The Virginia Bureau of Financial Institutions (the “Bureau”) recently sent members of the House and Senate Commerce and Labor Committees a letter reporting on the work of the legislative working group that met this year at the request of the legislature to examine issues related to consumer finance companies, internet lending, and open-end credit lenders. The letter states that the Bureau plans to develop proposed legislation for the 2018 session convening in January based on the study group meetings.
The key takeaways from the Bureau’s letter are as follows:
- The Bureau states that a “vast majority” of the study group members appeared supportive of requiring “out-of-state consumer finance companies” to be licensed and regulated under Virginia law. Thus, the Bureau’s legislation will likely include such licensing and regulatory provisions.
- The Bureau notes that there was no consensus for licensing open-end credit lenders. Currently, lenders offering open-end credit to Virginia consumers may do so without a license and little regulation, whether the lender is located in Virginia or outside the state. Because of opposition expressed in the study group to any change in current law on open-end credit, it would appear that this issue is unlikely to be addressed in the Bureau’s legislation.
- The Bureau further notes that while there was general consensus in support of “modernizing” the consumer finance company statutes in a number of places to conform to recent enactments in the titles governing payday lending and motor vehicle lending, there was not “significant support” for adding consumer protection protections found in those titles to the consumer finance company statutes.
Of course, the devil is always in the details, so we will have to wait to see the actual legislation to determine how lenders might be impacted. The Bureau’s legislation will likely be introduced sometime in December. We will report here on the details when it is.
The working group of the Virginia Bureau of Financial Institutions (the “Bureau”), which was established to consider potential legislation for the licensing and supervision of online lenders, held its last meeting on September 14th. The Bureau will now prepare a report, possibly with proposed legislation, to submit to the Virginia General Assembly for its consideration in the 2018 session.
At the September 14th meeting, it was established that there is consensus (no opposition) among the working group members to recommending legislation to amend Virginia’s consumer finance company statutes to require the licensing of online lenders and to subject such lenders to the same supervision by the Bureau that exists today for Virginia consumer finance companies with physical office locations in the state. The enactment of such legislation would mean that out-of-state online lenders making closed-end loans to Virginia consumers would have to obtain a license and comply with the other requirements of the consumer finance statutes. Currently, out-of-state lenders are not able to obtain such a license because the licensing provisions in the law contemplate a physical office location in Virginia. This has created uncertainty for online lenders.
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The working group of the Virginia Bureau of Financial Institutions (the “Bureau”), which was established at the direction of the Virginia General Assembly to consider potential legislation to regulate internet lending, held its second meeting on July 15th. The focus of the group is primarily on online closed-end and open-end loans made by non-depository lenders, particularly out-of-state lenders. Such lenders are not subject to the licensing and other requirements under Virginia’s current consumer finance statutes.
At the outset of the meeting, representatives from both the Bureau and the Virginia Attorney General’s office expressed their view that all non-depository lenders making loans to Virginia consumers should operate under the same Virginia statutory provisions, whether they make such loans from a physical location in Virginia or over the internet. They do not believe a separate statutory section for online lending is advisable, as had been suggested at the working group’s first meeting. The working group was in agreement with the Bureau and the Attorney General’s office on this point.
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The 2017 Virginia General Assembly tabled a number of bills (HB 1443, HB 1817, HB 2310, HB 2310, HB 2445, and SB 1126) dealing with consumer finance companies, Internet lenders, and open-end credit with the understanding that the issues raised in such bills would be studied by a working group of the Virginia Bureau of Financial Institutions this year. The Bureau study group is tasked with making legislative recommendations for consideration by the Virginia General Assembly in its 2018 session, which convenes in January.
The Bureau study will give particular attention to the licensing and supervision of Internet lenders making loans to Virginia residents. The Bureau has expressed concern that the current Virginia statutes governing consumer finance are outdated, and that given the proliferation of Internet lending modernization of such statutes is warranted. LeClairRyan will be closely involved with the activities of the Bureau study.
Legislation affecting online lending will be among the bills the 2017 Virginia General Assembly considers when it convenes on January 11th for its regular session. Delegate Peter Farrell has prefiled two bills that would impose new licensing requirements and fee limitations on such loans. Similar bills are expected to be introduced by other members of the General Assembly. These measures have the support of the Virginia Bureau of Financial Institutions (the “Bureau”), the Virginia Attorney General’s office, and Legal Aid organizations, among others.
With respect to Delegate Farrell’s bills, HB 1443 would subject any lender making consumer loans over the Internet to Virginia residents to the requirements of Virginia’s Consumer Finance Company Act (“Consumer Finance Act”), whether or not such lender has a physical presence in Virginia. Currently, the law applies only to those making loans from a physical location in Virginia. If the bill is enacted, online lenders would have to obtain a license from the Bureau and would be subject to an interest rate cap of 36% on loans under $2,500, among other things.
