Regulation
Fintech Sandbox? States, OCC Mull Regulatory Options
May 2, 2017It’s called the “New England Regulatory FinTech Sandbox.”
State banking regulators across the six New England states are exploring the creation of a regional compact that would allow financial technology companies to experiment with new and expanded products in “a safe, collaborative environment,” says Cynthia Stuart, deputy commissioner of the banking division at the Vermont Department of Financial Regulation.
Stuart asserts that she and her New England cohorts are adroitly positioned and uniquely qualified to oversee laboratories of finance. In Vermont, for example, she heads an agency that oversees regulation and examination of banks, trust companies, and credit unions as well as such nonbank financial providers as mortgage brokers, money transmitters, payday lenders and debt adjusters.
Financial watchdogs at the state level, Stuart observes, “are already witnesses to a wide breadth of financial services offerings and understand how they impact communities and consumers. As technology intersects with financial regulation,” she adds, “state regulators also appreciate the need to be open to technological innovation while balancing risk and return.”
The regional fintech sandbox is the brainchild of David Cotney, the former Massachusetts Commissioner of Banks, and Cornelius Hurley, director of Boston University’s Center for Finance, Law and Policy. The sandbox stitches together elements of Project Innovate, a development program for fintechs inaugurated by the U.K.’s banking regulator, and the European Union’s “passport” model for cross-border banking operations.
In the U.K., the Financial Conduct Authority is supporting both small and large businesses “that are developing products and services that could genuinely improve consumers’ experience and outcomes,” according to a 2015 report by the London agency. In harmonizing the regulatory regime for the sandbox across state lines of Maine, New Hampshire, Vermont, Massachusetts, Rhode Island and Connecticut, the program emulates the EU’s “passport.” Since 1989, a bank licensed in one EU country has been able to set up shop there while – thanks to the “passport” –operating seamlessly throughout the 28 states of the EU (soon to be 27 after “Brexit”).
“It’s still preliminary,” Cotney says of the proposed New England sandbox-cum-passport, “but we’ve talked to the financial regulators in all six states and there’s universal openness. Nobody want to be seen as being a barrier to innovation.”
(Barred by law from lobbying in Massachusetts, Cotney hands off the Bay State duties to Hurley while he meets with regulators and other officials in the five remaining New England states. In March, Cotney was named a director at Cross River Bank, a Fort Lee, N.J.-based, $600 million-asset community bank known for its partnerships with peer-to-peer lenders including Lending Club, Rocket Loans and Loan Depot.)
This nascent effort of financial Transcendentalism in New England is, meanwhile, taking place against the backdrop of an increasingly acrimonious battle between the Office of the Comptroller of the Currency and state banking authorities over the licensing and regulation of fintech companies. At issue is the OCC’s plan announced in a December, 2016 “whitepaper” to issue a “special purpose national bank” charter to nonbank fintechs.
Siding with the OCC are the fintechs themselves, including Lending Club, Kabbage, Funding Circle, ParityPay, WingCash. “A special purpose national bank charter for fintechs creates an opportunity for greater access to banking products, empowers a diverse and often underserved customer base, promotes efficiency in financial services, and encourages industry competition,” Kabbage wrote to the OCC in a sample industry comment to its whitepaper (which is on the agency’s website).
Also on board for the OCC’s fintech charter are powerful Washington trade associations such as Financial Innovation Now, the membership of which comprises Amazon, Apple, Google, Intuit and PayPal, and industry research organizations like the Center for Financial Services Innovation. The U.S. banking establishment also appears largely supportive of the OCC. While qualifying its imprimatur somewhat, the American Bankers Association declared that it “views the OCC’s intent to issue charters as an opportunity to further bring financial technology into the banking system…”
But an irate army of detractors is condemning the fintech charter outright. Consumer groups, small-business organizations, community banks, and state attorneys general number among the furious opposition. No cohort, however, has been more hostile to the OCC’s fintech charter than state banking regulators.
Maria T. Vullo, superintendent of New York State’s Department of Financial Services, has emerged as a firebrand. “The imposition of an entirely new federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape,” she wrote to the OCC earlier this year, “will invite serious risk of regulatory confusion and uncertainty, stifle small business innovation, create institutions that are too big to fail, imperil crucially important state-based consumer protection laws, and increase the risks presented by nonbank entities.”
