement Division at the Office of the Comptroller of the Currency, in Washington, D.C. Travis is also adjunct faculty at the Villanova University School of Law, where he teaches a course on regulation of financial institutions, is editor of the ABA’s Banking Law Committee Journal, and is a frequent speaker on bank regulatory and enforcement issues. In addition to his bank regulatory practice, Travis is the Co-Chair of Reed Smith’s Anti-Money Laundering and Trade Sanctions Group.
On May 17, 2017, Commodity Futures Trading Commission (“CFTC”) Acting Chairman J. Christopher Giancarlo announced an “important step forward” in bringing the CFTC’s regulations into the “digital world of the 21st century.” The CFTC’s new FinTech initiative, LabCFTC, will facilitate cooperation between the CFTC and FinTech innovators.
Read Reed Smith’s full report on our sister site, The FinTech Update.
Following the trend of regulators across the globe, the United Nations Office for Project Services’ (“UNOPS”) issued a request for information regarding the application of blockchain technologies on April 24, 2017. The UNOPS has formed a blockchain group within the United Nations to analyze the possible applicability of blockchain technologies to the international assistance area. The Request for Information explains that the UNOPS seeks “information widely from the industry of blockchain space and to identify potential partners / suppliers for the future work in the area of international, humanitarian, development or peacekeeping assistance.”
Read the full report on our sister site, the FinTech Update.
Read some of our other reports regarding distributed ledger technology below.
On March 23, 2017, the European Commission (“EC”) published a Consultation Document entitled “FinTech: A More Competitive and Innovative European Financial Sector.” The Consultation Document seeks comments regarding the development and regulation of novel financial technologies, including distributed ledger technology (“DLT” or “blockchain”), cloud computing, and artificial intelligence (“AI”). The EC hopes to obtain feedback from both financial services providers and consumers that will assist it in developing an appropriate regulatory framework for FinTech. It explains, in the Consultation Document, that “appropriate policies on important issues, such as access to technology, data standardisation and security, personal data protection and data management, need to be put in place,” to account for new innovative financial technologies.
Read the full report on our sister site, FinTech Update.
On Friday, in a decision certain to please the business community as well as the Chair and new majority of the Federal Communications Committee, the D.C. Circuit struck down parts of the FCC’s October 30, 2014 Order, 29 F.C.C. Rcd. 13998 (FCC 14-164), requiring that solicited faxes (those sent with consent of the recipient) must contain opt-out notices in order to avoid violating the TCPA. See Bais Yaakov of Spring Valley, et al v. FCC (No. 14-1234). In a 2-1 decision, the majority held that the FCC lacked authority under the statute to regulate solicited faxes. The D.C. Circuit thus limits liability under the TCPA to just unsolicited fax advertisements, as its plain language states.
This ruling vindicates the two Republican FCC Commissioners, now Agency Chair Ajit Pai and Commissioner Michael O’Reilly, both of whom dissented in 2014 when the Commission’s fax Order was adopted. The ruling should also moot pending lawsuits based solely on the absence of an opt-out notice in faxes sent with the recipient’s express permission or invitation.
One caution is worth noting though. The decision does not eliminate the need to honor opt-out requests, thus creating a potential issue of fact for litigants. On the one hand, this should make it much harder for plaintiffs’ attorneys to succeed at class certification because whether any particular person opted out of receiving faxes is an individualized factual issue. On the other hand, however, it becomes harder for a defendant to refute a claim that a particular plaintiff revoked his or her consent before receiving an allegedly offending fax.
Under the FCC’s 2014 Order, onerous as the requirement to include an opt-out notice in every fax was, the business community had certainty as to what was required in communicating with customers or potential customers by fax. Now, it is incumbent on businesses to review their existing procedures or implement new procedures to defend against allegations that they have ignored or mishandled attempts by consumers to withdraw consent.
It is also worth pointing out that Bais Yaakov was argued before a three judge panel consisting of D.C. Circuit Judges Brett Kavanaugh and Nina Pillard, and Senior Circuit Judge Raymond Randolph on November 8, 2016. Oral argument in the all-important TCPA case ACA International, et al. v. FCC, also before the D.C. Circuit, was argued a few weeks earlier, on October 19, 2016, before Judges Pillard, Sri Srinivasan, and Harry Edwards. Now that Bais Yaakov has been decided, one can assume that decision in ACA cannot be far behind, and with it more certainty with respect to the definition of an “automatic telephone dialing system” and — hopefully — some much needed, practical relief, such as in the case of reassigned telephone numbers.
Before one starts uncorking the champagne, however, it is worth noting that Judge Pillard, the only judge on both the panel that heard Bais Yaakov and the panel that heard ACA, was the lone dissenter in the just decided fax case. In her dissent, Judge Pillard focused on consumer harm and the need to address what she referred to as “a fusillade of annoying and unstoppable advertisements.” In her view, Congress expressly delegated authority to the FCC to implement a prohibition on unsolicited fax advertisements, and the opt-out notice requirement gave practical effect to that ban.
In any event, it shouldn’t be long now until we see how Judge Pillard and the rest of the D.C. Circuit’s ACA panel weighs in on this ever-evolving area of the law.
On March 28, 2017, the U.S. Securities Exchange Commission (“SEC”) issued a second denial of a bitcoin exchange-traded fund (“ETF”), following its rejection of the Winklevoss Bitcoin Trust earlier this month (Reed Smith commentary is available here). SolidX Bitcoin Trust would hold bitcoin as its primary asset, together with smaller amounts of cash. Theft of bitcoins would be protected against through insurance coverage. Read our full report on our sister site, FinTech Update.
