Bureau of Consumer Financial Protection Hires Fintech-Knowledgeable Attorney to Lead New Innovation Office
July 20, 2018
Acting Director of the Bureau of Consumer Financial Protection (Bureau) Mick Mulvaney announced this week that he has chosen Paul Watkins to lead the bureau’s new Office of Innovation.
According to a statement released by the agency, Mulvaney has created this new office to encourage consumer-friendly innovation, which Mulvaney says is a key priority for the Bureau. Much of this is already taking place under the agency’s “Project Catalyst” program. This work will now be folded into the Office of Innovation.
The agency statement said that the bureau intends to fulfill its statutory mandate to promote competition, innovation, and consumer access within financial services. To achieve this goal, the Bureau says it will focus on creating policies to facilitate innovation by engaging with entrepreneurs and regulators, and reviewing what it may deem to be outdated or unnecessary regulations.
“I am delighted that Paul Watkins is bringing his deep expertise, track record of protecting consumers, and commitment to innovation to the Bureau,” Mulvaney said. “I am confident that, under his leadership, the Office of Innovation will make significant progress in creating an environment where companies can advance new products and services without being unduly restricted by red tape that belongs in the 20th century.”
Prior to joining the Bureau, Watkins was the Chief Counsel for the Civil Litigation Division at the Arizona Office of the Attorney General. In this role, he managed the state’s litigation in areas such as consumer fraud, antitrust, and civil rights. He was also in charge of the office’s fintech initiatives, where he managed the FinTech Regulatory Sandbox, the first state fintech sandbox (or incubator) in the country.
The Bureau was created under former President Obama as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. It was initiated by Democratic politicians and has never been very popular among Republicans. Mulvaney has been applauded by Republicans for loosening regulations, but he is only there temporarily as the Acting Director. President Trump’s nominee for a permanent director of the Bureau is Kathy Kraninger, who was questioned yesterday by Senate Democrats.
According to The Washington Post, during yesterday’s questioning, Sen. Elizabeth Warren of Massachusetts, who was one of the key creators of the Bureau, accused Kraninger of “dodging” questions and giving “lawyerly and limited” answers. Republicans were pleased with Kraninger’s responses and are hopeful that she will be confirmed.
Meanwhile, a June court decision declared that the Bureau as an entity is unconstitutional because of its single directorship structure which gives the director too much unchecked power.
Interest in Equipment Finance M&A is Strong
July 19, 2018
Interest in mergers and acquisitions (M&As) in the equipment finance industry has been high in the first half of 2018, according to The Alta Group, a consultancy dedicated to equipment leasing and asset finance.
This follows a May 22 Reuters report announcing that global M&As reached $2 trillion in 2018, which at the time of publication, was a record for the value of deals in that period. This record was achieved in part by the $11.1 billion merger of GE’s (GE.N) transportation business with rail equipment maker Wabtec (WAB.N).
Echoing the robust global M&A climate, Cincinnati-based Verdant Commercial Capital, a large commercial equipment finance company, announced on Monday that it had acquired Intech Funding Corp., which does financing and leasing for manufacturing companies. (The Alta Group was involved in this acquisition). No financial terms were disclosed for this acquisition.
“Several of our clients had not considered selling their businesses yet,” said Bruce Kropschot, Senior Managing Director of The Alta Group, “but M&A market conditions are so favorable now they concluded they could not risk missing out on the opportunity to sell while prices were high and there were many interested acquirers.”
In a statement, Kropschot attributed this favorable climate for M&As to “the relatively high multiples reflected in the stock market and the M&A market, interest rates that are still quite low, substantial liquidity in corporations and financial institutions, and the recent tax legislation with its lower corporate income tax rates and 100% expensing on equipment purchases.”
The Alta Group has clients throughout the world and has been representing equipment leasing and finance companies since 1992. It is headquartered in Glenbrook, Nevada and employs 60 consultants worldwide.
