On December 2, 2016, the Office of the Comptroller of the Currency (OCC) announced a willingness to consider applications for special purpose national bank charters for Fintech companies. National bank status offers a number of advantages for Fintech companies, including the prestige of operating as a national bank, authority to conduct activities on a nationwide basis, preemption of state licensing and usury laws, and a single primary regulator, but also presents challenges, including a costly and time-intensive application process, rigorous supervision by the OCC, and liquidity, capital, and other requirements applicable to national banks.
Together with the announcement, the OCC released a white paper, "Exploring Special Purpose National Bank Charters for Fintech Companies," discussing its authority to grant, and criteria for approving, Fintech charters. Importantly, the announcement is not an OCC notice of proposed rulemaking, but a statement of a new approach to implementing its chartering authority. Fintech companies interested in a special purpose charter may apply immediately. In its white paper, the OCC requested public comment on a number of issues, including how the OCC should apply common bank requirements to Fintech applicants. Comments are due to the OCC by January 15, 2017.
Fintech companies should carefully consider the potential advantages and disadvantages of obtaining a national bank charter and whether they will be able to meet the requirements for approval before committing to the time and expense of an application.
What is a special purpose national bank charter?
The OCC has authority to charter special purpose national banks that offer only a limited number of financial services products, target a limited customer base, incorporate nontraditional elements, or have narrowly targeted business plans. Previously approved examples include trust banks, credit card banks, and cash management banks. A Fintech company seeking a special purpose charter might, for example, focus on online lending or payments and money transmission activities.
What activities are available to an OCC-chartered Fintech company?
A special purpose national charter bank must engage in one or more "core banking" functions. These include (1) fiduciary activities; (2) receiving deposits; (3) "paying checks"; or (4) lending money. The OCC interprets "paying checks" to include its modern equivalents, such as issuing credit and debit cards or any other method of facilitating electronic payments. "Lending money" includes a wide variety of credit products, including unsecured personal loans, mortgages, credit cards, and small business lending. As long as a special purpose national charter bank engages in at least one core banking function, it may also engage in other bank-permissible activities, provided it maintains the narrow business focus of its charter. Other bank-permissible activities include consulting and financial, investment, and economic advisory activities; acting as a finder or broker for financial products and services; leasing activities; and cash management services, among others.
Would a Fintech company with a special purpose charter be required to accept deposits?
No, receiving deposits is only one of four core banking activities. A Fintech company engaged in fiduciary activities, payments and money movement activities (paying checks), or lending money would not be required to take deposits. However, deposits can represent a low-cost and stable funding source. Fintech companies interested in applying for a special purpose charter should consider the business advantages of deposit funding against the increased compliance requirements applicable to banks that accept deposits.
What laws would apply to a nationally chartered Fintech company?
Many of the federal laws that currently apply based on a Fintech company's activities would still apply if it became a special purpose national charter bank, including, for example, the Truth in Lending Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfer Act, the Fair Credit Reporting Act, and the prohibitions on unfair or deceptive acts or practices under Section 5 of the Federal Trade Commission Act and similar prohibitions under Dodd-Frank. In addition, a Fintech company with a national charter would be subject to federal banking laws, such as the National Bank Act, as well as the Bank Secrecy Act (BSA), other anti-money laundering (AML) laws, and economic sanctions laws and regulations.
With few exceptions, all national banks are required to be members of the Federal Reserve system and therefore must comply with statutes and regulations administered by the Federal Reserve. These requirements include restrictions on transactions with affiliated entities and insiders, among others. In addition, if a chartered Fintech company accepts deposits, it would be required to apply to the FDIC for deposit insurance. Insured banks are subject to additional requirements administered by the FDIC, including obligations under the Community Reinvestment Act.
National banks, including special purpose charter banks, are not subject to many state laws, including usury laws (other than the bank's home state) and requirements to obtain licenses to do business or to engage in lending or money transmission. The preemption of state usury laws, in particular, may be of interest to non-bank lenders that are currently attempting to navigate the patchwork of fifty state usury laws, as well as the implications of decisions like Madden v. Midland in the Second Circuit. State laws that are not preempted by a federal charter include laws on anti-discrimination, fair lending, debt collection, taxation, zoning, criminal laws, and tort laws. Furthermore, the OCC has taken the position that state laws aimed at unfair or deceptive treatment of customers apply to national banks.
What effect would becoming a special purpose national bank have on a Fintech company's investors or parent companies?
A Fintech company that obtains a special purpose national bank charter may be a "bank" for purposes of the Bank Holding Company (BHC) Act if it accepts deposits and is FDIC-insured. A BHC is any company that owns a controlling interest in a bank, or exercises control over a bank, for example, through the selection of a majority of the directors or general partners of a bank. If an owner or investor has control of a bank and is deemed to be a BHC, it will be subject to the BHC Act and other laws applicable to BHCs and will be supervised by the Federal Reserve. As a BHC, the owner or investor will be required to maintain its own minimum capital levels, serve as a source of financial support to its subsidiary bank, and develop its own BSA and AML compliance program.
