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The Regulation of Marketplace Lending Charlotte 201 South College Street, Suite 1600 Chicago New York 111 West Monroe Street 1270 Avenue of the Americas, 30th Floor Charlotte, NC 28244-0009 Chicago, IL 60603-4080 New York, NY 10020-1708 The Regulation of Marketplace Lending: 980.495.7400 312.845.3000 212.655.6000 Salt Lake City A Summary of the Principal Issues 215 South State Street, Suite 800 San Francisco Washington, DC 595 Market Street, 26th Floor 1717 Rhode Island Avenue NW, Suite 800 Salt Lake City, UT 84111-2339 San Francisco, CA 94105-2839 801.533.0066 Washington, DC 20036-3026 415.541.0500 202.478.6444 September 2020 Update chapman.com THE REGULATION OF MARKETPLACE LENDING: A Summary of the Principal Issues September 2020 Update Marc Franson Peter Manbeck* This document has been prepared by Chapman and Cutler LLP attorneys for information purposes only. It is general in nature and based on authorities that are subject to change. It is not intended as legal advice. Accordingly, readers should consult with, and seek the advice of, their own counsel with respect to any individual situation that involves the material contained in this document, the application of such material to their specific circumstances, or any questions relating to their own affairs that may be raised by such material. The publication and receipt of this document do not constitute legal advice or establish an attorney-client relationship with any person. Attorney advertising material. © 2020 Chapman and Cutler LLP * The authors acknowledge with thanks the contributions of other Chapman and Cutler attorneys to the preparation of this survey, including David Batty, Colman Burke, Besty Chang, Walt Draney, Sara Ghadiri, Tobias Moon, Rossina Petrova, Kathryn Puls, Matt Stone and Greg Xethalis, with special thanks to our Research Services team headed by Sarah Andeen, proofreader Leah Mayes and our Marketing Team headed by Nancy Linder with the able assistance of Rebekah Alm and Claire Wambach. Table of Contents SECTION PAGE Preface ..................................................................................................................................................................... i Recent Developments .......................................................................................................................................... 1 I. True Lender Litigation in Colorado Settled in August 2020 ................................................. 1 A. What Is True Lender Litigation? .................................................................................. 1 B. Background on the Colorado Litigation ...................................................................... 2 C. Procedural Posturing: Removal and Remand ............................................................ 3 D. Banks File Declaratory Judgment Actions in Federal Court .................................... 4 E. Colorado Sues Securitization Trusts ............................................................................ 4 F. The August 2020 Settlement .......................................................................................... 5 II. The Madden Aftermath and the OCC and FDIC Issue Final Rules on "Valid When Made" ................................................................................................................................. 8 A. Background ...................................................................................................................... 8 B. Suits Filed Against Credit Card Trusts Dismissed .................................................... 9 C. Agencies Propose Rules ............................................................................................... 10 D. Final Rules Issued ......................................................................................................... 10 E. Court Decision Upholds OCC Rule ........................................................................... 13 F. OCC Proposes True Lender Regulation .................................................................... 13 III. Other Federal Developments Affecting Marketplace Lending .......................................... 14 A. Federal Deposit Insurance Corporation (FDIC) ....................................................... 14 B. Office of the Comptroller of the Currency (OCC) ................................................... 16 D. Board of Governors of the Federal Reserve System (Federal Reserve) ................ 17 D. Consumer Financial Protection Bureau (CFPB) ....................................................... 17 E. Federal Trade Commission (FTC) .............................................................................. 19 F. COVID-19 ....................................................................................................................... 19 G. Federal Legislation ....................................................................................................... 20 H. Securities and Exchange Commission (SEC) ............................................................ 21 IV. Update on Significant Litigation ............................................................................................. 22 A. Constitutionality of the Consumer Financial Protection Bureau (CFPB) ............. 22 B. FTC Action Against Online Lender Marketing Practices ....................................... 23 C. True Lender Case Resolved in Massachusetts ......................................................... 23 D. California Focus on Arbitration .................................................................................. 24 E. Think Finance Litigation Settled ................................................................................ 24 F. Beware of Electronic Communications ..................................................................... 25 G. D.C. Files True Lender Action .................................................................................... 27 V. State Developments ................................................................................................................... 27 A. Enforcement Actions .................................................................................................... 27 1. Massachusetts—$1.25 Million Penalty from Online Lender ..................... 27 2. Pennsylvania Licensing of Master Servicer Even When Subservicer Is Licensed/Debt Collector ....................................................... 28 3. California—Investigation of Auto Lending Relationship .......................... 28 B. State Licensing ............................................................................................................... 29 1. Nevada—Commercial Lenders ...................................................................... 29 2. Wyoming—Special Purpose Depository Institution ................................... 30 3. Pennsylvania—Technology Provider Does Not Require License ............. 30 C. California—Significant Regulatory Events ............................................................... 30 1. California Requires Licensing for Buy Now Pay Later (BNPL) Programs ........................................................................................................... 30 2. Disclosure Requirements for Commercial Lending Transactions ............ 32 3. California to Create Mini-CFPB ..................................................................... 32 4. Consumer Privacy Act ..................................................................................... 33 VI. In Conclusion: Looking Back and Looking Toward the Horizon ...................................... 33 Regulatory Issues ................................................................................................................................................ 35 I. Regulatory Matters .................................................................................................................... 35 A. Charters for Marketplace Lenders .............................................................................. 35 1. OCC Proposes Special-Purpose Charter for Fintech Firms ....................... 35 2. Federal Deposit Insurance Corporation ........................................................ 37 B. Other Regulatory Promulgations ............................................................................... 40 1. Office of the Comptroller of the Currency ................................................... 41 2. Federal Deposit Insurance Corporation ........................................................ 42 3. Department of the Treasury ........................................................................... 44 4. Consumer Financial Protection Bureau ........................................................ 47 5. Federal Trade Commission (FTC) .................................................................. 53 6. Federal Reserve ................................................................................................. 55 7. U.S. Congress Fintech Hearing ...................................................................... 56 8. Basel Committee on Banking Supervision ................................................... 56 9. General Accounting Office ............................................................................. 56 II. Lending Laws, Licensing and Related Litigation ................................................................. 57 A. Usury Laws .................................................................................................................... 59 B. Issues
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