Although big-state regulators from New York, California and Illinois have been in the vanguard of opposition, their unhappiness with the OCC is widely shared. Vermont regulator Stuart, who emphasizes the need for regulators “to embrace change,” nonetheless disparages the OCC’s endeavor.
“Of particular concern is the creation of an un-level playing field for traditional, full-service Vermont institutions to the advantage of the proposed nonbank charter,” she told deBanked. “The special purpose national nonbank charter would not be subject to most federal banking laws and would be regulated with a confidential OCC agreement. The disparity in regulatory approaches is concerning.”
What had been confined to a war of words – rounds of angry denunciations packed into letters and press releases directed at the OCC — reached fever-pitch last week when, on April 26, the Conference of State Banking Supervisors filed suit against the OCC in federal court. The lawsuit seeks to prevent the agency “from moving forward with an unlawful attempt to create a national nonbank charter that will harm markets, innovation and consumers,” according to a CSBS statement.
Among other things, the conference’s complaint charges that by creating a national bank charter for nonbank companies, the OCC has “gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws. Those laws,” the conference’s statement continues, “authorize the OCC to only charter institutions that engage in the ‘business of banking.’”
Under the National Bank Act, the conference’s complaint asserts, a financial institution must “at a minimum” accept deposits to qualify as a bank. By “attempting to create a new special purpose charter for nonbank companies that do not take deposits,” the complaint adds, the OCC is acting outside its legal authority.
Christopher Cole, senior regulatory counsel at the Independent Community Bankers Association – a Washington, D.C. trade association of Main Street bankers known for punching above its weight — asserts that the state banking regulators are on solid ground. “The whole question comes down to what should a bank be for purposes of a national bank charter,” he says in a telephone interview. “The Bank Holding Company Act (of 1956), federal bankruptcy laws, and tax laws – all three – define banks as insured depository institutions. It’s right there in the statutes. So our recommendation,” he says, “is for the OCC to go back to Congress” and ask for the explicit authority to create a fintech charter.
Because the OCC has “short-circuited rule-making” protocol required by another law – known as the Administrative Procedures Act — “the process hasn’t been kosher,” Cole adds.
Many members of Congress are also expressing outrage at the OCC. Not only have Democratic Senators Sherrod Brown of Ohio and Jeff Merkley of Oregon strenuously objected to the OCC’s fintech charter, but on March 10, 2017, Jeb Hensarling, the chairman of the House Financial Services Committee, fired off a “hold-your-horses” letter to Comptroller Thomas J. Curry. Signed by 34 House Republicans, the March 10 letter reminded Curry that his term of office would officially be up at the end of April, 2017, and urged him not to “rush this decision” regarding the fintech charters.
“If the OCC proceeds in haste to create a new policy for fintech charters without providing the details for additional comment, or rushing to finalize the charter prior to the confirmation of a new Comptroller,” the letter from Hensarling et alia declares, “please be aware that we will work with our colleagues to ensure that Congress will examine the OCC’s actions and, if appropriate, will overturn them.”
Never mind the stern letter from Chairman Hensarling, or the fact that an impressive array of Congressmembers on both sides of the aisle are bipartisanly unhappy, or that state banking regulators’ have filed suit, or that Curry’s replacement as Comptroller is overdue: the OCC is pushing ahead. The agency will play host to a bevy of financial technology companies and other financial institutions on May 16 for two days of get-acquainted sessions in its San Francisco office.
Billed as “office hours,” the West Coast meetings will consist of one-on-one, hour-long informational meetings “to discuss the OCC’s perspective on responsible innovation,” Beth Knickerbocker, the OCC’s acting chief innovation officer, says in a press release.
The office hours, Knickerbocker adds, “are an opportunity to have candid discussions with OCC staff regarding financial technology, new products or services, partnering with a bank or fintech company, or other matters related to financial innovation.”
Back in New England, Hurley, the Boston University law professor advocating the regional sandbox, says: “No one knows where fintech is going. But one place it’s not going is away.”
Lights Out for New York’s Attempt to Impose Stricter Lending Rules
April 5, 2017
In a late night session on Tuesday, and days past the budget deadline, the New York State Senate voted 58-2 in favor of a key budget bill. Noticeably gone from it was Part EE, which would’ve imposed stricter licensing requirements on not only just lending, but also other forms of finance. Part EE was originally put there by the Governor’s office as an amendment to Section 340 of the State’s banking law.
