Treasury Recommends Sweeping Regulatory Changes for Consumer Financial Services

A report issued last week by the U.S. Treasury Department recommends sweeping regulatory changes intended to promote innovation in the consumer financial services market, reduce regulatory burdens on consumer financial services providers, and update regulations applicable to various types of consumer lending and related consumer financial products and services.

The report, titled "Nonbank Financials, Fintech, and Innovation," is the fourth in a series of reports issued in response to President Donald J. Trump's Executive Order 13772, which established a set of core principles for regulating the U.S. financial system.

Each set of recommendations made by the Treasury is preceded by an explanation of the current statutory and regulatory framework applying to the subject of the recommendations, and a detailed discussion of the issues sought to be addressed by the recommendations.  Such issues particularly concern those arising from impediments or uncertainties that the current legal framework creates for marketplace developments driven by changes in technology.

The four categories into which the Treasury's recommendations are organized are set forth below. Given the report's length and the wide range of issues covered, we have limited the scope of this alert to several of the Treasury's key recommendations in each category and will publish supplemental discussions of additional recommendations, such as those concerning data aggregation and mortgage lending and servicing.

1. Embracing the efficient and responsible use of consumer financial data and competitive technologies.

The recommendations in this category address how regulatory approaches can be adapted to the digitization of communications and changes in the aggregation, sharing, and use of consumer financial data.

The Treasury recommends:

• The Federal Communications Commission (FCC) should continue its efforts to create a database of reassigned telephone numbers that would provide a safe harbor from Telephone Consumer Protection Act (TCPA) liability for callers who use such a database. (In April 2018, the FCC published a notice in the Federal Register seeking comment on a variety of issues relating to the creation of a "reassigned numbers" database, including the FCC's ability to create such a safe harbor.) The FCC should also provide clear guidance on reasonable methods for consumers to revoke consent to receive autodialed calls under the TCPA and Congress should consider statutory changes to mitigate unwanted calls to consumers and provide a revocation standard similar to the standard under the Fair Debt Collection Practices Act (FDCPA), which requires a consumer seeking to stop debt collector communications to provide written notice. In its March 2018 ACA International decision, the U.S. Court of Appeals for the District of Columbia Circuit upheld the FCC's ruling that a called party can revoke consent to receive autodialed calls at a wireless number "at any time and through any reasonable means that clearly expresses a desire not to receive further messages." In May 2018, the FCC published a notice in the Federal Register seeking comment on various issues arising from ACA International, including the "clearly defined and easy" methods a called party might use to revoke prior express consent.)

• Congress should enact a federal data security law to protect consumer financial data and provide consumers with timely notice of a breach, with such a law to create national standards that preempt state laws and contain standards that take into account an entity's size and activities.

2. Streamlining the regulatory framework to eliminate unnecessary fragmentation and foster new business models that are enabled by innovations in financial technology.

The Treasury recommends:

• State legislators and regulators should accelerate their efforts to reduce unnecessary inconsistences across state laws and regulations to achieve more harmonization, with such efforts to potentially include adoption of a system that allows "passporting" and reciprocity of state licensing. (The report discusses some of the limitations of the Nationwide Multistate Licensing System, which it describes as "one of the primary efforts of state regulators to achieve…enhanced cooperation [in the supervision of nonbank financial services companies.]." If the states cannot "achieve meaningful harmonization across their licensing and supervisory regimes within three years, Congress should act to encourage greater uniformity in rules governing lending and money transmission to be adopted, supervised, and enforced by state regulators." (The report points to the minimum mortgage licensing requirements of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) as a "similar model" used by Congress.)

• The Office of the Comptroller of the Currency (OCC) should finalize its proposal to grant special purpose national bank (SPNB) charters to nondepository financial technology companies. (Last week, the OCC announced that it will begin accepting applications for SPNB charters. See our legal alert for a detailed discussion of the OCC's decision to accept applications and to register for our August 28 webinar, "The OCC's Special Purpose National Bank Charter: What Fintech Companies Need to Know.")

