Responding to numerous requests, the Office of the Comptroller of the Currency (OCC) issued a release (the Release)[1] on December 2, 2016 explaining how special purpose national banks could be chartered to serve the needs of firms engaged in platform-driven financial activities. The Release makes clear a willingness to adapt the chartering process to the needs of such firms, but also a determination to subject any such bank to roughly the same regulatory and supervisory constraints to which any national bank is subject. Among other things, the OCC would need to approve the sufficiency of the special purpose bank’s capital, liquidity and operational capabilities, lending policies, business plan and compliance, and recovery and resolution procedures, and both state and federal consumer-protection statutes would apply.[2] The Release also makes clear that the OCC does not intend to preclude the use by fintech companies of special state charters (should they become available) or state nonbank licenses.[3]

For marketplace lenders, an OCC charter would provide an alternative to the third-party lending arrangements and an effective means of addressing “true lender” and Madden concerns, but some of the matters mentioned above might present their own significant challenges.

The OCC is requesting responses to the questions described under Request for Comment below by January 15, 2017.

Chartering and Regulating Special Purpose National Banks

The OCC treats fintech charters as analogues to charters currently available to other specialized financing companies, such as trust companies and credit card issuers. Such charters are available to fiduciaries or to companies that take deposits, pay checks or lend money. If a fintech company engages in at least one of those activities, it can contemplate using a special purpose national bank as its vehicle. Which activities it chooses will determine which statutes and regulations will apply. As a national bank, it will be subject only to the National Bank Act (NBA) for some of its activities but to both the NBA and state law for others. Because almost all national banks must be members of the Federal Reserve System, a special purpose national bank will be subject to the statutes and regulations applicable to member banks. If the special purpose bank is covered by the definition of “bank” in the Bank Holding Company Act, companies holding interests in it may have to apply for Federal Reserve approval to be bank holding companies and comply with the applicable requirements.[4] If the special purpose bank determines that its operations require the taking of deposits, it must become an insured bank, which not only adds the Federal Deposit Insurance Corporation (FDIC) as a supervisor but also triggers the application of requirements that apply only to insured institutions, such as the Community Reinvestment Act and the receivership provisions of the Federal Deposit Insurance Act.[5] All fintech banks that serve consumers would be subject to a range of federal and state consumer protection statutes. As national banks, however, they would generally not be subject to state licensing requirements. The exact role of the Consumer Financial Protection Bureau would depend on the bank’s size and activities and on whether it is FDIC-insured.

Chartering requires the development and submission of a detailed three-year business plan and adequate governance, compliance and recovery and resolution procures. In addition, the bank must demonstrate that it will have adequate capital and liquidity and operate in a fashion that indicates financial inclusion.[6] The detail and complexity of any procedures and structures necessary to satisfy these requirements will depend on the bank’s size and the complexity and riskiness of its business. The OCC seems to be fully aware that certain types of businesses, such as marketplace lending platforms that also securitize their loans from time to time, may have different capital and liquidity needs than full-service banks. It will have to reach general conclusions on these matters once it begins the chartering process. Among the factors it will consider for capital purposes, according to the Release, are:

the scope and nature of the bank’s proposed activities, quality of management, funds management, ownership, operating procedures and controls, asset quality, earnings and their retention, risk diversification, and strategic planning. In addition to assessing the quality and source of capital, the OCC also considers on- and off-balance sheet composition, credit risk, concentration, and market risks.

A different set of considerations are described as applying to the development of expectations regarding liquidity:

projected funding sources, needs, and costs; net cash flow and liquid asset positions; projected borrowing capacity; highly liquid asset and collateral positions (including the eligibility and marketability of such assets under a variety of market environments); requirements for unfunded commitments; and the adequacy of contingency funding plans. All aspects of liquidity should address the impact to earnings and capital, and incorporate planned and unplanned balance sheet changes, as well as varying interest rate scenarios, time horizons, and market conditions.

Many of the laws and regulations with which a fintech lender must typically apply would also apply to a special purpose fintech national bank. However, as a bank the lender would not only have to show in its business plan how its compliance systems and staff would cope with these requirements, it would also have to prove to its supervisor (at the very least, the OCC) on an ongoing basis that its systems and staff were mastering their tasks. This reflects the difference between dealing with a licensing authority and dealing with a prudential supervisor.

Interestingly, the Release devotes substantial discussion to the requirement of financial inclusion as it applies to a special purpose bank lender without FDIC insurance. In particular, it states that the business plan for such a bank should discuss the following:

  • an identification of, and method for defining, the relevant market, customer base, or community;
  • a description of the nature of the products or services the company intends to offer (consistent with its business plan), the marketing and outreach plans, and the intended delivery mechanisms for these products or services;
  • an explanation of how such products and services, marketing plans, and delivery mechanisms would promote financial inclusion (e.g., provide access to underserved consumers or small businesses); and
  • full information regarding how the proposed bank’s policies, procedures, and practices are designed to ensure products and services are offered on a fair and non-discriminatory basis. For example, the OCC may ask an applicant that plans to extend credit to provide the terms on which it plans to lend, including a description of the protections it plans to provide to individuals and small business borrowers.

The demands imposed on planning for recovery and an exit strategy are described in similar detail and appear to represent the kind of planning that only a few non-banks are likely to have engaged in.

Despite the potential difficulty of adapting its standard practices regarding the kinds of issues described above to the needs of a fintech bank, the OCC makes clear in the Release its willingness to search for workable solutions. However, it also points out that it is authorized to develop and impose new standards even if the existing regulatory framework does not appear to require them.

Request for Comments

The Release requests both general comments and specific responses regarding the need for, or advisability of, the kinds of requirements described above. For example, comments are sought regarding any special considerations that might apply to capital, liquidity and financial inclusion. Other issues on which comment is requested include:

  • public policy benefits and risks of allowing fintech companies to use a bank charter, including any risks that might arise from a narrow business focus;
  • the potentially different needs of consumers and small businesses;
  • possible effects of imposing a bank supervisory model on fintech business operating practices;
  • any possible unfair advantages a fintech bank might have over full-service banks, as compared to the challenges posed by non-bank fintech lenders;
  • the need, if any, to apply special considerations to services related to digital currencies;
  • any general safety and soundness considerations not mentioned in the Release; and
  • ways in which the OCC can structure the application process to make it helpful and efficient.

Comments should be submitted in writing by January 15, 2017.