Over the last two months, several trade groups used what little time they had to express concerns over the language. Their biggest frustration was that no one had consulted with them in advance. In February, Dan Gans, the executive director of the Commercial Finance Coalition (CFC) said, “They should allow all the stakeholders to have their voices heard.” The CFC, which represents many small business financing companies, did their best to do just that last month by actually making the trek to Albany.
Ultimately, the legislature did not support the Governor’s plan. Both the Senate and the Assembly removed Part EE from their versions of the budget and on Tuesday night, the Senate passed it. The Assembly passed it the day after.
This is the first time the budget deadline has been missed under Governor Andrew Cuomo. The last miss was in 2010 under Governor Paterson, which came in 125 days late.
Does Fintech Have a Distinctively British Accent? – From Congressman McHenry’s Speech
April 1, 2017Regulation around technology-enabled lending has generally been a point of contention in the US. Even regulators are finding themselves at odds with other regulators, like the OCC vs. the NYDFS for example. Might relationships like these be contributing to America’s innovative decline?
At LendIt last month, Congressman Patrick McHenry (R-NC) said, “Is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.”
Forward-looking regulation has helped a nation like Kenya make the movement of money cheaper in their country than it costs to move money here, McHenry said. “They’ve moved generations ahead overnight,” he exclaimed.
If you haven’t seen the video, check it out below:
Or you can read the full text from our transcription of it:
“And thank you all for being here. This is a wonderful celebration on, you know, a stereotypical February or March day here in New York. Cold as can be. Good to be inside. But thank you for taking the time to gather. The work that you’re about improves the American economy, gives more options for my constituents and for the citizens across this great country of ours, and gives them better options and opportunities to make decisions for themselves and put power back into their hands in a very competitive environment.
In fact, it’s really liberating to be out of D.C. especially at moments like this. You don’t know what the latest news story is gonna be or the latest tweet, so good to talk about something meaningful over the long run. And the reason why I’m here is because my focus legislatively has been around utilizing technology for innovative forms of finance.
I came about this in a very simple way that’s relatable to other people. But you know, the idea of Fintech, in 10 years, in 20 years, the term “Fintech” will be scoffed at kind of the way that we scoff at how they described Amazon 20 years ago. They said it was an e-Commerce site, that it was a webpage. Right? And we laugh at people that would describe it that way today. Every company that’s in the retail space has an e-Commerce site. Everyone is competing in this new form that Amazon represented the new wave of 20 years ago. So, the term “Fintech” may be much like referring to something as not a website, but a webpage. And in time, the way people are interacting with the banking system is going to continue to change in fundamentally different ways.
It’s exciting to think about how consumers and small businesses across America are gonna find these new ways to access capital over the next generation. And you all are at the forefront of that. And at D.C., I’ve tried to lead the change of that change in mindset. And you know, this is not only about helping Fintech companies, but also about fundamentally altering how regulators interact with innovative companies. And so, the focus on lending, helping families access capital as I said in the beginning, I came to it in a very natural way.
I saw my father start a small business as a child. When I was a child, the youngest of 5 kids, I saw my father start a business in the backyard mowing grass. Very simple, relatable thing. Most of us have mowed grass at some point in our life. And my father started that small business in our backyard and he used the great financial innovation of his time to buy his second piece of equipment, which he put on a MasterCharge. Great financial innovation and that helped him start a small business.
Now, that small business didn’t change the world, but it changed my brother’s and sister’s lives and put the 5 of us through college. That’s a meaningful thing and that is the American dream as my father defined it and as I define it. Now, that’s not creating Facebook. It’s not this other sort of revolution of internet technology, but it certainly made a huge difference in our community and for our family.
So, how did we utilize technology and help those small businesses like my father access and grow? The plight of small business in America though right now is real. The next generation of small business owners are struggling to get off the ground. The facts are that small business loans used to make up a majority of bank balance sheets. Now, 20 years— Well, in 1995, they were majority of the bank balance sheets. Now, it’s 20% of bank balance sheets.
Now, you also see small town America, which used to lead the country in small business starts, small counties, small communities across the country have lagged. So, smaller counties used to lead the nation in new businesses even as late as the 1990s, mid `90s. But just in this decade alone, small counties have lost businesses. U.S. counties with 100,000 people or fewer residents lost more businesses than they created. We see stagnation among small business owners and small business starts. This is why Fintech is so vital and so important. Technology is the only way to ensure that we spread and democratize capital outside of Austin, Boston, Silicon Valley, and New York.