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Financial technology companies will soon have a new business model to consider – one that will allow them to avoid the various licensing and other regulatory requirements in the states where they do business. The Office of Comptroller of the Currency (“OCC”), the federal banking agency responsible for the supervision of national banks, announced on December 2nd that it will start granting limited or special purpose national bank charters to fintech companies. There are, however, strings attached. A fintech company electing such a charter will be subject to many of the same rigorous safety and soundness standards that currently apply to traditional banks.
The OCC’s white paper released in connection with this announcement notes that a special purpose national bank has the same status and attributes under federal law as a full-service national bank. This means that the OCC’s new “fintech charter” will allow a fintech company to comply with just a single set of federal standards rather than a host of different state laws, which is something fintech companies have been seeking for some time. In this regard, a fintech charter would receive the benefits of federal preemption of state laws to the same extent as full-service national banks. Thus, an alternative online lender with such a charter would not be subject to any state consumer finance licensing requirements. Moreover, such a lender would be able to extend online loans to consumers residing in any state based on the usury laws of the state where the lender is located.
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On October 11, 2016, the United States Court of Appeals for the District of Columbia Circuit ruled that the Consumer Financial Protection Bureau’s (CFPB) structure is unconstitutional. PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177, 2016 WL 5898801 (D.C. Cir. Oct. 11, 2016).
Unlike most independent agencies, which contain multi-member structures to check against arbitrary decision-making and abuse of power, the CFPB is an independent agency lead by a single Director subject only to for-cause removal by the President of the United States under the Dodd-Frank Act. The Court of Appeals observed that this structure “represents a gross departure from settled historical practice,” noting the CFPB’s Director wields “enormous power over American business, American consumers, and the overall U.S. economy.” The court concluded that the CFPB’s structure “poses a greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” Given the CFPB’s unchecked structure, “other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.”
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Online marketplace lending platforms are offering compelling new ways for consumers and businesses to obtain loans. Driven by innovations in financial technology (FinTech) that have created dramatic efficiencies, these platforms have changed the face of financial services. According to a KPMG report, the U.S. online alternative finance industry originated $36.4 billion in loans in 2015, up from $11.6 billion in 2014. This segment of the finance industry has obviously been expanding rapidly and we anticipate this expansion will continue.
Just as FinTech has created new online lending models, crowdfunding has created new models for equity investing, donations, and rewards. A 2015 Goldman Sachs report noted that crowdfunding, sourcing funds across a network of supporters, is potentially the most disruptive of all new models in finance.
This blog serves to provide news and commentary on legal and regulatory developments affecting online marketplace funding and crowdsourcing. Particularly as much of the law is evolving rapidly in these emerging areas, and regulators are just now confronting what kind of framework should be put in place, we seek to keep abreast of ongoing developments and let you know about them here and offer practical observations.
On June 27, 2016, the Supreme Court denied certiorari in Madden v. Midland Funding. The decision is unsettling for the banking and marketplace lending industries, which had hoped the Supreme Court would seize the opportunity to reverse the Second Circuit’s controversial holding. As a result of the denial, secondary (non-bank) debt purchasers operating within the Second Circuit are ostensibly prohibited from collecting interest charges in excess of state usury caps – a practice that traditionally had not been an issue as long as the interest charges were permissible under the original loan agreements.
The Solicitor General and the OCC had argued in a brief to the Supreme Court that the Second Circuit clearly misunderstood the underlying law. Despite heavily criticizing the Second Circuit’s reasoning, the Solicitor General recommended that the Supreme Court deny certiorari primarily because there was no actual circuit split and the defendant could succeed based on a choice-of-law question on remand. The Supreme Court likely relied heavily on the Solicitor General’s brief when making its decision. Some commentators have speculated that the Court simply decided to wait to address the issue until after Antonin Scalia’s vacancy has been filled.
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The Financial Services Roundtable, a leading financial services trade association that represents the interests of the top banks and other large financial institutions in the country, announced this week a new Tech Collaboration Program to bring together leaders from financial technology companies (“FinTech”) and traditional financial institutions. The program is intended to help FinTech and financial institutions work cooperatively together to develop best practices and guidelines to improve security, efficiency and to better meet consumer demand for financial services.
The program reflects a friendlier approach to FinTech from the financial services industry. Banking leaders elsewhere have expressed dissatisfaction that FinTech lacks proper federal regulation and oversight and could put consumers at risk. The Financial Services Roundtable’s program suggests that cooperation may be a way to address those concerns.