• Federal banking regulators should, in coordination, review their third-party vendor and service provider guidance through a notice and comment process and further harmonize their guidance to place more emphasis on (i) making third-party oversight more efficient by removing inconsistencies in how banks should apply the guidance and allowing banks to more comfortably apply risk-based or tailored approaches when conducting due diligence on third parties, and (ii) enabling innovation in a safe and prudent manner.

3. Updating activity-specific regulations that apply to various products and services offered by nonbanks to accommodate technological advances.

The Treasury recommends:

• "Valid When Made." In response to the U.S. Court of Appeals for the Second Circuit's decision in Madden v. Midland Funding, Congress should codify the "valid when made" doctrine, which provides that a loan contract that is valid when made cannot be invalidated by a subsequent transfer to a third party. In that decision, the Second Circuit held that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act (NBA) allows the national bank to charge. The federal banking regulators should use their available authorities to address challenges posed by Madden. (For several years, we have advocated for the OCC's adoption of a rule providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the NBA for their entire term. Given the political uncertainty of Congressional action, we believe that the OCC's adoption of a rule represents the most practical approach. In February 2018, the House passed H.R. 3299, the "Protecting Consumers' Access to Credit Act of 2017," also known as the "Madden fix" bill, to address the uncertainty created by Madden by amending Section 85, as well as relevant provisions of the Home Owners' Loan Act (HOLA), the Federal Credit Union Act, and the Federal Deposit Insurance Act (FDIA.))

• "True Lender." Congress should codify that the existence of a service or economic relationship between a bank and a third party (including a Fintech company) does not affect the bank's role as the true lender of the loans it makes. Federal banking regulators should reaffirm (through additional clarification of applicable compliance and risk-management requirements, for example) that the bank continues to be the true lender in such partnership arrangements. (We have similarly urged the OCC to adopt a rule providing that the regulatory treatment of a loan under federal law should turn on the loan's origination by a national bank, and not on whether the bank retains the predominant economic interest in the loan. Like the challenges posed by Madden, we believe that given the political uncertainty of Congressional action, the OCC's adoption of a rule addressing "true lender" concerns represents the most practical approach. In November 2017, H.R. 4439, the "Modernizing Credit Opportunities Act," was referred to the House Financial Services Committee to address "true lender" challenges. The bill would amend Section 85 of the NBA, as well as relevant provisions of the Bank Service Company Act, the HOLA, and the FDIA.)

• Credit Services/State Licensing. States should revise credit services laws to exclude businesses that solicit, market, or originate loans on behalf of a federal depository institution pursuant to a partnership agreement. This recommendation is intended to address the threat that state licensing statutes can create for bank partnership arrangements with nonbanks. (The Treasury report references the decision of the Maryland Court of Appeals in CashCall, Inc. et al. v. Maryland Commissioner of Financial Regulation, which held that CashCall could not assist Maryland consumers in obtaining loans from out-of-state, state-chartered banks at interest rates in excess of the maximum rate permitted by Maryland law without being licensed as a "credit services business" under the Maryland Credit Services Business Act.)

• Marketplace Lending. Federal and state lawmakers should make legislative changes to address the following constraints that unnecessarily limit the operation of partnerships between banks and marketplace lenders:

• Student lenders and servicers. The Department of Education should create guidance on minimum servicing standards for federal student loans that address how servicers handle decisions with significant financial implications (e.g. applying payments to multiple loans, prioritizing repayment plans, and using deferment options), minimum contact requirements, standard monthly statements, and timeframes for completing certain activities (e.g. processing forms or correcting specific account issues). Although student loan servicing had been included as a "long-term actions" item in the Consumer Financial Protection Bureau's (CFPB) rulemaking agenda for several years under the leadership of former Director Richard Cordray, it was designated "inactive" in the Spring 2018 rulemaking agenda published under Acting Director Mick Mulvaney's leadership.