How do we get the rest of the country, small town America, and even the urban areas that don’t get the focus and attention? And so, I think the power of harnessing big data is gonna fundamentally change the way we look at debt. It’s already happening. And you’re the leaders of it. Instead of relying on the credit score, which was a great innovation in the 1970s, fixed the problem in the 1970s, today, companies are using big data to better understand who will and who should qualify for loans. And what we’re discovering is that the way we help people out of debt is by understanding the data behind the debt.
Look at the way technology is fundamentally changing lives and places like Kenya. Think of this. In Kenya, the phone, your smartphone, our smartphone is that way to financial inclusion in Kenya. The movement of money cheaper in Kenya than it is here because of this simple device. It’s more powerful in that jurisdiction than in ours because of regulation and forward-looking regulation. And instead of loading buses filled with luggage that’s filled with cash in moving money in Kenya, they’re now doing it through a fast transfer over their mobile device. They’ve moved generations ahead overnight. And in fact, in many ways, they’re leading the world in Fintech deployment. So, we’re living in a new and exciting era in financial services. It’s actually matched the best interest of consumer protection with the demands of global smartphone-led revolution that we, as consumers, are driving. Now, that’s what’s happening in the real world.
So, let me translate back to you what is happening in the analog world of Washington. D.C. The regulatory challenges of Fintech are real. It’s major in Washington. We have a diversity of regulators. That’s certainly part of our American system. And that’s not gonna change any time soon. So, what is the current landscape? If you are in Fintech and you wanna make sure you’re complying with financial laws and regulations, where do you go? Who do you ask? Who do you talk to? Is there an open door in Washington? Do you know who your regulator is? Do you know who your regulator should be? Do they meet with you? Are they willing to meet with you? What’s your legal and compliance cost before you even get a product hashed out? These are major things you have to wrestle with in starting your businesses or growing your businesses. So, believe it or not, the difficult question is who do you talk to in Washington? And there is no simple answer. And because there’s so little clarity on which regulator to go to, often there’s even less clarity of how the underlying laws or regulations are being enforced by that regulator in this new marketplace.
And so, this is the hidden secret of Washington. The regulators themselves are so behind when it comes to understanding technology that they themselves do not really know how to apply regulation to innovations in Fintech. They just simply do not know. And trust me, I realize this as a legislator. 5 years ago, I helped craft what is called the JOBS Act. I wrote a piece of the JOBS Act. It resulted in 14 pages of legislative text around investment crowdfunding. 14 pages of legislative text. 3 years later, the Securities and Exchange Commission wrote 700 pages of regulation around my 14 pages of law. And if you are all involved in investment crowdfunding under Title 3 of the JOBS Act,— three of you, right— there will be a lot more had they written good regulation and actually complied with the mindset of Congress when we passed the JOBS Act.
So, I see this when regulators don’t actually know how to meet the demands of innovation and what’s happening in this information revolution that we have. And so, as a result, America is actually falling further behind the rest of the world. And unlike other areas of the world, which have created regulatory sandboxes for banks and technology companies to innovate and find a light-touch regulation, here in Washington or there in Washington, regulators are struggling to adapt.
And is it any wonder that Fintech has a distinctively British accent these days? It’s good reason. We have regulatory competition around the globe, but we don’t have the right regulatory competition here in the United States. And while we have a patchwork of conflicting, and overlapping, and confusing regulations, in places like the U.K., they’re creating an entire ecosystem of financial innovation and allowing it to flourish. And they become the model for the rest of the world and the intellectual property center for the rest of the globe when it should be here in the United States.
Well, while we’re all trying to figure out whether or not virtual currencies are more like property or money here in the United States, top countries around the world are using digital currency to move payment platforms overnight, change payment platforms, make it cheaper, more affordable to move funds for the smallest and the biggest. So, while the world’s rapidly adopting new financial technology to expand the middle class, our country’s regulators have created capital deserts here in the United States in rural and in urban areas. We understand the notion of an urban food desert. If you can get good food that is close to your home in an urban area, you can actually feed your children wholesome meals. We understand that. That’s a big discussion. Well, likewise, we’re starving off small business innovators in urban areas and let’s say less desirable zip codes in urban areas and less desirable zip codes in rural areas. And so, we’re starving off opportunity and that has a result in small business starts and the rise from the turn in the economy from those that are living on the margins to those that move up to the upper middle class and upper class based off being starved from capital.
