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]]>The Office of the Comptroller of the Currency (“OCC”) has published its proposal for how it will address a national Fintech Charter “Fintech Charter”. The Fintech Charter could be used by any entity providing certain financial services, including, money transmitters, check cashers and providers of technology (“Financial Service Centers” or “FSC”). Current OCC regulations allow the OCC to permit “a national bank or a Federal savings association” with a special purpose. The advantage of the national bank charter for a fintech company is that it allows the fintech company to conduct business on a nationwide basis under the National Bank Act (“NBA”). The NBA gives national banks preemption over certain state laws. The key to the Fintech Charter strategy, is the ability to charge the interest rate of the jurisdiction where the lender is domiciled. The FDIC has also discussed third-party lending arrangements.
Many states have responded by litigating against an OCC charter and have made efforts to make their own laws more stringent and/or commercially reasonable to become the “go to” state for licensing. What does this mean to a fintech company? When you engage counsel to set up your licensing plan, be aware that there is reciprocity for some activities. The key is understanding the products and services offered and to be sure you are adequately licensed in all jurisdictions that you do business to make the loans in your revenue model. Please note that I am writing an article about this subject matter in greater depth. There are breaking developments in this area of practice on a fairly frequent basis and my article will discuss the strategies and recent case law.
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]]>The post CFPB Final Rule Prohibiting Class Action Waivers in Arbitration Clauses appeared first on Alexson Law.
]]>The four primary provisions of the final rule are as follows:
Under the final rule, a “predispute arbitration agreement” is defined as: “an agreement between a covered person . . . and a consumer providing for arbitration of any future dispute concerning a consumer financial product or service described below.
The CFPB’s final rule may be viewed at: http://files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf
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]]>The post Compensation-Overtime Pay for Mortgage Underwriters appeared first on Alexson Law.
]]>The appeal presents the question of whether a class of mortgage underwriters are entitled to overtime compensation under the Fair Labor Standards Act (“FLSA” or “the Act”), 29 U.S.C. § 201 et seq., for hours worked in excess of forty per week. The court decided that because the mortgage underwriters’ primary job duty does not relate to the bank’s management or general business operations, the administrative employee exemption under 29 U.S.C. § 213(a)(1) and 29 C.F.R. § 541.200(a) does not apply,1 and the underwriters are entitled to overtime compensation.
The facts as recited in the opinion are important to understand. PSB sells mortgage loans to consumers purchasing or refinancing homes and then resells those funded loans on the secondary market. Mortgage underwriters at PSB review mortgage loan applications using guidelines established by PSB and investors in the secondary market, including Fannie Mae, Freddie Mac, and the Fair Housing Administration. Loan transactions begin when a loan officer or broker works with a borrower to select a particular loan product. A loan processor then runs a credit check, gathers further documentation, assembles the file for the underwriter, and runs the loan through an automated underwriting system. The automated system applies certain guidelines based on the information input and then returns a preliminary decision. From there, the file goes to a mortgage underwriter, who verifies the information put into the automated system and compares the borrower’s information against the applicable guidelines, which are specific to each loan product.
Mortgage underwriters are responsible for thoroughly analyzing complex customer loan applications and determining borrower creditworthiness in order to ultimately decide whether PSB will accept the requested loan. They may impose conditions on a loan application and refuse to approve the loan until the borrower satisfies those conditions. The decision as to whether to impose conditions is ordinarily controlled by the applicable guidelines, but the underwriters can include additional conditions. They can also suggest a “counteroffer”—which would be communicated through the loan officer—in cases where a borrower does not qualify for the loan product selected, but might qualify for a different loan. Underwriters may also request that PSB make exceptions in certain cases by approving a loan that does not satisfy the guidelines. After a mortgage underwriter approves a loan, it is sent to other PSB employees who finalize the loan funding. Underwriters say that whether a loan is funded ultimately depends on factors beyond the underwriter’s control. Another group of PSB employees sells funded loans in the secondary market. The key to this fact pattern is that the discretion involved is within the guidelines set forth by PSB.
The law as applied, FLSA, require employers to pay employees time and a half for overtime work—that is, work in excess of forty hours per week under 29 U.S.C. § 207(a)(1). Employees who are “employed in a bona fide executive, administrative, or professional capacity” are exempt from those provisions under 29 U.S.C. § 213(a)(1). To determine whether employees qualify for the administrative exemption, the Secretary of Labor has formulated a “short duties test.” A qualifying employee must (1) be compensated not less than $455 per week; (2) perform as her primary duty “office or non-manual work related to the management or general business operations of the employer or the employer’s customers;” and (3) have as her primary duty “the exercise of discretion and independent judgment with respect to matters of significance.” 29 C.F.R. § 541.200(a). An employee’s primary duty is “the principal, main, major or most important duty that the employee performs.” 29 C.F.R. § 541.700(a). The Court applied the test and held that the underwriters were entitled to overtime (did not fall within the exemption).
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]]>The post Compensation of Finders In The Sale Of California Securities appeared first on Alexson Law.
