Maryland Latest State To Issue EWA Guidance

FTX-Linked Farmington Hit With C&D, Prime Trust Files for Bankruptcy, CFPB To Create Data Broker Rules, Clarification On Dave's Q2 Earnings

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FTX-Linked “Moonstone” Receives Cease & Desist; Prime Trust Files For Bankruptcy

While neither of these developments was particularly unexpected, they do add some additional color to the situations at both institutions.

Farmington State Bank, briefly known as “Moonstone Bank,” in reference to its business model pivot from serving farmers to catering to crypto and marijuana companies, and its holding company, FBH Corporation, received a cease and desist order from its primary federal regulator, the Federal Reserve Board.

Farmington had already announced earlier this month that it would “voluntarily” shutdown and transfer customer deposits and accounts to and enter into an asset purchase agreement with the Bank of Eastern Oregon.

The enforcement action seems to serve two primary purposes: to require Farmington and its holding company to preserve capital and assets to ensure an orderly wind down that protects depositors and the Deposit Insurance Fund; and to provide (some) additional context on regulators’ relationship with the bank prior to its collapse (Bank Reg Blog has a great deep-dive and analysis on the order here.)

The enforcement action clarifies that, at the time FBH Corporation applied to become a bank holding company, the Reserve Bank imposed certain conditions on the company — including that FBH would not:

(i) change its business plan;

(ii) engage in servicing activities on behalf of the Bank, including with respect to digital bank operations; or

(iii) move the performance of any operational or risk management activities from the Bank to FBH or its nonbank subsidiaries without providing thirty days’ prior notice to the Reserve Bank;

The Washington state regulator, the WSDFI, also imposed conditions and limitations in 2020 upon the change in control on the new principal shareholder, Jean Chalopin — who also happens to be the largest shareholder of Bahamas-based Deltec Bank, which provides services to stablecoin Tether:

(i) that, for a period of three years, all changes in senior management, changes to the business plan, and any significant changes in operations, including digital bank operations, required prior written regulatory approval, including by submitting Interagency Biographical and Financial Reports for any proposed executive officer or board member, and providing updated business plans with three years pro-forma financial statements for any new strategic initiatives or significant operational changes;

(ii) that, for a period of three years, FBH remain committed to serving the needs of the Bank’s historical customers and the Farmington community;

(iii) that FBH and the Bank would not do business with or enter into any transactions with certain entities affiliated with Chalopin without prior written regulatory approval; and

(iv) that, for a period of three years, the Bank would maintain a Tier 1 leverage Capital ratio of 9 percent or greater;

And, in granting the Bank’s application to become a member of the Federal Reserve System, the Reserve Bank further required that the Bank and FHB would not (emphasis added):

(i) change the Bank’s business plan in any manner, including, without limitation, hiring or replacing senior management, placing new directors on the Bank’s board, or expending material resources to develop the Bank’s digital banking products and customer- facing applications, without first providing notice to and consulting with the Board of Governors or the Reserve Bank to ensure that such changes would not constitute a change in the general character of the Bank’s business under the Board’s Regulation H (12 C.F.R. § 208.3(d)(2)); or

(ii) change the Bank’s business plan to pursue a strategy focused on digital banking services or digital assets, or to launch a digital banking application to the general public without receiving prior approval from the Board of Governors or the Reserve Bank for a change in the general character of the Bank’s business under Regulation H;

Despite the extensive list of conditions and limitations, the enforcement action only cites the Bank’s decision to enter into a non-binding MOU with a technology partner with the intent of developing a platform for issuing stablecoins as constituting a change in the Bank’s business plan and general character and thus a violation of the above conditions and limitations on its operations.

Prime Trust Bankruptcy

Prime Trust, a Nevada-chartered trust company, was ordered to shut down earlier this year by state regulators after failing to meet customer withdrawal requests due to a “shortfall” of customer funds.

Now, unsurprisingly, the company has filed for bankruptcy. The filing indicates the company has between 25,000 and 50,000 creditors and assets between $50 million and $100 million vs. liabilities of between $100 million and $500 million.

Part of the problem that led to Prime Trust’s collapse? The company seems to have literally lost the keys to one or multiple crypto wallets containing customer funds.

Maryland Is Latest State To Issue EWA Guidance

Maryland is the latest state to issue guidance or regulation about increasingly popular earned wage access (EWA) products — joining Nevada and Missouri, which both recently passed laws regulating the product.

In Arizona, the attorney general issued an opinion that no-interest, non-recourse products are not considered “consumer lender loans” in the state and do not require a state “consumer lender” license.

Connecticut has taken a quite different path, quietly amending the definition of a “small loan” to include EWA-type products — if the APR is over 12%, where APR must be calculated consistently with the “Military APR” defined in the Military Lending Act. The MAPR classifies a broader set of potential fees and charges as “finance charges” that must be included in the APR.

This seems to classify both employer-integrated and direct-to-consumer EWA products as “small loans,” if the APR, including any “tips” and expedited funding fees, exceeds 12%.

California is in the process of a rulemaking that would define EWA-type products as “credit,” including requiring relevant disclosures and abiding by the state’s interest rate cap.