• Short-term, small-dollar installment lending. The CFPB should rescind its final payday/auto title/high-rate installment loan rule (Payday Rule) in light of comprehensive state product restrictions and licensing requirements for nonbank, short-term, small-dollar installment lenders. The Treasury believes that such state restrictions and requirements make additional federal regulation unnecessary. (In January 2018, the CFPB announced that it intends to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act. Although the Payday Rule became "effective" on January 16, 2018, the compliance date for the rule's substantive requirements and limits (Sections 1041.2 through 1041.10), compliance program/documentation requirements (Section 1041.12), and prohibition against evasion (Section 1041.13) is August 19, 2019. On June 12, 2018, the Texas federal court hearing the lawsuit filed by two trade groups challenging the Payday Rule granted the stay of the lawsuit requested in a joint motion filed by the trade groups and the CFPB, but denied the stay of the Payday Rule's August 19, 2019, compliance date that was also requested in the joint motion. A motion for reconsideration filed by the trade groups seeking reconsideration of the court's June 12 order was denied.) To encourage responsible short-term, small-dollar installment lending by banks, the FDIC should reconsider its guidance on direct deposit advance services and issue new guidance similar to that issued by the OCC. (In May 2018, the OCC issued a bulletin setting forth core lending principles and policies and practices for short-term, small-dollar installment lending by national banks, federal savings banks, and federal branches and agencies of foreign banks and encouraging banks to engage in such lending.)

• Debt collection. The CFPB should establish minimum federal standards for third-party debt collectors that address the information that is transferred with a debt for the purposes of debt collection or in the sale of the debt.  The CFPB should determine whether the FDCPA's existing validation letter standards should be expanded "to help consumers assess whether the debt is owed and determine an appropriate response to collection attempts."  The Treasury does not support the FDCPA's expansion to first-party collections absent further Congressional consideration. (In its Spring 2018 rulemaking agenda, the CFPB stated that it was "preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures." The CFPB estimated the issuance of a Notice of Proposed Rulemaking in March 2019.)

• Credit models. Federal and state financial regulators should enable the testing of creditworthiness models by banks and nonbanks that employ new approaches, such as the use of machine learning-based algorithms and the consideration of alternative data, such as utility and rent payments and technology use patterns (e.g. social media, browsing history). Regulators, through interagency coordination whenever possible, should tailor regulations and guidance to enable the increased use of such alternative data and new modeling approaches by reducing uncertainties. In particular, they should provide regulatory clarity for the use of alternative data and new modeling approaches that are generally recognized to have predictive value for use in credit decisions consistent with applicable law. The Treasury is supportive of industry efforts to obtain alternative data, such as monthly payments to telecom, utility, or rental companies through regular reporting of such data to consumer credit reporting agencies (CRAs). (H.R. 435, the "Credit Access and Inclusion Act of 2017," passed the House in June 2018 with bipartisan support and is currently under consideration by the Senate. The bill would amend the Fair Credit Reporting Act to allow landlords (including the Department of Housing and Urban Development), utility companies, and telecommunications providers to provide consumer credit information to CRAs.)

4. Advocating an approach to regulation that facilitates responsible experimentation.

The Treasury recommends:

• Federal and state financial regulators should establish a unified solution to the fragmented nature of the U.S. financial regulatory system to permit meaningful experimentation for innovative products, services, and processes. This solution would be in the form of a "regulatory sandbox" to promote the adoption and growth of innovation and technological transformation in financial services by providing targeted relief across multiple regulatory frameworks. Instead of promoting the establishment of a formal sandbox overseen by a single regulator, the Treasury plans to work with federal and state financial regulators to design a sandbox solution. However, the Treasury recommends that Congress consider legislation to provide for a single process that includes preemption of state laws if necessary should financial regulators be unable to address the Treasury's objectives. (Earlier this year, the State of Arizona created the first regulatory sandbox in the United States. Paul Watkins, who was formerly in charge of Fintech initiatives in the Arizona Attorney General's office, was recently named the Director of the CFPB's Office of Innovation and is expected to consider the creation of a regulatory sandbox at the federal level.)