Fintech Regulations
and What You Need to
Know
Enjoy the tacos and drinks! We’ll start
the presentation at 7pm.
#CommerceInnovated
Commerce.Innovated. Program Overview
• Joint accelerator program run by SVB and MasterCard
oSeed stage startups innovating in commerce, payments, and
fintech
oTwo classes annually (fall/spring)
o4-6 companies selected per class
• Program offering consists of operational mentorship and
consulting – fully customized for each startup
• Unique ‘golden phone’ access
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What We Look For In Companies
1) Innovating in the commerce, payments, and fintech ecosystem
o Solution makes life easier, safer or better for a consumer or business
2) More than just a simple idea
o Has live or planned beta of an initial solution, have seed funding secured, and
plan to raise Series A
3) Putting the bottom line first
o First paying customer is locked in or being on-boarded
4) Strong team foundation
o Assembled a core team with the vision and rock star brain trust you’ll need for
success
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Past Commerce.Innovated. classes
Spring 2014
Fall 2014
Spring 2015
 Gift card conversion (NYC)
 B2B eCommerce (MN)
 Mobile point of sale solutions (NYC)
 Digital wallets (NYC)
 Group payments (SF)
 Simplified marketplace selling (SF)
 Simplified marketplace selling (SF)
 Digital wallets (NYC)
 B2B referral network (NY)
 B2B referral network (NY)
 Card adaptive controls (SV)
 Card adaptive controls (SV)
 Expense sharing (BOS)
 Digital commercial banking (SF)
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Current Class – Spring 2016
Compliance Solutions
 An API to Know Your
Customers,
simplifying customer
data for financial
services companies
Location Analytics
 On a mission to
map the world
and enable next
generation
commerce
 Based in NYC
Authentication Solutions
Consumer Credit
 Decentralized
authentication
platform for the postpassword era and
Internet of Things
 Instant access to
digital consumer
credit without a
traditional credit
report
 Based in SF
 Based in LA
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Next Class – Fall 2016
Applications open for the next
Commerce.Innovated. class in
April 2016
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Andy Lorentz
Partner, Financial Services, Prepaid and Emerging
Payments
Davis Wright Tremaine LLP
Washington, D.C.
March 21, 2016
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Navigating the financial services
maze
Bank Secrecy Act
FDIC Deposit Insurance
Data breach/security
State Privacy and Security Statutes
Truth in Savings Act
Truth in Billing
Electronic Fund Transfer Act / Regulation E
Reg D
OFAC
Truth in Lending Act / Reg Z
State Money Transmitter Laws
Gift card
OFAC
Anti-Money Laundering Compliance
Unfair, Deceptive or Abusive Acts and Practices Laws
Card brand rules
Regulation B
Durbin Amendment
Identity-Theft Red Flags
Regulation DD
Regulation II
Reg CC
Check 21
TISA/Reg DD
Gramm-Leach-Bliley Act
Fair Credit Reporting Act
E-SIGN Act
Escheat
Business of banking / Deposit-Taking
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What Activities Trigger Regulation in Fintech?
Some Key Product & Service Scenarios:
1. You’re touching money intended for others.
2. You provide services to (or partner with) a bank.
3. You extend credit to consumers or small businesses.
4. You collect or share personal financial information.
5. You offer funds transfer, gift cards or remittance services to
consumers.
6. You hold other people’s property.
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6 Product and Service Scenarios
1. You’re touching money intended for others.
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State Money Transmitter Laws
Issue: Transmitting money or selling or issuing open-loop
payment instruments requires a license in each state in
which that activity is conducted.
Sweeping scope:
 Very broad statutory provisions
and (sometimes) interpretations
 Uniform Money Services Act:
Are you offering a “medium
of exchange”?
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State Money Transmitter Laws
California: “If you are taking money from A to give to B”
“Payment processor”/ “payee-agent” exception
Federal money transmitter regulation does NOT preempt
state money transmitter laws
Price of working in payments: (almost) every solution
involves a depository institution or a licensed
institution or a licensed money transmitter –
somewhere!
 May act as agent of licensed money transmitter
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6 Product and Service Scenarios
2. You provide services to (or partner with) a bank.
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Bank Outsourcing Guidance
 Issue: Innovation frequently involves outsourcing or
partnering with other parties. Financial institutions are
accountable to their regulators for the acts of their
service providers.
 Fintech companies may, in some cases, be viewed as service
providers as they perform critical functions for financial
institutions
 Key Takeaway: Critically examine relationships and assess
whether a party is providing a critical service to a financial
institution. If so, analyze which regulatory requirements may
be implicated and would need to be addressed operationally
and/or in agreement.
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6 Product and Service Scenarios
3. You extend credit to consumers or small businesses.
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Federal and State Lending Laws
 Issue: Extending credit to consumers is among the most heavily
regulated areas of retail financial services
 Truth in Lending Act/Regulation Z- disclosures and limitations on
cardholder liability
 Equal Credit Opportunity Act/Regulation B – credit discrimination
based on prohibited factors [applies to businesses too!]
 State licensed lending laws – licensing for high-interest loans
 State loan broker laws – negotiating or facilitating loans; fee
regulation
 State and federal credit repair laws
 Usury laws and exportation of maximum interest rates
 State Retail Installment Sales Acts
 Bank Secrecy Act regulations
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6 Product and Service Scenarios
4. You collect or share personal financial information.
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Gramm-Leach-Bliley Act (GLBA)
 Issue: GLBA regulates the collection, disclosure and
safeguarding of “nonpublic personal information” by any
“financial institution” that is “significantly engaged” in providing a
“financial product or service” to consumers
 Are you a “financial institution”?
