For nonbank providers of consumer financial services, one of the most challenging parts of doing business is the need to comply with the laws of multiple states. Entities like money transmitters and consumer lenders typically must obtain licenses in the states in which they do business, and comply with an array of varying state laws. And for entities that are online or mobile in nature, the “states in which they do business” can mean all fifty states—plus the District of Columbia and U.S. territories. This has been the source of many operational challenges and frustrations for fintech companies and startups in recent years.
These multiple layers of federal and state requirements are a key reason that the U.S. regulatory regime has drawn criticism as being much less conducive to financial services innovation than other regimes, like the United Kingdom. The U.S. federal prudential banking regulators themselves, including the Office of the Comptroller of the Currency (OCC), have expressed concern that the U.S. is falling behind in financial services innovation compared to other areas of the world.
Could these problems soon become a thing of the past?
The OCC, which charters and supervises national banks, has proposed offering a new special-purpose national bank charter for fintech companies. The OCC formally proposed this in December 2016 and received numerous comments on the proposal. Now, the OCC has released a draft supplement to its Licensing Manual that would establish application processes for this new charter and the OCC’s standards for evaluating such applications. The OCC is soliciting comments from the public through April 14 at firstname.lastname@example.org.
Since this is still only a proposal, many questions remain about how this new charter would work in practice.
However, from what the OCC has released so far, it appears that entities whose activities include some form of money transmission and consumer lenders (which includes online and crowdsourced lending) are among the companies that could qualify for this charter. The OCC has stated that entities that engage in the “core banking functions” of lending money or “paying checks” could qualify, and that “issuing debit cards or engaging in other means of facilitating payments electronically may be considered the modern equivalent of paying checks.” (Companies eligible for this charter would not take deposits and would not be FDIC-insured; deposit-taking entities already may—indeed, must—apply for a national or state bank charter.) Thus, the OCC appears to be creating a path for consumer lenders and money transmitters to obtain this charter.
For such companies, a key benefit of a national bank charter centers on one concept: federal preemption of state laws.
A major appeal of a national bank charter is that national banks are exempt from many state laws, including those requiring licenses to conduct business. Thus, money transmitters and consumer lenders could potentially operate across the U.S. without the need to obtain the state licenses that would otherwise be necessary. Obtaining licenses in all 50 states can take as long as one or two years and cost some $1.5 million in fees, costs and bonding requirements. National banks (as well as state banks) also have certain freedom to lend money at rates not constrained by state usury laws. That has obvious appeal to consumer lenders. And all entities receiving this new charter would have one primary federal regulator rather than being supervised and examined by numerous state regulators.
Several fintech industry groups have commented in favor of the OCC’s proposed charter. Financial Innovation Now (FIN), which includes Amazon, Apple, Google, Intuit and PayPal, submitted a letter supporting the move and lauding the OCC’s creation of an Office of Innovation.
“The OCC’s decision to issue special-purpose bank charters to fintech companies is recognition that the current regulatory environment must evolve to provide different options for meeting the financial needs of consumers and small businesses,” FIN wrote in its letter, dated Jan. 17, 2017. It added that the OCC fintech charter could help “foster responsible innovation, including through partnership with other chartered institutions, and maintain traditional policies separating banking and commerce.”
FIN noted that while state-by-state monitoring may be appropriate for some entities, fintechs should have the option of a federal choice. The OCC charter would be optional for fintech firms that choose to apply for it, not a mandatory licensing requirement. FIN also expressed concern that fintech firms should not be subject to a greater level of scrutiny or regulation simply because they are new. It urged OCC to tailor regulations to an individual firm’s risk and business model, a policy it already pursues in overseeing national banks.
Specific areas where OCC should tailor fintech risk metrics, according to the FIN letter, include: risk-based capital; risk analysis of products and services, which tend to be more narrow at fintechs than traditional banks; data security, to which FIN says fintech firms are especially attuned; and financial inclusion. On financial inclusion in particular, FIN wrote that inclusion should not be based on geographic or physical access given the online and mobile nature of many fintech entities. This point is essentially a call for the “modernization” of the Community Reinvestment Act, which requires that regulators examine insured banks’ record of meeting the credit needs of their communities—specifically, in geographic areas where the banks have branches or a “substantial portion” of their loans are made.
Given the numerous positive aspects of the OCC’s proposal, why would a nonbank provider choose not to apply for a national bank charter?
It is not entirely clear—because numerous aspects of this new framework are not yet clear. Some requirements that would apply under OCC supervision are still nebulous—such as capital and liquidity requirements, which the OCC has suggested will be tailored to fit the particular entity. These might (or might not) turn out to be more onerous than state requirements. And having the OCC as a supervisor may or may not be preferable to supervision by state authorities. The OCC cautioned in its explanatory statement accompanying the comments to its December 2016 proposal that “[t]here will be no ‘light-touch’ supervision of companies that have [a special-purpose national bank] charter. Any fintech companies granted such charters will be held to the same high standards that all federally chartered banks must meet.”
And it is important to note that obtaining a national bank charter would not exempt an entity from all state laws. As the OCC stated in the December proposal, while “state laws would not apply if they would require a national bank to be licensed in order to engage in certain types of activity or business,” state laws that would still “generally apply to national banks include state laws on anti-discrimination, fair lending, debt collection, taxation, zoning, criminal laws, and torts. In addition, any other state laws that only incidentally affect national banks’ exercise of their federally authorized powers to lend, take deposits, and engage in other federally authorized activities are not preempted. Moreover, the OCC has taken the position that state laws aimed at unfair or deceptive treatment of customers apply to national banks.”
Given that is the OCC fintech charter is such a novel framework, it may be that some entities that would qualify for this charter will choose to hold off on applying, and learn from the experiences of those entities that go first.
But even those that choose to wait to apply may not want to wait to see what the final framework looks like without taking the opportunity to have their views considered. Again, those potentially affected by this proposal should consider submitting public comments to the OCC before the comment period closes on April 14, 2017.