On March 10, 2017, the U.S. Securities Exchange Commission (“SEC“) issued an order disapproving BATS BZX Exchange’s proposal to list and trade shares of the Winklevoss Bitcoin Trust. The proposal, if granted, would have established a bitcoin exchange-traded fund (“ETF“) that market participants could invest in through the BATS BZX Exchange platform.
The SEC rejected the Winklevoss Bitcoin Trust due to the lack of regulation in the bitcoin market. It explained that “the significant markets for bitcoin are unregulated and that, therefore, the Exchange has not entered into, and would currently be unable to enter into, the type of surveillance-sharing agreement that helps address concerns about the potential for fraudulent or manipulative acts and practices in the market for the Shares.” The SEC concluded that the bitcoin market is largely unregulated, unlike the markets for other commodities such as gold and silver, and therefore the Winklevoss Bitcoin Trust is susceptible to manipulation. “Absent the ability to detect and deter manipulation of the Shares—through surveillance sharing with significant, regulated markets related to the underlying asset—the [SEC] does not believe that a national securities exchange can meet its” regulatory obligations.
The SEC considered the U.S. Commodity Futures Trading Commission’s (“CFTC“) jurisdiction over virtual currencies as “commodities,” but found it insufficient to prevent manipulation in bitcoin spot markets. It explained that “[a]lthough the CFTC can bring enforcement actions against manipulative conduct in spot markets for a commodity, spot markets are not required to register with the CFTC, unless they offer leveraged, margined, or financed trading to retail customers.”
This creates a bit of a chicken and egg situation, with regulated products not being approved because there are insufficient regulated markets with which to have surveillance-sharing agreements. The SEC order offers some hope for bitcoin ETFs that remain on the docket for approval, noting that bitcoin is “still in the relatively early stages of its development and that, over time, regulated bitcoin-related markets of significant size may develop.” As the spot bitcoin market likely will remain largely unregulated, it is most likely that the SEC will require bitcoin-based derivatives products, such as futures or options, to be traded on regulated exchanges before approving a bitcoin ETF. However, if bitcoin prices remain high, but still volatile, it may not be very long before we see a bitcoin derivatives product traded on an exchange registered with the CFTC as more traders seek to speculate or hedge bitcoin risk.
The SEC order is available here.
The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) recently announced an effort to better understand how “alternative data” could be used to expand access to credit. Through a formal notice and request for information just published, the CFPB is trying to learn more about the potential to use of what it calls “non-traditional” or “alternative” data points to develop credit scores. These data items include occupation, length of time in a particular job or residence, behavioral data, such as shopping habits, and information about consumers’ friends and associates gleaned from social media networks (among other things). The CFPB believes that use of this data could help provide credit scores to the “credit invisibles” – the roughly 45 million Americans who have limited, stale, or no credit history – and potentially move those consumers into mainstream credit products with more affordable terms. While not the CFPB’s current area of focus, they also welcome information about alternative data and modeling techniques in business lending markets.
Lender license requirements recently included in the New York governor’s proposed 2017-2018 budget would expand the jurisdiction of the New York State Department of Financial Services (NYDFS) to cover many financial technology (FinTech) credit-lending companies that are currently exempt from license requirements. The proposed budget would prohibit businesses that are not registered as licensed lenders from making personal loans with a principal of $25,000 or less, and commercial loans of $50,000 or less, regardless of interest rate. Current New York state banking law only requires a license if the charged interest rate is above 16 percent. The budget would additionally apply the licensing requirement not only to any company that solicits and “makes, purchases or acquires” loans for New York residents, but also to any that “arranges or facilitates” the origination of such loans.
NYDFS’ expanded lender licensing authority would apply to marketplace lenders—online platforms that facilitate small-scale loans by matching credit lenders with consumers—as well as to merchant cash advance companies, big data credit startups, and any other companies that provide or facilitate smaller-scale loans online or offline. The proposed budget provides that the NYDFS superintendent may allow an exemption from the licensing requirement “when necessary to facilitate low cost lending in any community.” However, neither the proposed budget nor NYDFS has offered further guidance as to how the exemption would be applied.
NYDFS currently imposes significant registration requirements on licensed lenders. Among other hurdles, businesses must file and maintain compliance documentation, implement internal controls, and undergo background checks, examinations, and annual assessments. Businesses seeking licensed lender status are not permitted to make loans while registration is pending.
New York’s proposed expansion of the lender license requirement continues an ongoing dispute between federal and state authorities over the regulation of FinTech companies. In December, the Office of the Comptroller of the Currency (OCC) announced it would consider granting FinTech companies special-purpose national bank charters that would treat them similarly to national banks from a regulatory perspective, and generally preempt state laws. The OCC’s proposal would enable non-bank FinTech companies to seek a single banking license from a single national regulator, as opposed to numerous licenses across multiple states. In response, NYDFS Superintendent Maria Vullo submitted a letter opposing the OCC’s proposal, and claiming FinTech activities would be better regulated by the states. The proposed expansion of NYDFS’ lender license requirements appears to follow Superintendent Vullo’s views.
FinTech companies and marketplace lenders in particular should be cognizant of these and other continuing efforts to regulate FinTech, and should prepare accordingly. Steps that FinTech companies can take now to prepare for future regulation include engaging directly with potential regulators; conducting self-assessments of compliance with existing lending and finance laws, such as the Gramm-Leach-Bliley Act; assessing the retention of company data and records; and crafting and implementing internal compliance policies and controls.
For more information about efforts to regulate FinTech and maintaining compliance as a FinTech company, please contact Kari Larsen.