 Section 4(k) of the Bank Holding
Company Act of 1956:
 (A) Lending, exchanging,
transferring, investing for
others, or safeguarding
money or securities.
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Gramm-Leach-Bliley Act (GLBA)
What consumer data is covered by GLBA?
 (i) Personally identifiable financial information (PIFI); and
 (ii) Any list, description, or other grouping of consumers (and publicly
available information pertaining to them) that is derived using any
PIFI that is not publicly available.
 Customer v. Consumer Distinction
 A customer has an ongoing relationship with the financial institution
 Notice and Opt-Out Requirements
 Initial and annual privacy notices required for customers, possibly a
revised notice too
 Opt-out is also required if a financial institution discloses nonpublic
personal information to any non-affiliate outside of exceptions
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6 Product and Service Scenarios
5. You offer funds transfer, gift card or remittance
services to consumers.
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Electronic Fund Transfer Act/Regulation E
 Issue: Consumer protection law covers many different types of
consumer electronic fund transfers, including:
 Transfers to and from consumer asset accounts
 Includes debit cards and ACH
 Doesn’t include pooled custodial
accounts
 Gift cards(both open- and
closed-loop)and gift certificates
 International remittance transfers
 Proposed prepaid card rule
 Payroll and government benefits
cards
 ATM transactions
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Electronic Fund Transfer Act/Regulation E
 Regulation E Requirements:
 Disclosures
 May include periodic statements, receipts and/or pre-transaction
disclosures or notifications
 Limits on Liability
 Caps consumer liability for reported
fraudulent, unauthorized or erroneous
transactions
 Holder of account must investigate and
determine if an “error” has occurred
 Preauthorized transfers
 Special notice and consent requirements
applicable to transactions authorized in advance
 Transaction restrictions
 Fee and expiration date restrictions for gift cards
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6 Product and Service Scenarios
6. You hold other people’s property.
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Unclaimed Property Laws
Issue: State unclaimed property laws require a holder to
report and pay abandoned property to the state after its
“dormancy period”
 Purpose is to generate revenue for the state ***reunite lost property
with its true owner***
 Escheat priority rules and “Giftcos”
 Rule 1: State of residence of owner
 Rule 2: State of domicile of holder
 Rule 3: Place of transaction Struck
down by New Jersey Retail
Merchants Association v.
Sidamon-Eristof, verdict upheld
by Third Circuit
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Unclaimed Property Laws
Effect of anonymous property
Accounting for “breakage”
NJ law imposing “third priority” rule (place of transaction)
was struck down as effectively overriding the second
priority rule
 Also imposed zip code collection requirement on sellers of gift
cards (which might bring the first priority rule into play), but
backed down after major gift card distributors threatened to
boycott NJ
Pending Delaware qui tam action against “Giftco” structure
– seeks treble damages for unreported gift card balances.
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What’s Next in Fintech Regulation?
Regulatory Scrutiny on Marketplace Lending:
 In July 2015, the Department of Treasury issued an RFI seeking
information about marketplace lending
 In March 2016, the CFPB began to collect consumer complaints
regarding marketplace lending, potentially signaling future
enforcement activity
 In 2015, the CFPB issued a proposed framework for regulating
installment loans
 The proposed rule will obligate lenders to assess borrowers’
ability to repay for short term (<= 45 days) and longer term,
high interest loans (> 36% APR)
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Increase in UDAAP Actions
 Regulators (CFPB, FTC, Fed and FDIC) have been
especially active in this area in recent years
 CFPB brought approximately 40 UDAAP enforcement
actions in 2015
 60% increase from previous year
Detailed Survey of UDAAP Actions:
 http://www.paymentlawadvisor.
com/2016/02/08/our-latestsurvey-of-udaap-activity/
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Resources for Fintech Compliance
The Payment Law Advisor:
http://www.paymentlawadvisor.com/
The Consumer Financial Protection
Bureau (CFPB):
http://consumerfinance.gov
OCC Risk Management Guidance on
Third-Party Relationships
(October 2013), OCC Bulletin 2013-29
FFIEC Handbooks
FDIC Financial Institution Letter 44- 2008
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Disclaimer
This presentation is a publication of Davis Wright Tremaine LLP. Our purpose
in making this presentation is to inform our clients and friends of recent legal
developments. It is not intended, nor should it be used, as a substitute for
specific legal advice as legal counsel may only be given in response to
inquiries regarding particular situations.
Attorney advertising. Prior results do not guarantee a similar outcome.
Davis Wright Tremaine, the D logo, and Defining Success Together are
registered trademarks of Davis Wright Tremaine LLP. © 2014 Davis Wright
Tremaine LLP.
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Contact info
Andrew J. Lorentz
Partner
[email protected]
Washington, D.C.
202.973.4232
@paymentLAWadv
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Panelists
Moderator :
Tommy Nicholas, Co-Founder, Alloy.co
Panelists:
Wren York, Director High Risk Business Operations, SVB
Andrew Lorentz, Partner, Davis Wright Tremaine LLP
Dan Quan, Senior Advisor to the Director of the CFPB and Head of
Project Catalyst
#CommerceInnovated
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Questions?