Like Bureau of Consumer Financial Protection, Court Declares FHFA Unconstitutional
July 19, 2018The Bureau of Consumer Financial Protection (Bureau), created largely by Democratic politicians in the wake of the 2008-10 financial crisis, has not been the most popular government agency under the current administration. That said, a June court decision declared that the agency itself is, in fact, not very democratic.
The controversial decision came from District Judge Loretta Preska of the New York’s Southern District who declared the Bureau to be unconstitutional based on its single directorship structure. (The current structure features a director who has full control over decisions with no requirement of a vote or a consensus from other colleagues or parties).
This week, the Court of Appeals for the Fifth Circuit made a ruling against the Federal Housing Finance Agency (FHFA) for the same reason – because it deemed the agency to be unconstitutional based on its single directorship structure.
The FHFA was established by the 2008 Housing and Economic Recovery Act to ensure that Fannie Mae, Freddie Mac and the Federal Home Loan Bank System are operating in a safe and sound manner so they can serve as a reliable source of liquidity and funding for housing finance and community investment.
The defense for this decision against the FHFA cites heavily from a 2016 ruling, written by Supreme Court Justice nominee Brett Kavanaugh, that asserts that the Bureau is unconstitutional in large part because the director cannot even be removed the president. Part of this week’s FHFA decision is as follows:
“Congress encased the FHFA in so many layers of insulation—by limiting the President’s power to remove and replace the FHFA’s leadership, exempting the Agency’s funding from the normal appropriations process, and establishing no formal mechanism for the Executive Branch to control the Agency’s activities—that the end ‘result is a[n] [Agency] that is not accountable to the President.’ The President has been ‘stripped of the power [the Supreme Court’s] precedents have preserved, and his ability to execute the laws—by holding his subordinates accountable for their conduct—[has been] impaired.'”
The 2016 decision decreeing that the Bureau is unconstitutional is similar:
“Other than the President, the Director of the Bureau is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power. That is not an overstatement. What about the Speaker of the House, you might ask? The Speaker can pass legislation only if 218 Members agree. The Senate Majority Leader? The Leader needs 60 Senators to invoke cloture, and needs a majority of Senators (usually 51 Senators or 50 plus the Vice President) to approve a law or nomination. The Chief Justice? The Chief Justice must obtain four other Justices’ votes for his or her position to prevail…”
Clearly, some judges feel that the Bureau and the FHFA are unconstitutionally formed. Whether these agencies will change their structure in response to these decisions is unclear.
FCI Implements Factoring Solution That Is Islamic Law-Compliant
July 17, 2018The FCI, an international trade group focused on factoring, implemented changes to its General Rules of International Factoring so that they are now compliant with Islamic (Shari’a) law. The Amsterdam-based factoring group, which just celebrated its 50th anniversary, worked with Dubai-based Noor Bank and other constituents, to create amendments to its rules that would make it Shari’a law compliant, according to a recent FCI announcement.
While the details of the changes to FCI’s rules were not immediately available, deBanked spoke to Abed Awad, founding partner at New Jersey-based Awad & Khoury, who is an expert in Islamic law.
Awad said that Shari’a law’s fundamental problem with factoring is that it involves collecting interest, which is prohibited. While factoring might not seem to involve interest, Awad said that offering less cash upfront for a receivable that is worth more in the future, is essentially a reverse form of interest.
But Awad said that in recent years, people have developed a somewhat controversial concept, called Tawarruq (or monetization) that abides by the prohibition of interest rule while yielding the same result. This is how it works:
A merchant in need of cash goes to a bank. Rather than offering cash to the merchant, the bank instead arranges for a merchant to buy a commodity (like oil or sugar), on credit. The merchant doesn’t have to pay for the commodity until a future date. Meanwhile, the merchant quickly sells the commodity for cash to a third party. The merchant now has cash and will not be paying interest of any kind. The bank still makes money. It gets paid for structuring the arrangement between the merchant and the seller of the commodity, and for evaluating the creditworthiness of the merchant.
