The Office of the Comptroller of the Currency (OCC) has taken another step toward implementing its proposal to allow financial technology (fintech) companies to apply for a special purpose national bank (SPNB) charter, issuing a draft supplement to the OCC's existing Licensing Manual.
According to the OCC, the draft supplement was informed by more than 100 comments it received on its proposal, which are summarized in a separate document issued concurrently with the supplement. While noting in its press release that it typically does not solicit comments on procedural manuals and supplements, the OCC stated that "consistent with its guiding principles of transparency and fostering open dialogue with stakeholders," it will nevertheless receive comments on the supplement until April 14, 2017.
The draft supplement describes the licensing process envisioned by the OCC for fintech companies seeking an SPNB charter. It covers:
initial steps toward an SPNB charter, including initial contact with the OCC's Office of Innovation, prefiling communications with the OCC Licensing Division, and charter application filing procedures;
chartering standards, including relevant policy considerations, coordination with other regulators having jurisdiction over the proposed SPNB, and the effect of prior or pending investigations or enforcement actions;
Of particular note are the OCC's comments in its discussion of chartering standards that a pending investigation or enforcement action may be grounds for denial of a charter application. The OCC will coordinate as appropriate with other regulators having jurisdiction over the proposed SPNB when considering charter applications. As noted below, state regulators have expressed strong opposition to the OCC's proposal. As a result, the potential for a state enforcement action to result in the denial of a charter application could encourage state regulators to launch investigations or bring enforcement actions to block charter applications. At the same time, a fintech company interested in obtaining a charter should consider the potential impact on its charter application of entering into a settlement where the company has possible defenses.
In its summary of the comments received on its proposal, the OCC defended its authority to charter SPNBs that do not offer FDIC-insured deposits, citing its authority to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money. It also addressed other issues raised by commenters:
The OCC disagreed with commenters, including the Conference of State Bank Supervisors and the New York Department of Financial Services, which objected that a national bank charter would allow a fintech company to avoid state consumer protection laws and make it more difficult for states to enforce such laws by removing their visitorial oversight. The OCC stated that an SPNB "would be subject to consistent federal consumer protection standards and federal supervision standards," including OCC enforcement of Section 5 of the FTC Act (which prohibits unfair or deceptive acts or practices), and observed that the Dodd-Frank Act's federal preemption standards would result in the application of state law to SPNBs in the same way and to the same extent as it applies to other national banks. Under Dodd-Frank, a state's laws are preempted if they discriminate against national banks (as compared to a bank chartered by that state) or operate to prevent or significantly interfere with the exercise of a national bank's powers. The OCC noted that, under these standards, state laws that address anti-discrimination, fair lending, debt collection, taxation, zoning, crime, and torts generally apply to national banks and would also apply to SPNBs. (We note that the proper scope of national bank preemption of state law has long been a source of debate and does not merely engender controversy with respect to SPNBs.)
Regarding predatory lending concerns, the OCC cited its actions to eliminate predatory, unfair, and deceptive practices in the federal banking system and noted that federal law gives a state-chartered bank the same ability to export the usury laws of the state in which it is located as a national bank.
Regarding small business customers, the OCC stated that it would expect an SPNB "to provide sufficient disclosures and clear information to ensure that all borrowers, including consumers and small businesses, can make informed credit decisions" and that it would "look favorably on an applicant's commitment to educate small business borrowers about their rights and responsibilities."
Regarding financial inclusion concerns, the OCC stated that "[t]o help ensure that [the significant potential of fintech companies to expand access to financial services] is realized, the OCC would expect a formal commitment to, and plan for, financial inclusion from SPNBs engaged in lending activities or providing financial services to consumers or small businesses." The business plan submitted with a charter application must contain a Financial Inclusion Plan (FIP) section as described in Appendix B of the draft supplement. Charter applications are subject to a 30-day public comment period, and the FIP will be included in a public file of the charter application that is maintained by the OCC and provided to any person upon request and also published on the OCC website.
Regarding capital requirements, the OCC acknowledged that its minimum capital requirements for national banks "may not be sufficient for measuring capital adequacy for some SPNBs" and that in those cases, it will use "alternative approaches to determine the appropriate capital requirement." The OCC's approach will likely require SPNBs to provide more capital as compared to banks since it will consider an SPNB's off-balance-sheet exposure. In response to comments urging the OCC to require SPNBs to assess their liquidity needs over a full credit cycle that includes both normal and stressed conditions, the OCC noted its awareness that many companies and business models have not yet operated in stressed conditions. The OCC stated that it would therefore expect a charter applicant "to consider and address, among other items, projected borrowing capacity under normal and adverse market conditions." It also stated that, like other national banks, SPNBs should create comprehensive contingency funding plans.
The OCC's draft licensing supplement makes clear that the charter process for fintech companies will not be easy and that companies that become SPNBs will be subject to intense regulatory scrutiny at the federal level and potentially steep capital and liquidity requirements. To meet regulatory expectations, an SPNB will need to demonstrate compliance with applicable laws and regulations, including Bank Secrecy Act/anti-money laundering/Office of Foreign Assets economic sanctions requirements, fair lending laws, and other applicable consumer protection laws and regulations.
However, for lenders that can become SPNBs and would otherwise confront a multitude of state lending restrictions, a charter may have substantial appeal. An SPNB could export a uniform interest rate nationwide from the state where it is located, avoid state licensing requirements, examinations, and other exercises of "visitorial authority," and disregard state laws that prevent or significantly interfere with the exercise of their powers under federal law. Given the likely distinctions between the activities of SPNBs that make and sell loans and the situation addressed by the Second Circuit in Madden v. Midland Funding, this preemption of state usury law could well extend to companies that purchase loans from SPNBs.
While one side of the political spectrum has criticized the OCC’s proposal for undermining consumer protections, the other side has criticized it for imposing undue restrictions on SPNBs. Thus, it remains unclear whether, when, and in what form the proposal will ultimately be implemented. Recognizing this reality and the further reality that the proposal will not be useful or available for all fintech companies, Alan S. Kaplinsky, Practice Leader of Ballard Spahr's Consumer Financial Services Group, recently urged the OCC to adopt a rule to take issue with Madden. While Comptroller Thomas J. Curry has expressed reluctance to do so in the midst of ongoing litigation, Mr. Kaplinsky has argued that there is clear OCC and U.S. Supreme Court precedent to support the OCC's issuance of an interpretive opinion or rule in this circumstance.