Other entities weighing in include the Treasury Department, which has sought to clarify that EWA doesn’t constitute a loan for tax purposes; New Jersey, New York, Vermont, Virginia, North Carolina, South Carolina, Georgia, Mississippi, and Texas have introduced or are considering legislation to regulate EWA products.

Image: Bloomberg Law

For its part, Maryland’s guidance seems pretty straightforward:

• if employers provide EWA products directly to their employees at no cost, this would not be considered a loan

• if the limit/amount advanced is less than the amount of wages an employee had already accrued, this would not be considered an “advance,” as the employer already “owes” the employee this amount

• if a Maryland consumer receives the product from an independent third-party, the arrangement’s “facts and circumstances” must be analyzed to determine if the providers are “lenders” that must be licensed

• the facts and circumstances considered include: who bears the economic risk of the transaction (the employer or third party); the level of contact between the third party and consumer; and who benefits from any fees or tips paid by the consumer — if the third party receives most of the economic benefit of any fees or tips, they are more likely to be viewed as a “lender” than as a service provider

The problem with this guidance is that few, if any, employers “directly” provide EWA services — instead, they rely on third-party companies that have built the capabilities to do so.

While this guidance sounds perfectly reasonable on the surface, in reality, which programs would be considered “service providers” and which would be “lenders” needing a license remains pretty much as unclear as ever.

Chopra Announces New Rulemaking To Govern Data Brokers

In a colorful speech last week, in which he compared data brokers to peeping toms, CFPB Director Chopra announced the Bureau’s intention to undertake new rulemaking to protect Americans from “harmful data broker practices” and “data surveillance.”

The growing use of artificial intelligence, Chopra said, “relies on ingesting massive amounts of data about our daily lives,” often facilitated by data brokers.

The 1970 Fair Credit Report Act (FCRA) governs collection and use of certain kinds of data. FCRA gives consumers certain rights and protections, including “(1) safeguards to ensure accurate information, (2) the right to dispute errors, (3) the right to access your own information, and (4) restrictions on how others can use your information.”

FCRA was substantively updated and amended in 2003 by the Fair and Accurate Credit Transactions Act (FACT Act).

But with the explosion of what some refer to as “surveillance capitalism,” everything from items you’ve purchased to websites you’ve visited or social media posts you’ve liked and can be monitored, tracked, aggregated, and used to profile you.

In his remarks, Chopra laid out two key proposals:

• to designate certain data brokers as “consumer reporting agencies,” which would impose obligations on them to ensure the accuracy of data and give rights to consumers to dispute data they hold; as an example, Chopra specified data brokers that collect information related to a “consumer’s payment history, income, and criminal records.”

• the second proposal centers around clarifying to what extend “credit header data” — the identifying information on a credit report, including name, date of birth, and Social Security number — constitutes a consumer report. Designating credit header data as a consumer report would substantially limit the circumstances in which bureaus could sell such data.

A Clarification On Dave’s Q2 Earnings Analysis

Last week, I published an analysis of both Dave and MoneyLion’s most recent quarterly earnings.

The team at Dave pushed back on two key metrics in my analysis: average revenue per user (ARPU) and customer acquisition cost (CAC).

While the alternative calculations the team pointed me to are mathematically correct, the significant differences in the company’s preferred metrics vs. alternate ways of interpreting those data points illustrate the importance of going beyond earnings releases and presentations, which, unsurprisingly, strive to put the most positive spin possible on company performance, to understand how a business is actually performing.

For average revenue per user, the company claimed $129 on an annualized basis — with the important caveat that this represented revenue over only 1.9 million “monthly transacting members” — not all 9.2 million Dave users.

Image: Dave Q2 Earnings Presentation

Looking at average revenue for all users yields the $26.64 on an annualized basis included in my analysis.

The decision to calculate ARPU by looking only at “monthly transacting members” particularly risks being misleading, because the company calculated CAC based on the marketing expense over total new members acquired in Q2 — regardless of whether or not they were considered to be monthly transacting members:

Image: Dave Q2 Earnings Presentation

This presents an impression — an inaccurate one, I would argue — that the company is paying $20 to acquire a user that will generate $129 in annual revenue.

And while Dave did gain 739,000 new members in the quarter, it also lost users, for a net increase of 500,000; dividing total marketing spend by the net increase yields the $30 CAC calculation I presented.

Perhaps more importantly — and not called out in last week’s analysis — is that Dave actually saw its monthly transacting members decline by 5% sequentially to 1.9 million, which a company spokesperson attributed to “the migration off of legacy subscription billing system and onto our newly-built platform, which better positions us to launch new subscription offerings over the coming quarters.”

Meaning the company spent nearly $15 million on marketing in Q2 and still lost 100,000 active users in the quarter.

As the saying goes, there are lies, damned lies, and statistics.

Other Good Reads

‘Don’t You Remember Me?’ The Crypto Hell on the Other Side of a Spam Text (Bloomberg Businessweek)

Is David Solomon Too Big a Jerk to Run Goldman Sachs? (New York Magazine)

Hawaiian Electric and Its Subsidiary Bank (Bank Reg Blog)

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