The end result is the same for the merchant. The merchant gets cash quickly, albeit a little less quickly because there are multiple parties involved. Noor Bank currently offers an Islamic law compliant factoring product. Tawreeq Holdings, which has offices in Luxembourg, United Arab Emirates and Morocco, specializes in the Tawarruq alternative to factoring.
“Islamic Factoring is an increasingly important element in the finance of international trade and our ability to support Shari’a compliant business is particularly important for our global member base, said Peter Mulroy, Secretary General of FCI. “This development is another real enhancement of the support we can provide for our members.”
Walmart Not New to Financing
July 17, 2018
Walmart is considering switching its branded credit card business partner from Synchrony Financial to Capital One Financial Group, according to a Bloomberg report. Accordingly, the change in banking partner is related to the retailer’s vision for Walmart Pay, Walmart’s current checkout payment system.
In light of this, it is worth noting that Walmart is no stranger to working creatively and ambitiously with banks. In fact, aside from currently having independent bank branches that operate from inside Walmart stores – including Fort Sill National Bank and City National Bank and Trust – Walmart once had aspirations to become a bank.
In 2006, using an old and now controversial statute, the behemoth retailer attempted to get a charter to become an Industrial Loan Company (ILC) Bank. Chris Cole, Senior Regulatory Counsel at Independent Community Bankers of America (ICBA), a trade group, told deBanked that banks and other anti-Walmart groups banded together to thwart the retailer’s plans.
Recently, two fintech companies, SoFi and NelNet, have submitted applications to become ILC banks.
California Bill May Disadvantage Small Brokers
July 17, 2018A California State Assembly bill that carefully defines what a broker is, could significantly affect small, unlicensed brokers, according to Tom McCurnin, an attorney at Barton, Klugman and Oetting in Los Angeles.
Assembly bill 3207 enumerates the ways that the bill would depart from the current law. Most notably, the definition of a broker would be far more precise. The current California Licensing Law, which requires brokers to be licensed, defines a broker as “anyone who is engaged in the business of negotiating or performing any act as a broker in connection with loans made by a finance lender.”
Tom McCurnin – Barton, Klugman & Oetting LLP“It’s a circular definition,” McCurnin said. “It presently says that a broker is someone who is brokering transactions.”
Essentially, it defines a broker as a broker, leaving plenty of room for ambiguity.
“With respect to registering to conduct business in the state of California, we’ve got tons of brokers doing deals in California, but they’re not licenced here,” McCurnin said. “They do deals in California, but they’re located in Florida or New York or Michigan. They’re making money in the state of California. Why shouldn’t they pay their fair share of taxes?”
People can always evade the law and not get licenced. But the idea behind this bill is that by making the definition of a broker perfectly clear, it’s no longer possible for a broker to make an argument that they’re not really a broker. With the language in the bill, a broker would be in clear violation of the law if they don’t obtain a licence.
The new definition of a broker would be “anyone who, among other things, transmits confidential data about a prospective borrower to a finance lender with the expectation of compensation.” McCurnin notes that “expectation of compensation” is an important phrase, currently used to describe real estate brokers, because it states clearly that the broker intends to earn money from the consumer. The proposed definition in the bill continues to define a broker as someone who “participates in any loan negotiation between a finance lender and prospective borrower, participates in the preparation of loan documents, communicates lending decisions or inquiries to a borrower, or charges a fee to a prospective borrower for any services related to an application for a loan from a finance lender.”
This definition leaves little room for debate. So what does getting a California State broker licence entail? It requires that a broker have at least $25,000. Beyond this, McCurnin says it inquires primarily about three other things: 1) if you have a criminal record (fingerprints are required), 2) what type of loans you intend to broker (secured, unsecured, etc.), and 3) the size of the loans you intend to broker. There are different regulations for different loan sizes.