We have to fix that. Fintech is the solution, but the regulation has to change. And that is something that I’ve been focused on over the last 6 years. And I think we have a trilogy of good ideas that I would submit to you this morning. First is let me just tell you my mindset in regulating and legislating. And to borrow from startup culture, the bills that I try to focus on are minimal viable bill. It’s a simple idea.
One idea that focuses on solving a discrete problem. Something in the marketplace that needs a regulatory fix in order to flourish. And it will help the greatest number of people and have the greatest impact on tech companies, bank startups, and small business folks and families. So, looking at the headache test, one of the areas of interaction with the government that’s creating unnecessary delay is the IRS not having a piece of technology that will allow people to verify income data.
And so, as a result of that, I’ve — legislation that is called the IRS Data Verification Modernization Act, 45060 for those of you who are in the game on this, but it simply will do this. It will automate a bottleneck manual process that is utilized via e-mail and fax with the IRS in verifying basic information that you, as lenders, need to allow mortgages, student debt, refinancing, and small business loans. It’s the taxpayer’s information. You pay for the service to verify it. We should have better service rather than the shoddy service IRS is currently giving you. You should be able to get this in an instant with an API rather than getting something faxed to you in 7 to 10 days. It’s absurd that the IRS can’t update and we’re gonna force them to update.
Our second bill, it goes directly to returning consistent uniform systems for our capital markets, which I believe is a fundamental thing in our 50-state regime with a variety of regulators. We have to have some base level of understanding on what is valid. And the bill is simple. It codifies the Valid-When-Made Doctrine that we’ve had in this country for nearly 100 years. And that was an established legal precedent prior to the Second Circuit Court’s decision in the Madden case. Madden versus Midland. And our view is the Second Circuit’s opinion was unprecedented. It’s created uncertainty for Fintech companies, banks, and the credit markets; making credit less available and more expensive. So, the simple fix is returning to the Valid-When-Made Doctrine. Congress under our constitutional system has the right to make this very clear to the courts of our intention when we pass the original law and nothing has changed when it comes to this. And this is the second bill that I’ll be pushing this year.
And finally, a third piece of legislation that is broader in discussion and it’s the Financial Services Innovation Act. This bill creates a new paradigm for regulators in Washington. It says in a first of a kind way, it forces regulators to meet the demands of rapid innovation in financial services. Instead of the old analog version of command and control regulation that’s messy and rigid based off of opinion, not fact, my bill requires agencies of jurisdiction to create offices of innovation that will engage with entrepreneurs and provide a regulatory on-ramp for financial innovation. It basically forces all the regulators, all the financial regulators to create a new door for financial innovation. A welcoming door. Come in with your ideas. Let’s talk about regulations that can enable this technology to flourish. And in getting data in return, the agency would be in permanent beta testing mode, which would give them data to prove out consumer benefit or consumer harm. It will give them data to adopt the whole footprint of regulation in all these financial regulators.
Now, that is a major mindset shift for our financial regulators, a major mindset shift for any regulator in our American system of governance. But with thorough analysis, I believe that innovators will be better off in this regime when you have data that is driving the decision making of regulators and regulators driving decisions that are informed rather than opinion based.
Now, saying that we’re gonna base our politics off of fact these days is its own enormous political challenge, but I think it’s important that we all agree facts are important things and we should base our decision-making solely on that set of facts in order to do the right thing for our country, the right thing for our economy, right thing for families, right thing for small business starts. So, permanent beta testing involves continuously evolving, testing, and proving. It’s what you do everyday as innovators.
Now, those are 3 major pieces of legislation that can have an impact, but the mindset in Washington is much— Well, it’s much different than you might think. Legislators are eager for new ideas, for new information. They’re eager to hear what you are about and what you’re doing. And given the nature and the speed of innovation, you have an obligation to be engaged in Washington. If you’re not engaged in Washington, Washington is still gonna be engaged in what you do. You’re just gonna get worse rather than better. So, if you inform decision makers you have data to backup what you’re expressing, what you’re advocating for, we’re gonna be better off, but you all in your pitches, right, have to— The basic startup pitch, you’ve got to answer one question. Why now? Why now? I think American financial innovation is at an inflection point. I really do. We’ll either lead the world in the next few years or we’re gonna be left behind. It’s our choice. It’s our choice. And it’s time that regulators treat innovation no longer as a threat, but as an opportunity to consumers. It’s time to recognize that regulators need to recognize— I think it’s time that they recognize that consumer protection and innovation are not mutually exclusive. Now, that’s the reason why it’s now, but it’s not gonna happen unless you engage in Washington and make your voices heard. You’ve gotta make your voices heard in order to get the results we need so we can have innovation flourish in this country, that we can be the market leader for the world, that we can be an exporter of these ideas rather than having to export ourselves to different markets in order to take that data and that mindset and deploy those resources globally.
