Acting Comptroller of the Currency Keith Noreika, in remarks on July 19 to the Exchequer Club, confirmed that the OCC is continuing to consider its proposal to allow financial technology (fintech) companies to apply for a special purpose national bank (SPNB) charter.  Since the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced, there has been considerable speculation as to what position the OCC would take on the proposal.

In his remarks, Acting Comptroller Noreika referenced the lawsuits filed by the New York Department of Financial Supervision and the Conference of State Bank Supervisors challenging the OCC’s authority to grant SPNB charters to fintech companies.  He indicated that in these lawsuits, the OCC plans to “vigorously” defend its authority to rely on its regulation at 12 C.F.R. section 5.20(e)(1) to grant SPNB charters to nondepository companies.  He also countered arguments that granting SPNB charters to fintech companies would disadvantage banks and create consumer protection risks.  (As we have previously observed, both lawsuits present a lack of ripeness and/or no case or controversy problem. )

At the same time, referring to the proposal as “a good idea that deserves the thorough analysis and the careful consideration we are giving it,” Mr. Noreika was noncommittal about what the OCC’s ultimate position would be.  Despite his statement that the OCC plans to defend its charter authority in the lawsuits, Mr. Noreika also stated that “the OCC has not determined whether it will actually accept or act upon applications from nondepository fintech companies for special purpose national bank charters that rely on [section 5.20].  And, to be clear, we have not received, nor are we evaluating, any such applications from nondepository fintech companies.  The OCC will continue to hold discussions with interested companies while we evaluate our options.”

Acting Comptroller Noreika suggested that fintech companies consider seeking a national bank charter by using other OCC authority “to charter full-service national banks and federal savings associations, as well as other long-established special purpose national banks, such as trust banks, banker’s banks, and other so-called CEBA credit card banks.”  According to Mr. Noreika, the state plaintiffs in the lawsuits had conceded that the OCC has such other authority.  Observing that many fintech business models may fit into the established categories of special purpose national banks “that do not rely on the contested provision  of regulation, section 5.20,” he stated that “we may well take [the states] up on their invitation to use these [other] authorities in the fintech-chartering context.” (emphasis included).

Many years ago, we were successful in converting a consumer finance company to a national bank and had no difficulty in obtaining OCC approval.  Nonbanks engaged in interstate consumer lending should consider conversion as an option since it enables the converted bank to (1) export throughout the country “interest” (as broadly defined under the OCC’s regulations) as permitted by its home state, (2) disregard non-interest state laws that impair materially the exercise of national bank powers, and (3) accept FDIC-insured deposits, which generally are the lowest cost source of funds.  Nonbanks engaged in non-financial activity or with affiliates engaged in such activity may be limited to SPNB conversions due to activity restrictions in the Bank Holding Company Act.

The OCC’s proposal to create a fintech charter would, if finalized, help some companies partially avoid the negative impact of the Second Circuit’s decision in Madden v. Midland Funding.  (In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.)  It would also help some fintech companies deal with the risk of a court or enforcement authority concluding that the fintech company, and not its bank partner, is the “true lender.”  Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.

The “true lender” risk, which is not confined to the fintech space but can arise in many bank-partner-model arrangements, is a live issue.  In litigation currently ongoing in federal district court in Colorado, two state-chartered banks are seeking to enjoin enforcement actions brought by the Colorado Uniform Consumer Credit Code Administrator against the banks’ nonbank partners that market and service loans originated by the banks and purchase loans from the banks.  The Administrator has alleged that because the banks were not the “true lenders” on the loans sold to the banks’ partners, the loans are subject to Colorado law regarding interest, not the law of the states where the banks are located.

Unfortunately, as set forth in Alan Kaplinsky’s article for American Banker’s BankThink, the possibility that the OCC might charter SPNBs (or deposit-taking fintech national banks) does not fully address the Madden and “true lender” risks facing fintech companies, their bank partners, or other entities involved in “bank-model” lending programs.  The SPNB proposal has not been adopted and may be overturned in litigation.  It does not extend to non-fintech companies.  In many respects, it includes burdensome provisions.  And Madden risks would remain for loan purchasers.

We believe that recent developments, both in Colorado and elsewhere, highlight the need for the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.