Being licensed requires being registered to conduct business in the state of California. And a registered business must pay taxes on earnings in the state. With this in mind, McCurnin said the passage of this bill could be a win for California in that it could result in more out-of-state brokers getting registered and paying taxes on their earnings in the state.
At the same time, should the bill pass, McCurnin thinks it would be a big loss for the small broker who is either unable to show $25,000 or who might have something unsavory to hide. But if the small broker working from his basement has enough capital and is willing to state what he intends to broker in California, then obtaining the license shouldn’t be a problem.
The bill passed in the state Assembly and is being reviewed in the Senate. An amendment to the bill was made on July 5. Another California bill of great significance to the alternative lending industry is SB-1235, which has passed in the state Senate and is being reviewed in the state Assembly. McCurnin said he believes that the broker bill will pass.
“California is a very liberal place,” McCurnin said. “It’s like another country.”
How to Avoid Being Sued by a Professional TCPA Plaintiff
July 13, 2018
Did you know that if you receive an unwanted solicitation call on your private cell phone or residential landline, you can win between $500 and $1,500 in damages from the offending company? The company can be charged for violating a statute of the 1991 Telephone Consumer Protection Act (TCPA), which prohibits companies from calling consumers without their express permission. You might not know about this, but others know about it all too well.
Some people use this TCPA statute as a way of making money, by purchasing multiple phone numbers in the hope they will receive unsolicited phone calls that violate the TCPA statute. And if they do, they sue. deBanked previously explored “professional plaintiffs” like this, with a focus on those who have come up against funding companies.
According to Michael O’Hare, CEO of Colorado-based Blindbid, people who manipulate the TCPA statute for profit also target lead generation companies like his. O’Hare is currently being sued by a plaintiff for several million dollars in a class action lawsuit. The claim is that Blindbid allegedly made five unsolicited calls in 2016 to the plaintiff’s plumbing company. (According to David Klein, Managing Partner at Klein Moynihan and Turco, there is a murky area in the TCPA regulation where, if a cell phone is used for both personal and business use, the phone can be considered a personal phone, protected under TCPA.) In O’Hare’s case, upon further discovery, it was determined that only one of the five alleged calls actually came from Blindbid. But O’Hare says that the number was opted in and manually dialed. Regardless, O’Hare’s plaintiff is a pro, what some might call a “professional plaintiff.”
Over the last six years, this plaintiff participated in four major class action lawsuits that have led to combined settlements of $31 million, according to O’Hare. The plaintiff has also filed 34 cases in federal court since 2016, O’Hare said.
What is noteworthy about O’Hare’s case is that it’s part of what he says is a trend towards class action lawsuits based on TCPA violations, and often brought on by professional plaintiffs. O’Hare said it’s no coincidence that his plaintiff waited for two years to sue.
“The longer a plaintiff waits, the more members he can bring into the class. And the more members in the class, the larger settlement,” O’Hare said.
As a way to transform O’Hare’s lawsuit into a class action suit, he said that his plaintiff’s attorney has made the argument that if Blindbid violated his client’s TCPA rights to privacy with the one unsolicited call, then Blindbid likely violated others as well. So in discovery, the plaintiff’s attorney wants to compel Blindbid to turn over its phone records for the past two years to prove that Blindbid had “express written consent” from the other merchants it called. In the age of the internet, “express written consent” translates to filling out an online form where the individual consents to receive a phone call.
To satisfy the attorney’s request, Blindbid would have to match every phone number that was called with a corresponding computer IP address. This should be doable, but O’Hare says that professional plaintiffs, like his, deny that they ever filled out an online lead form, or that the IP address O’Hare has on record belongs to them.
“In the past, if there was an alleged TCPA violation, most companies could settle for a few thousand dollars to $10,000 depending on the number of violations,” O’Hare said. “Now there are these are multi-million dollar settlements.”
Unlike the fines of years past, these class action lawsuits can sink your company. While O’Hare said that there is no way to completely protect one’s company from being sued, below are some of his recommendations.
