On July 31, the OCC announced that nondepository financial technology firms engaged in one or more core banking functions may apply for a special purpose national bank (SPNB) charter. The announcement follows a report released the same day by the Treasury Department, which discusses a number of recommendations for creating a streamlined environment for regulating financial technology, and includes an endorsement of the OCC's SPNB charter for fintech firms (fintech charter).
OCC announces it will accept fintech charter applications, including for nondepository institutions
Who can apply? The OCC announcement, in the form of a news release accompanied by a policy statement and a supplement to the Comptroller's Licensing Manual (Supplement) on fintech charters, stated that the OCC will consider SPNB charter applications from fintech companies engaged in at least one of the three core banking functions: (i) paying checks, (ii) lending money, or (iii) taking deposits. In the OCC's view, the agency's statutory authority, regulations, and policies permit it to charter a SPNB that does not take deposits within the meaning of the Federal Deposit Insurance Act (FDI Act), and therefore is not required to obtain federal deposit insurance (FDI). The OCC noted that its decision to accept applications for fintech charters came after "extensive outreach with many stakeholders over a two-year period, and after reviewing public comments" submitted in response to OCC publications contemplating the possibility of fintech charters in December 2016 and March 2017.
Will owners with controlling interests become bank holding companies? Although the Supplement is silent with respect to whether the owners of a SPNB are subject to regulation as a holding company, the OCC, in the white paper issued in December 2016, suggested that owners of fintech SPNBs may not necessarily be bank holding companies. There, the OCC noted that fintech companies that become SPNBs may be subject to the Bank Holding Company Act (BHCA) and the Federal Reserve's implementing regulations if the fintech company is owned or deemed to be controlled by a holding company and the fintech company is considered a "bank" for purposes of the BHCA. Importantly, the BHCA, by definition, applies to FDIC-insured institutions or other entities that both accept demand deposits and make commercial loans.1 Thus, a fintech firm that receives a SPNB charter presumably would not be a "bank" under the BHCA if, as the OCC appears to contemplate, SPNBs would be engaged in the business of banking "but would not take deposits and would not be insured by the [FDIC]." This would mean that the owners of such a fintech charter would not be subject to the BHCA's control provisions, restrictions on ownership of non-financial businesses, or Federal Reserve supervision. This is significant as it opens the door to various entities to own or control a fintech SPNB that are not generally eligible to become bank holding companies, such as venture capital and private equity funds, as well as major technology and commercial firms.
Now that the OCC has decided to move forward with the fintech charter, the market awaits the Federal Reserve's response and what formal or informal guidance it will provide regarding fintech charters issued by the OCC.
How heavily will SPNBs be regulated? In its announcement, the OCC attempts to allay concerns that fintech SPNBs will be treated more favorably than their traditional charter applicant counterparts: "Fintech companies that apply and qualify for, and receive, [SPNB] charters will be supervised like similarly situated national banks[.]" For example, de novo fintech SPNBs will, like traditional de novo national banks, be subject to an initial heightened level of supervision once the application is approved. However, the OCC also makes clear that during the application phase, fintech SPNB charter applicants "will be evaluated on [their] unique facts and circumstances." This approach appears to demonstrate the OCC's understanding that fintech companies may not fit the mold of a traditional banking organization; however, it also leaves room for agency discretion in the application process that might not normally be available to a full-service charter application. Even given this potential for discretion, the Comptroller's Licensing Manual supplement makes clear that fintech companies should expect that the OCC will review their applications with an eye toward each entity's organizers, management and directors, business plan, capital and liquidity, financial inclusion, and contingency planning.
How are other regulators reacting? The OCC's announcement was met with pushback from New York Department of Financial Services (NYDFS) Superintendent Maria T. Vullo, who stated that NYDFS "strongly opposes [the] decision by the [OCC] to begin accepting applications for national bank charters from nondepository financial technology (fintech) companies. [NYDFS] believes that this endeavor, which is also wrongly supported by the Treasury Department, is clearly not authorized under the National Bank Act. As [NYDFS] has noted since the OCC's proposal, a national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape."