]]>The “finders” exemption, went into effect on January 1, 2016 at Corporations Code Section 25206.1. Finders who satisfy the requirements of the exemption can now receive transaction-based compensation on the sale of a security in California. The exemption is available to individuals (not otherwise registered as a broker-dealer or agent) who meet the definition of a “finder” as set forth in §25206.1(a) and who comply with the disclosures and record keeping requirements of the exemption, including filing an annual Statement of Information with the Commissioner on the form prescribed in rules CCR §260.211.4 and §260.211.5.
Any of the following acts, whether inadvertent or otherwise, render a finder ineligible for the exemption: (1) failing to file a renewal Statement of Information or pay the renewal fee before the filing due date; (2) failing to comply with any of the conditions in §25206.1(a); (3) performing any of the acts or satisfying any of the circumstances described in §25212 of the Corporations Code or Rule 506(d) of Regulation D; (4) failing to obtain any written agreement or make any disclosures required under §25206.1(e); (5) failing to disclose on the renewal Statement whether transaction-based compensation has been received; and (6) failing to maintain the records required under §25206.1(f).
Although this exemption provides individuals who provide finder services in California with the ability to earn a percentage of the transaction in accordance with an agreement, there are limitations to the definition including:
However, this exemption does not allow for introduction of investors outside California, so we often see transactions that require a separate analysis of each component of the compensation. For example, how do we compensate all the brokers in a transaction including a California broker (real estate), securities and a finder on a 1031 exchange using a Delaware Statutory Trust, as a portion of the exchange property with out of state parties? Please contact us to discuss your compensation issue.
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]]>The post Conference Of Bank Supervisors File Complaint Against The OCC Over Fintech Charters appeared first on Alexson Law.
]]>The complaint alleges that the OCC is over-reaching its authority in granting charter status to non-banks. On March 15, 2017, the OCC Issued a Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies pursuant to NR 2017-31. This Manual set forth the application procedures, etc. to obtain this charter. The OCC argues that the National Bank Act gives the OCC the legal authority to grant national bank charters to companies engaged in any aspect of banking and it is not prohibited from this action because a company delivers banking services in new ways with innovative technology.
The CSBS complaint claims that the OCC has gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws. The OCC’s proposed action ignores Congress, seeks to preempt state consumer protection laws, harms markets and innovation, and puts taxpayers at risk of inevitable fintech failures. The State regulators believe that there is already state licensing schemes in place to adequately protect consumers. States also receive revenue from these technology companies by way of licensing fees and can expand banking departments with new hires to supervise these licensees.
The OCC Charter, which would potentially make it easier for these technology lenders to operate nationally, has already been the subject of criticism, even in the industry. In my informal conversations with industry leaders, the feeling is that the industry has already structured the business models based upon current state laws and have expended considerable transaction costs to do so. Of course, there is still the concerns regarding cost of funds that is not addressed by the state law licensing models. Having been involved in structuring the business model for online commercial real estate lending and brokerage, there were concerns about doing business nationwide, and being able to offer our customers the same products and services, but we did create the state licensing business model that is still the model for compliance.
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]]>Harriet B. Alexson will be the moderator for a panel on “Funding Emerging, Growth and Recovering Businesses” on May 16, 2017 at noon at Orange County Bar Association (“OCBA”) Headquarters in Newport Beach, Ca.
The program is sponsored by the OCBA Banking and Lending Section. This program will discuss the business and legal requirements of asset based lending and other commercial lending products available to businesses in the emerging, growth and recovering markets.
There has been a discussion in the marketplace about “access to commercial credit” so this program will cover the lending requirements and the underwriting and legal requirements, provided by institutional lenders and commercial finance sources.
This program is a must for banks, finance lenders and growth businesses. Ms. Alexson will moderate the panel and provide legal analysis and guidance with respect to the loan documents.
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]]>The post Strategic Alliances: Legal Consideration in Financial Services Transactions appeared first on Alexson Law.
]]>One example of a strategic alliance, is an agreement between a federally-regulated financial institution and a state licensed real estate broker, who may be brokering residential mortgage loans through a technology, or marketplace lending platform. These relationships must be carefully documented with respect to many issues, including, but not limited to the compensation arrangements among the participants, the integration of the technology platform to comply with federal and state law, allocation of risk through indemnification clauses and financial responsibilities of the parties. Based on new case law, it is important to identify and confirm the underwriting structure. Additionally, if there are third-party entities used in the underwriting process, such as title insurance companies, escrow, sharing of brokerage fees or intellectual property rights, these issues must be resolved prior to closing. These alliances or collaborative partnerships can be documented to achieve one goals, and, or subsequently can end in a merger of the entities. Legal considerations, such as compensation, including warrants and options, as applicable, ability to unwind if certain benchmarks are not met, which entity takes the lead if the relationship must be terminated, and most importantly, the regulatory requirements of each entity must be properly addressed.
Another issue that arises when parties are working together and coming from different “business cultures” is the issue of trust. As counsel I advise dealing with the trust issue throughout the negotiations. In the case of the strategic alliance relationship example given above, one set of participants is interested in technology innovation and bringing credit to marketplace participants in a user-friendly manner. The other set of participants comes from a “highly-regulated” environment and makes deliberate decisions looking at all the issues prior to closing. Sometimes, without experiences counsel involved, the cultures may clash and the transaction may not close. Although we cannot quantify the trust issue, we can draft representations and warranties, covenants, hold-back funds in a post-closing escrows, etc. to work through these issues.
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