Have express written consent of all the merchants you call
Online consent is valid if the text explicitly states to the user that he is giving, in effect, express written consent to be contacted by your company by phone, text and/or email.
Register your company with Federal and State Do Not Call Registries.
Respect merchants’ requests
If they do not want to be called any longer, put their numbers on your “Do Not Call” list.
Have a written “Do Not Call” policy
Have a TCPA attorney review the policy and include a copy in your company employee guide.
Find a good TCPA scrubbing service
These are services that have many of the numbers that belong to professional plaintiffs and they monitor for newly registered phone numbers. They tell you which numbers to remove from your lists. Some good scrubbing services are TCPALitigatorList.com and DNC.com.
Don’t buy lists from overseas
These lists are full of professional litigator phone numbers you are taking a huge risks.
Never autodial / robo call
Robo calls are the most dangerous type of calls you can make unless you have a full opt-in list with express written consent from each of the merchants. Robo calls and text messaging TCPA violations are the easiest TCPA cases for plaintiffs to win and the settlements are higher. Every robocall or text is fined. The use of an autodialer is one of the elements to prove a TCPA violation. If you use an auto dialer with human intervention, like EVS 7, you can argue that your autodialer calls are manual calls. Still, use caution.
Consult with a TCPA attorney
I would advise every company that does any outbound calling to consult with a TCPA attorney about best practices. An ounce of prevention is worth a pound of cure.
DFS Releases Recommendations for Online Lending
July 12, 2018
The New York State Department of Financial Services (DFS) released a report on Wednesday on the subject of online lending in the state. The report was mandated by a bill signed by New York Governor Andrew Cuomo on June 1 of last year. According to the original bill, this report was to be researched and composed by a task force of multiple parties. But in the eleventh hour, the section regarding the task force was struck. The report is to be presented to the governor, the temporary president of the senate, the speaker of the assembly, the chair of the senate standing committee on banks, and the chair of the assembly standing committee on banks.
Wednesday’s 31-page report is based on survey responses from 35 online lenders operating in the state, lending both to businesses and to individuals. One of the revelations in the report is that, from the data obtained, “New York individuals appear to account for a higher total dollar amount of loans than New York businesses.”
The report presents three primary assertions:
Equal Application of Consumer Protection Laws.
The report establishes that New York has strong consumer protection laws and regulations that apply to financial institutions. “These protections should apply equally to all consumer lending and small business lending activities,” the report reads. The report explains that there are strong protections against payday lenders and indicates that there should be strong protections across the board, even though the financial products and the consumers may vary widely.
Usury Limits Must Apply to All Lending in New York.
The report asserts that access to credit at usurious rates has long been prohibited in New York and that online lenders should not be able to bypass this by having arrangements with banks in other states, like Utah, where the usury laws are different. In New York, the civil usury rate is 16% and the criminal usury rate is 25%. But because online lenders have arrangements with out-of-state banks, they can charge interest at rates well above 25%.
Currently, if an online lender sues a merchant for not paying, the merchant cannot use usury as a defense. In the report, DFS recommends that a business should have the right to present usury as a defense.
All Online Lenders Should be Licensed and Supervised.
The report states that New York State chartered banks, credit unions and licensed non-depositories are subject to regular examinations by the DFS and, if applicable, federal regulatory agencies.
“Many online lenders remain unlicensed in New York with no direct supervisory oversight from a safety and soundness or consumer compliance perspective,” the report reads. “Direct supervision and oversight is the only way to ensure that New York’s consumers and small business owners receive the same protections irrespective of the channel of delivery [of financing.]”
Some of these issues relate to the well-known 2015 Madden v. Midland Funding court decision, in which a credit card consumer (Madden) won a case against a debt-collection agency (Midland Funding) because the court decided that Midland, as a non-bank, was not allowed to charge interest above what was allowed in the state.