Vullo's vocal opposition to the fintech SPNB charter was unsurprising in light of previous litigation brought by NYDFS and the Conference of State Bank Supervisors (CSBS) against the OCC alleging that a fintech national bank charter is not permitted under the National Bank Act (NBA). Specifically, these lawsuits claimed that the SPNB charter previously proposed by the OCC would include vast preemptive powers over state law and would serve as an unprecedented, unlawful expansion of the chartering authority given by Congress for national banks. (See previous InfoBytes coverage here.) Both suits were dismissed in federal court earlier this year as unripe because the OCC had yet to officially announce its chartering policy. However, NYDFS warned it would continue to pursue litigation if the OCC moved forward. It is unclear whether such litigation could come in the near term based on the OCC's July 31 announcement, or whether NYDFS and/or CSBS would wait to re-initiate litigation until the OCC affirmatively grants a fintech charter.
Conversely, acting CFPB Director Mick Mulvaney issued a press release offering support for the actions taken by the OCC and Treasury. "We welcome the important steps taken by our fellow agencies to promote innovation. Success will be determined by how well U.S. regulators coordinate their efforts. We look forward to working with our [s]tate and [f]ederal partners to insure American global leadership in the [fintech] space for years to come." Mulvaney's statement follows the Bureau's decision to create the agency's new Office of Innovation, which will focus on policies for facilitating innovation, engage with entrepreneurs and regulators, and review outdated or unnecessary regulations. The Office of Innovation (as previously covered by InfoBytes here) will be led by Paul Watkins who previously worked for the Arizona Attorney General and helped launch the first state regulatory sandbox for fintech innovation.
What are some of the remaining obstacles for potential applicants? While the OCC's announcement answers the biggest question that had previously been outstanding regarding the fintech charter-- namely, whether the charter would ever become affirmative OCC policy--other critical issues remain unresolved. Although the Supplement makes clear that the business plan for a SPNB charter applicant will be of paramount importance in assessing safety and soundness considerations, it remains to be seen how an application by a relatively monoline business, such as a marketplace lender offering unsecured loans, will be received by the OCC and what steps will be necessary for it to mitigate the inherent risks of such a business model.
Likewise, it is expected that the OCC will give careful scrutiny to capital and liquidity plans, which will necessarily be considered on a case-by-case basis in light of an applicant's business plan. In particular, it is noteworthy that the OCC repeated its prior statement from the 2016 white paper that liquidity requirements "could include entering into a liquidity maintenance agreement with a parent company or maintaining a certain amount of high-quality liquid assets." How this might apply to certain applicants, particularly in the context of ownerships structures involving financial sponsors as opposed to strategic investors, will be of significant importance in determining how widely available the SPNB charter option is in practice to many fintech firms given their current ownership structures.
In addition, additional guidance regarding the OCC's supervisory authority and approach for nondepository SPNBs will likely develop over time. The OCC often relies upon the authorities granted to it under the FDI Act, which governs "insured depository institutions,"2 as a basis for various supervisory and enforcement actions its takes with respect to national banks. Because nondepository fintech SPNBs are not required to have FDI, they would not be subject to many frequently-cited provisions in the FDI Act applicable to "insured depository institutions." Although the OCC signaled that it would attempt to apply certain provisions of the FDI Act, such as section 1831p-1 (safety and soundness standards) and section 1829b (retention of records) indirectly by using charter conditions, duly taking into account the "relevant differences" between a full-service bank and a SPNB, it remains to be seen what those conditions will be.
The OCC's announcement comes as welcome news to fintech companies that are attracted by the benefits of a national bank charter, but do not intend to accept deposits or are unable to subject their parent companies to bank holding company requirements under the BHCA. However, it is expected that legal challenges to the OCC's authority will be restarted, either upon the issuance of the OCC's announcement or the granting of a SPNB charter to a fintech company.
