[co-author: Lauren Haahr]
On July 31, 2018 the Office of the Comptroller of the Currency (OCC) announced that, effective immediately, it is now accepting national bank charter applications from nondepository financial technology (fintech) companies engaged in the business of banking. Under the National Bank Act, the OCC has broad authority to grant charters for national banks, including special purpose national banks (SPNBs). An SPNB is a national bank that engages in a limited range of banking or fiduciary activities, targets a limited customer base, incorporates nontraditional elements or has a narrowly targeted business plan. SPNBs also include national banks that engage in the "business of banking", including one or more of the core banking functions of taking deposits, paying checks or lending money.
Benefits of a National Charter
The primary advantage of an SPNB charter, which is the same benefit enjoyed by all national banks, is the federal preemption of state law. National banks are entitled to federal preemption of state laws and regulations, including licensing requirements, when they conflict with a national bank’s power to engage in a broad range of payment services. For example, nationally-chartered banks are able to avoid state-level money transmitter licensing requirements and certain lending licensing requirements. Federal preemption would be advantageous for fintech companies operating in many states, because the licensing requirements often vary from state to state, which can make compliance very expensive.
Burdens of a National Charter
While a federal charter provides many regulatory advantages, it also creates increased regulatory and supervisory requirements. Fintech SPNBs would be subject to the regulations and federal supervision that apply to all national banks. The OCC will tailor these standards based on the fintech SPNB’s business model, size, complexity and risks, consistent with applicable law. A fintech company with an SPNB charter will be supervised like similarly situated national banks, including with respect to capital, liquidity and risk management. A fintech SPNB applicant must demonstrate a commitment to financial inclusion and develop a contingency plan to address significant financial stress. After the OCC approves the charter, the OCC will supervise the fintech SPNB, as it does all other national banks, under a scheduled supervisory cycle, including on-site examination and periodic off-site monitoring. It is also important to note that the OCC has not clearly defined the specifics of how it intends to tailor its regulatory standards to each SPNB. Thus, the regulatory burden that will be placed on SPNBs remains relatively uncertain.
Applicability of Bank Holding Company Act
The OCC’s SPNB charter procedure is available only to fintech companies that do not take deposits. Fintech companies that seek a national bank charter and plan to take insured deposits should apply for a full-service national bank charter. A fintech SPNB that takes deposits would be required to obtain insurance from the Federal Deposit Insurance Corporation (FDIC) and would be regulated and supervised by the FDIC. Under the Bank Holding Company Act (BHCA), the definition of "bank" includes insured depository institutions. Bank holding companies are subject to strict restrictions on their activities and may engage only in certain businesses relating to the business of banking. However, so long as a fintech SPNB does not take deposits and engages in only lending or payment activities, the holding company of a fintech SPNB could avoid regulation under the BHCA.
SPNB Application Process
Fintech companies must meet the same chartering requirements and standards applicable to all national banks. This application process consists of four phases: pre-filing meetings, filing, review and the decision (which may include the imposition of certain conditions to approval). The OCC will primarily take into consideration the following factors when evaluating whether to grant an SPNB charter to a fintech company:
1. The qualifications and experience of the company’s organizers, management and directors
2. The company’s business plan
3. The company’s capital and liquidity
4. The company’s commitment to financial inclusion
5. The company’s contingency plan in case of significant financial stress
The OCC seeks to make a decision on a complete and accurate application within 120 days after receipt or as soon as possible thereafter, but review of an SPNB charter application may require additional time and scrutiny. In light of the rigorous approval process the OCC intends to undertake, it is likely that the SPNB charter is intended for fintech companies that are established with a highly experienced management team and a strong operating history. In other words, it appears that startup fintech companies will have a difficult time obtaining an SPNB charter.
Industry Reaction
While many fintech companies are excited by the OCC’s issuance of final procedures for fintechs to apply for an SPNB charter, this announcement will likely reignite opposition from state regulators and consumer groups. The initial proposal in 2016 was met with considerable backlash from these detractors. Previously, the Conference of State Bank Supervisors and the New York Department of Financial Services each filed lawsuits challenging the OCC’s authority to grant SPNB charters to nondepository fintech companies. Both lawsuits were dismissed because the OCC had not yet finalized the procedures for a fintech company to apply for an SPNB charter.
Because of the regulatory and supervisory burdens that accompany a national charter, the untested fintech SPNB application process, and the uncertainty regarding likely future judicial proceedings and rulings, it is unclear if any fintech companies will apply for an SPNB charter in the near future, and it is also unclear if the value of an SPNB charter outweighs the burdens and risks.
Lauren Haahr is an associate at Stinson Leonard Street. Her MN license is currently pending. She is licensed to practice law in MD and DC.