Let’s make sure that we can lead this market to better and greater things. With your engagement, we can. Without your engagement, we’re gonna be left behind. So please, please engage in Washington. Make your voices heard. And with your voices being heard, I think we can have change for the better. So, thank you for your leadership. Thank you for the opportunity to be here with you. God bless.”
House Committee on Financial Services to Air ‘The State of Bank Lending in America’ at 2PM EST
March 28, 2017Update: The House has blocked streaming of this procession from any place other than Youtube
The Subcommittee on Financial Institutions and Consumer Credit will hold a hearing entitled “The State of Bank Lending in America” at 2PM EST on Tuesday. According to a memo, “the hearing will examine recent trends in lending and how the current regulatory climate impacts the availability of credit for consumers and small businesses.” The premise is that community financial institutions have been lending less since the passage of Dodd-Frank and that this may be constraining consumer and small business access to credit.
Speaking on the panel before the Committee is:
- Mr. Scott Heitkamp, President and Chief Executive Officer, ValueBank Texas, on behalf of the Independent Community Bankers of America
- Ms. Holly Wade, Director, Research and Policy Analysis, National Federation of Independent Businesses
- Mr. David Motley, President, Colonial Companies, on behalf of the Mortgage Bankers Association
- Mr. Michael Calhoun, President, Center for Responsible Lending
We will attempt to live stream it on deBanked’s homepage when it airs.
Brief: New York’s Attempt to Over-Regulate Lenders Downgraded to Doubtful
March 14, 2017
The Governor’s budget bill has encountered resistance up in Albany, sources say, specifically Part EE that aimed to amend New York’s banking law and impose sweeping licensing restrictions on all types of lending and finance. Analysts felt that the language could have vast unintended consequences beyond just online lenders, including factoring, commercial lenders and brokers, merchant cash advance and the securitization markets.
The passage of this proposal now looks doubtful. The Assembly, one of two branches of the State’s legislature, introduced their own version of the budget on March 13th and removed the language.
“The Assembly rejects the Executive proposal granting DFS regulatory authority over any online lenders doing business in New York State,” the bill says. Notably, they also rejected “the Executive proposal to authorize enforcement of Insurance, Banking, and Financial Services Law against unlicensed individual or businesses, including bringing a civil action.”
The Senate echoed same. “The Senate denies the Executive proposal to authorize the Superintendent of the Department of Financial Services to expand the regulation of small loan lenders,” their bill states.
Industry trade groups, namely the Commercial Finance Coalition (CFC), had mobilized quickly to tell their members’ stories up in Albany two weeks ago. One of the group’s concerns was that they had not been consulted in advance, nor given any time to engage in a discussion about the proposal.
“They should allow all the stakeholders to have their voices heard,” said Dan Gans, CFC’s executive director. With the proposal’s chances of making it through the final budget by the March 31st deadline waning, the group and others may finally get an opportunity to do just that at some point later in 2017. According to The CFC, they are looking for additional companies to support them in that endeavor. Anyone interested in finding out how they can help should contact Dan Gans at dgans@polariswdc.com.
With Clock Ticking, Members of the Commercial Finance Coalition Journeyed to the New York State Capitol
March 5, 2017
With less than a month to go until New York State’s budget deadline, members of the Commercial Finance Coalition (CFC) traveled to Albany, NY last week to address a vague and confusing licensure proposal put forth by Governor Cuomo. According to the CFC, nobody from the New York Department of Financial Services, the governor’s office or the state legislature had contacted any of their members prior to putting the language in the budget that they suspect could lead to catastrophic consequences. So on very short notice, they packed their bags and went up to Albany to tell their story to as many legislators as they could.
“It could destroy the industry if the worst comes to fruition,” declared Robert Cook, a partner at Hudson Cook LLP, who was speaking in reference to the proposal. The industry not only employs thousands of people in New York State but also provides much-needed capital to small businesses there. The CFC says that their members injected more than $50 million into New York businesses just last year alone.
