Whether the long and arduous chartering process, ongoing examination and supervision requirements, substantial capital requirements and limitations on initial rapid growth will outweigh the benefits of the bank partnership model or state licensing model remains to be seen.

On Friday, December 2, the OCC announced that it will issue special-purpose national bank charters to fintech companies, published a whitepaper on the topic, and requested comment on the granting of special-purpose national bank charters.

The OCC is imposing significant regulatory requirements for new special-purpose national bank charters, similar to the requirements for full-service national banks.

Features and Attributes of Special-Purpose National Bank Charters

Banking Functions

A special-purpose national bank may limit its activities to fiduciary activities or to any other activities within the business of banking. As such, a special-purpose national bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: receiving deposits, paying checks or lending money.

Corporate Structure

All national banks, including special-purpose national banks, are organized under and governed by the National Bank Act. The corporate organization and structure provisions of the National Bank Act (classes of shares, voting rights, number of directors and terms of office) govern the corporate structure of a special-purpose national bank.

Bank-Permissible Activities

A special-purpose national bank may engage only in activities that are permissible for national banks.

Rules and Standards Applicable to a Special-Purpose National Bank

The special-purpose national bank will be “subject to the same laws, regulations, examination, reporting requirements, and ongoing supervision as other national banks,” the OCC said. This includes limits on lending and on real estate holdings. Other laws that apply include the Bank Secrecy Act (BSA), other anti-money laundering (AML) laws, and the economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC).

In addition, special-purpose national banks generally are subject to the prohibitions on engaging in unfair or deceptive acts or practices under section 5 of the Federal Trade Commission Act, and unfair, deceptive, or abusive acts or practices under section 1036 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

Application of State Laws to Special-Purpose National Banks

The whitepaper includes a detailed treatment of state law preemption, but state law would apply, or in some circumstances, not apply, to a special-purpose national bank in the same way and to the same extent as state law applies to a full-service national bank. However, a fintech national bank would be able to export its home state’s interest rate nationwide, and would be exempt from state licensing laws such as those regulating money transfers. These are significant advantages over state licensing models used today.

Receivership Provisions

Uninsured special-purpose national banks would be subject to the receivership provisions in the National Bank Act. This is in conjunction with the recent Notice of Proposed Rulemaking issued by the OCC in September 2016, regarding its resolution authority with respect to uninsured national banks.

Insured DepositsFDIC Approval Required

While many companies considering a special-purpose fintech national bank charter are likely to opt for business models that would not accept deposits, any fintech national banks that propose to accept deposits other than trust funds would be required to apply to, and receive approval from, the FDIC. If a special-purpose national bank was insured by the FDIC, it would be subject to the Community Reinvestment Act (CRA) based on its application to insured depository institutions.

Generally, a bank must be engaged in the business of receiving deposits (other than trust funds) for the FDIC to consider granting deposit insurance. The FDIC’s regulations provide that an institution is engaged in the business of receiving deposits other than trust funds if it maintains one or more non-trust deposit accounts in the minimum aggregate amount of $500,000. 12 CFR 303.14(a).

The Federal Reserve System

With rare exceptions, all national banks, including insured and uninsured trust banks and other special-purpose national banks, are required to be members of the Federal Reserve System. Since most special-purpose national banks would be member banks, the statutes and regulations that apply to member banks also would apply to them.

Application Requirements and Supervisory Standards

National banks are required to meet very high supervisory standards. Consistent with the OCC’s mission, these standards include safety and soundness requirements, as well as requirements to provide fair access to financial services, treat customers fairly, and comply with all applicable laws and regulations. These standards are tailored for each institution based on the bank’s size, complexity and risks. As a national bank, a special-purpose national bank also would be expected to meet these high standards, tailored to its size, complexity and risks.

The OCC would expect any applicant for a special-purpose national charter to fulfill all of the requirements of a full-service national bank. That includes at least the following:

  1. Business Plan: A robust and well-developed business plan covering a minimum of three years, clearly articulating why the applicant is seeking a national bank charter and providing significant detail about the proposed bank’s activities;
  2. Governance Structure: A strong governance structure and risk management system to identify, monitor, manage and control risk; and have the expertise, financial acumen, and risk management framework to promote safety and soundness oversight;
  3. Capital: Minimum and ongoing capital levels commensurate with the risk and complexity of the proposed activities of the applicant, including a proposed minimum level of capital that the applicant would meet or exceed at all times;
  4. Liquidity: Adequate liquidity to readily and efficiently meet expected and unexpected cash flows and collateral needs at a reasonable cost, without adversely affecting either daily operations or the financial condition of the bank;
  5. Compliance Risk Management: A culture of compliance that includes a top-down, enterprise-wide commitment to understanding and adhering to applicable laws and regulations and to operating consistently with OCC supervisory guidance. In addition, the applicant would need appropriate systems and programs to identify, assess, manage and monitor the compliance process (e.g., policies and procedures, practices, training, internal controls and audit), and a commitment to maintain adequate compliance resources;
  6. Financial Inclusion: A demonstrated commitment to financial inclusion “that supports fair access to financial services and fair treatment of customers,” including a business plan that demonstrates how the proposed bank plans to respond to the needs of the community. Normally, this is addressed through the CRA requirements, but special-purpose national banks that are not insured depository institutions are not subject to the CRA. As such, the OCC expects an applicant seeking a special-purpose national bank charter that engages in lending activities to demonstrate a commitment to financial inclusion that supports fair access to financial services and fair treatment of customers. The nature of the commitment would depend on the entity’s business model, and the types of loan products or services it intends to provide.

The Chartering Process

The OCC’s standard process for reviewing and making decisions about charter applications would apply to applications from fintech companies for a special-purpose national bank charter. The chartering process encompasses four phases: prefiling, filing, review and evaluation, and decision. The whitepaper refers potential applicants to the OCC’s Chartering Regulation and the “Charters” booklet of the Comptroller’s Licensing Manual.

Request for Comment

The OCC has requested comment on several specific questions, primarily dealing with financial inclusion. Respondents should provide written comments by January 15, 2017. Submissions should be sent to [email protected].

Notable questions asked by the OCC for comment include the following:

  • What are the public policy benefits of approving fintech companies to operate under a national bank charter? What are the risks?
  • What elements should the OCC consider in establishing the capital and liquidity requirements for an uninsured special-purpose national bank that limits the type of assets it holds?
  • What information should a special-purpose national bank provide to the OCC to demonstrate its commitment to financial inclusion to individuals, businesses and communities?
  • Should the OCC seek a financial inclusion commitment from an uninsured special-purpose national bank that would not engage in lending, and if so, how could such a bank demonstrate a commitment to financial inclusion?
  • Would a fintech special-purpose national bank have any competitive advantages over full-service banks the OCC should address? Are there risks to full-service banks from fintech companies that do not have bank charters?
  • Certain risks may be increased in a special-purpose national bank because of its concentration in a limited number of business activities. How can the OCC ensure that a special-purpose national bank sufficiently mitigates these risks?

Pepper Points

  • This much-anticipated development is likely to be met with enthusiasm from the fintech community, which lobbied hard for the OCC to offer this type of charter. Whether the long and arduous chartering process, ongoing examination and supervision requirements, substantial capital requirements and limitations on initial rapid growth will outweigh the benefits of the bank partnership model or state licensing model remains to be seen.
  • Given the recent issues with funding problems at some fintech lenders, the possibility of having a stable source of low-cost bank deposits may prove to be very attractive to some fintech companies.
  • The relatively unregulated online lending industry has thrived in large part due to a low-cost operating environment compared to what regulated banks face. In competing head-to-head in a higher-cost OCC-regulated environment, the competitive landscape would be reversed, and banks that accept deposits and otherwise enjoy greater and more diversified access to funding would have a marked advantage over limited-purpose fintechs. As a result, an OCC-chartered fintech bank may find itself having to become more “bank like” survive—forfeiting the hallmark flexibility that made it successful to begin with.
  • The concentration of assets of most fintech companies may be a challenge during the chartering process. That the OCC asked for input on the issue reflects the concern that a prudent regulator has on the issue from a safety and soundness perspective.
  • The lack of CRA requirements for uninsured special-purpose national banks is a welcome sign, but the way in which the OCC applies its requirement for financial inclusion could make this requirement a “CRA-light,” or just another check-the-box requirement.
  • Given how vocal state regulators have been in expressing their displeasure with the proposed fintech charter, this is likely to lead to additional conflict between the OCC and its state regulatory partners, a conflict that has been ongoing for 150 years.
  • The OCC makes it a point to encourage potential applicants to meet with the agency early and often before applying to ensure that problems are ironed out before the paperwork is submitted.
  • We encourage those thinking about exploring this alternative to speak with experienced bank counsel to discuss the issues raised above in greater detail. Pepper Hamilton has substantial experience in chartering new banks and Messrs. Dabertin and Rubis have substantial involvement in the OCC chartering process from their time working for the OCC.