Treasury report focuses on regulations for nonbank financial institutions and fintech
Treasury's comprehensive report, "A Financial System That Creates Economic Opportunities--Nonbank Financials, Fintech, and Innovation," is the last in a series of four issued in response to President Trump's Executive Order 13772, that mandated a review of financial regulations for inconsistencies with promoted "Core Principles." (See here for InfoBytes coverage on the first three reports.) Treasury's report is the culmination of numerous consultations with stakeholders who focus on consumer financial data aggregation, lending, payments, credit servicing, financial technology, and innovation.
The report identifies more than 80 recommendations designed to promote innovation in the financial services industry, expand options for consumers, and "enable U.S. firms to more rapidly adopt competitive technologies, safeguard consumer data, and operate with greater regulatory efficiency." These recommendations include:
- Embracing Digitization, Data, and Competitive Technologies. Among other things, the report (i) encourages the FCC to address the issue of unwanted calls; (ii) recommends Congress create statutory guidance for a Telephone Consumer Protection Act revocation standard; and (iii) "recommends that the [CFPB] promulgate regulations under the Fair Debt Collection Practice Act to codify that reasonable digital communications . . . are appropriate for use in debt collection."
- Aligning the Regulatory Framework to Promote Innovation. The report discusses the need to evolve the U.S. financial regulatory framework, both at the state and federal level, to enable innovation and ensure a globally competitive marketplace for financial services. Recommendations include (i) harmonization of state law through uniform, model laws, including increased coordination and streamlining of state licensing and supervision; (ii) moving forward with the OCC's special purpose national bank charter to provide support to "beneficial business models"; and (iii) harmonizing guidance related to bank partnerships with third-parties and clarifying which companies are subject to third-party guidance.
- Encouraging Bank Partnerships. Treasury recommends that Congress "codify the `valid when made' doctrine and the role of the bank as the `true lender' of loans it makes."
- Enhancing Mortgage Lending and Servicing Requirements. Treasury suggests various modifications to the current mortgage origination, servicing, and foreclosure processes, including accepting digital promissory notes and notary standards, and creating a model foreclosure law for adoption by the states.
- Rescinding the CFPB's Payday Lending Rule. Treasury finds that the payday lending rule is "unnecessary" because states have shown they can regulate the industry themselves and provide more effective oversight. According to the report, the CFPB's rule does not take into account the real demand for payday loans, which "serve a unique niche of consumers that may not have many alternatives to high-priced credit." As previously covered in InfoBytes, Mulvaney announced in January that the Bureau was "reconsidering" its final rule addressing payday loans, vehicle titles loans, and certain other extensions of credit, which was finished last October. The report also discusses Treasury's support for recent steps taken by the OCC to encourage sustainable and responsible short term, small dollar installment lending by banks, and calls on the FDIC to rescind guidance that it issued in conjunction with the OCC in 2013 that pushed many banks out of smalldollar loans. Last October, the OCC rescinded its guidance and issued a bulletin in May encouraging banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC's core lending principles. (See previous InfoBytes coverage on the OCC's actions here and here.)
- Encouraging Use of New Credit Models and Data. Treasury recommends banks and nonbank financial companies use new credit modeling and data sources, where such approaches have been found to provide predictive value that is consistent with applicable law.
- Developing a Regulatory Sandbox to Facilitate Experimentation. Treasury recommends that federal and state financial regulators create a "regulatory sandbox" that would facilitate meaningful experimentation with innovative financial services under the supervision of a single regulator.
- Understanding and Engaging with International Approaches to Regulation. The report also emphasizes the need for U.S. regulators to facilitate information sharing among regulators and standard-setting organizations at an international level to avoid regulatory fragmentation and promote international approaches that benefit cross-border capital and investment flows.
Many of the report's recommendations, including those highlighted here, face significant practical obstacles in the short term, such as action by Congress, adoption of uniform state legislation, or a coordinated effort by different, and sometimes competing, stakeholders. However, at least one agency was keen to show its willingness to act. The OCC's announcement that it would move forward with accepting fintech applications, discussed in further detail above, was made only a few hours after the Treasury report was released. We can expect to learn in the coming weeks whether other state and federal agencies have also been working behind the scenes to coordinate strategies for adopting other Treasury recommendations now that the report has been made public.