Several law firms who have written about the proposal have used words like could, may and likely to explain what will happen, in part because it seems as though no one’s really sure. CFC members worry that the proper research hasn’t been done, especially when there hasn’t been any engagement with them. “They should allow all the stakeholders to have their voices heard,” said Dan Gans, CFC’s executive director.
As the clock ticked down, the CFC’s two-day effort in the capitol building played out like a scene from a movie.
Are you aware of Part EE of the TED Bill?
This is what we do…
No, nobody from the Department of Financial Services has even talked to us
No, we’re not kidding
And on it went…
Gans says the CFC is looking for additional companies in the small business financing industry to support their efforts. He’ll be at the LendIt Conference. “I would be happy to meet with anyone interested in joining the CFC and helping us fight this misguided policy that is also attending,” he said. He can be contacted at dgans@polariswdc.com.
The budget deadline in New York State is March 31st.
As NY Lending License Proposal Looms, Industry Trade Groups Mobilize
February 13, 2017
The alternative small-business finance community plans to lobby hard against a far-reaching proposed expansion of the New York state lending license. The proposal calls for any person or company that solicits, arranges or facilitates business and consumer loans – or other types of financing – to obtain a license. That could include MCA companies, business loan brokers and ISOs.
Critics claim the expansion, which Governor Andrew M. Cuomo included in his proposed state budget, could trigger a series of ominous and possibly unintended events in the courts and on Wall Street. “It could destroy the industry if the worst comes to fruition,” declared Robert Cook, a partner at Hudson Cook LLP.
Some opponents also contend that the public hasn’t had a reasonable opportunity to respond. “Sneaking a provision with significant impact like this into the budget and not going through regular order is really disturbing,” said Dan Gans, a Washington lobbyist who also serves as executive director of the the Commercial Finance Coalition. “They should allow all the stakeholders to have their voices heard.”
The industry’s trade groups have been quick to react. The Small Business Finance Association has been in contact with New York state legislators to help them understand the ramifications of the proposal, according to Stephen Denis, the trade group’s executive director. Meanwhile, Gans is recommending that the CFC’s board hire an Albany lobbying firm to help advance the industry’s interests.
New York’s current consumer licensing law is written broadly enough to cover any loan to an individual for less than $25,000, even if it’s made for commercial purposes, said Cook. That means the current law could cover loans to sole proprietorships but would not affect loans to corporations, limited liability companies, partnerships or limited liability partnerships, he noted.
Under the proposal in Governor Cuomo’s budget, any type of commercial loan of up to $50,000 would require a license, Cook said. Today, the state requires a license only if a loan carries a simple interest rate of more than 16 percent. Under the budget proposal, all lending would require a license, even if the interest rate is less than 16 percent. Loans made by alternative funders typically carry interest rates of 36 percent to 100 percent, he said.
New York already has a criminal usury rate of 25 percent, but lenders have two methods of avoiding that cap, according to Cook. Under one method, the parties to the loan can use a provision called the “choice of law clause” and thus agree that the contract is subject to the laws of a state that does not limit commercial usury rates, he said. Or, using the second method, the small-business finance company can solicit the loan and refer it to a bank in a state without a cap. The bank makes the loan but then sells the loan back to the small-business finance company or an affiliate, he noted.
But adopting the changes proposed in the New York budget could possibly stymie both methods of circumventing the state’s usury laws. Consider the choice of law clause, Cook suggested. The courts could interpret the proposed expansion as an effort by the state to gain more control of commercial lending. That could prompt the courts to refuse to enforce choice of law clauses involving New York state because doing so would violate a significant policy in New York, he maintained. The proposal could also gut the second way around the usury law – the bank model – by requiring employees of out-of-state banks to have a license in order to originate loans or by prohibiting rates in excess of New York’s cap, he said. Both outcomes are speculative but constitute distinct possibilities, he added.
Expanding the license would also grant additional regulatory authority to the New York State Department of Financial Services, Cook maintained. Besides requiring the license, the DFS would have the ability to regulate, supervise and examine commercial lenders, he said. In the past the department has imposed some significant regulations on licensees, including fair lending requirements and cyber security requirements, he said. “They’re a very active regulator,” he contended. “They could require commercial lenders to jump through a lot of hoops that aren’t there today.”
What’s more, time would pass while a company negotiates the initial hoops simply to obtain a license. Qualifying for the current New York license, for example, can take up to nine months, Cook said. “It’s a fairly intensive licensing process that requires a lot of information about the company, the officers and directors of the company,” he noted. “The licensing process is tough in New York.”
The expansion could also limit the industry’s access to capital, Cook warned. Some alternative funders raise money by selling loans or interests in loans on the secondary market. Requiring a license to buy those products could prompt Wall Street to look elsewhere for less-burdensome investment opportunities, he said.
The laundry list of potential bad effects has many in the industry wondering about the state’s intentions toward the industry. “It’s not clear whether the people up in Albany understand the potential effect this has,” Cook said.
To help bring about that understanding, the CFC intends to call upon its members and merchants who have benefitted from alternative finance to visit officials in the state capital, Gans said.
Gans finds reason for optimism as the associations coalesce around the issue. The state Senate in Albany tends to be pro-business, and I am confident we will find allies that will stand up to this, he said.
Denis also seems upbeat about the industry’s efforts to make itself heard in Albany. In Illinois, some legislators failed to differentiate between consumer loans and commercial loans when considering legislation last year, he noted. That might be the case in New York, too, and the SBFA might help them make the distinction, he said. As an example of the differences, he pointed out that business loans often carry high interest rates because of high risk. “We have talked to some folks in Albany, and everyone is receptive to the industry,” he said. Small business is a powerful constituency, he maintains.
Gans, Denis and Cook all said they’re not opposed to legislation or regulation that addresses problems caused by bad actors in the industry, but all three oppose government action that they believe unnecessarily limits members of the industry who are operating in good faith.
The proposed license in New York differs in at least one significant way from the California lending license that many alternative funders have obtained, Cook noted. The California license doesn’t impose a cap on interest rates, he said. If the New York proposal imposed licensing requirements but did not limit interest rates, the industry probably would reluctantly accept it, he suggested.
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Dan Gans at the CFC can be contacted at dgans@polariswdc.com
Stephen Denis at the SBFA can be contacted at sdenis@sbfassociation.org
Robert Cook at Hudson Cook can be contacted at rcook@hudco.com
‘Debt Collection Terrorist’ Wants FCC to Get Rid of Implied Consent in TCPA
February 9, 2017
Craig Cunningham, the serial TCPA plaintiff who once aspired to author a book titled, Tales Of A Debt Collection Terrorist: How I Beat the Credit Industry At Its Own Game and Made Big Money From the Beat Down, now wants to make it easier to sue for TCPA violations.
Cunningham appeared in a deBanked story about telemarketing last year after it was discovered that he had sued alternative business finance companies for alleged violations. Declining to speak with me at the time, there was plenty to glean from his trail of forum posts where he uses the alias Codename47. One post stands out. “TCPA enforcement for fun and for profit up to 3k per call,” is the title of one thread he started in 2014 on the FatWallet forum.
And if his motives are fun and profit, then a petition filed by Cunningham with the FCC to limit the scope of “prior express consent” might concern you because it would create more opportunities for him and others to initiate lawsuits. This week, the FCC actually asked the public to comment on his petition.
With this Public Notice, we seek comment on a petition for rulemaking and declaratory ruling filed by Craig Moskowitz and Craig Cunningham (Petitioners).1 Petitioners request that the Commission initiate a rulemaking “to overturn the Commission’s improper interpretation that ‘prior express consent’ includes implied consent resulting from a party’s providing a telephone number to the caller.”2 Specifically, Petitioners request that the Commission issue a rule requiring that for all calls made to wireless and residential lines subject to the Telephone Consumer Protection Act (TCPA) restrictions in 47 U.S.C. § 227(b)(1)(A)(iii) and 47 U.S.C. § 227(b)(1)(B),3 “prior express consent” must be express consent specifically to receive autodialed and/or artificial voice/prerecorded telephone calls at a specified number, and such consent must be in writing.4 In addition, Petitioners seek a declaratory ruling to remove uncertainty regarding the meaning of “prior express consent” resulting from previous Commission orders.5
In the original description of Cunningham’s never-written book, his co-author Brian O’Connell, a famous writer, wrote this of Cunningham’s baiting strategy:
“The key was baiting the collections agent on the other end of the line and waiting for the agent to say something incriminating that crossed the line into what the law considered abuse. He began taping calls and soon had his first lawsuit against a security alarm company looking for $450 from an early termination fee.”
He has long since moved on from just debt collectors and files a lot of suits over allegedly unwanted calls.
Comments on Cunningham’s FCC proposal to make suing even easier, can be submitted online or by mail.