What agency would have authority over a Fintech company with a special purpose charter?
The OCC would be the Fintech company's regulator and supervisor and would examine the company for compliance with both OCC regulations and any applicable Federal Reserve and FDIC regulations. If the Fintech company elects to accept deposits, the OCC will also review for compliance with federal consumer financial protections laws, unless the company has assets of more than $10 billion, in which case the Consumer Financial Protection Bureau (CFPB) will also have the authority to conduct examinations. If the company does not accept deposits, the OCC will examine for compliance with consumer financial protection laws, unless the company is engaged in residential mortgage loan activities, student lending, or payday lending, or is a "larger participant" in the consumer reporting, auto lending or leasing, debt collection, student loan service, or international money transfers industries, as defined by the CPFB, in which case the CFPB has examination authority for those activities.
In general, state agencies and law enforcement bodies have no visitorial powers over a nationally chartered institution. While a state attorney general may still bring suit against a national bank, state attorneys general and state banking regulators do not have authority to supervise or examine a national bank.
What is the chartering process like?
The chartering process has four stages:
- Prefiling: Potential applicants engage with the OCC in formal and informal meetings to discuss their proposal, the chartering process, and application requirements.
- Filing: Applicants submit their charter application to the OCC.
- Review and Evaluation: The OCC reviews the application, conducts background and field investigations, and determines whether to approve the charter.
- Decision: The OCC grants preliminary approval, subject to certain conditions; the new bank raises capital and prepares for opening; and the OCC conducts a preopening examination.
What are the OCC's expectations for a special purpose charter application from a Fintech company?
The OCC expects a Fintech company chartered as a special purpose national bank to meet the high supervisory standards applicable to national banks, as tailored to its size, complexity, and risks. In its white paper, the OCC discussed several considerations for reviewing a special purpose charter application from a Fintech company, such as a detailed business plan covering a minimum of three years of operations, information on how the applicant will meet required capital and liquidity levels, and a description of the proposed bank's governance structure and compliance management system (CMS).
In addition to the above, the OCC placed unusual emphasis on the inclusion of recovery and exit strategies, as well as a resolution plan, as part of a Fintech company's application. The OCC expects a Fintech applicant to clearly articulate changes in the proposed bank's size, risk profile, and activities, or in external market factors, that could threaten the bank and to identify a wide range of credible options for restoring financial strength and viability. Furthermore, the OCC "may also require" the company to develop a clear exit strategy for unwinding operations in an organized manner. The OCC's focus on recovery and exit strategies here is interesting, given that formal resolution plans are ordinarily only required under the Dodd-Frank Act for banking organizations of $50 billion or more, and the typical form of business plan for a national charter application makes an alternative business strategy section optional, at the discretion of the OCC or other bank regulators.
Fintech companies interested in a charter will also need to develop and implement a comprehensive compliance management system (CMS). This may be an importation consideration for certain Fintech companies, particularly startups, where the business's initial investments may have focused on growing the product rather than limiting compliance risks. There have been various enforcement actions brought by federal agencies, such as the Financial Crimes Enforcement Network and the CFPB, against Fintech companies where the business model outpaced compliance.
What are some key issues to consider when exploring the option of a national charter?
Fintech companies and other stakeholders may wish to provide comments to the OCC. A full list of the OCC's questions is available in the OCC white paper. More to the point, applicants should be prepared to address all of the OCC's questions in the context of any application. In that regard, potential applicants should take note of the following:
- The OCC's first question for comment asks about the public policy benefits and potential risks of approving Fintech companies to operate under a national bank charter. This suggests that the OCC will carefully review applications to understand the policy implications of proposed activities, particularly potential risks to consumers, as well as ways to limit those risks through charter conditions. In the white paper, the OCC explains that if a law does not apply directly to a Fintech company, the OCC may, nonetheless, work with the company to achieve the goals of a particular law through the OCC's authority to impose conditions on its approval of a charter. This point ties into the OCC's repeated suggestion that interested applicants meet with the OCC prior to submitting an application to discuss their business plans.
- In Questions 3 – 5, the OCC requests information on whether and how it should seek a "financial inclusion" commitment from Fintech companies seeking an uninsured special purpose national bank charter. The Community Reinvestment Act (CRA) requires banks to take specific steps to meet the credit needs of their communities, including low- and moderate-income neighborhoods, individuals, and underserved geographic areas, but the CRA applies only to insured depository institutions. Because many Fintech companies applying for the special purpose charter may have no interest in taking deposits, the CRA would not apply to them. Nevertheless, the OCC's questions show an intent to use its chartering authority to impose similar requirements on Fintech applicants that would not accept deposits. Potential applicants should consider how they would meet financial inclusion expectations, whether under the CRA or charter conditions imposed by the OCC.
- In Question 6, the OCC asks whether it should use its chartering authority to address gaps in protections for individual borrowers versus small business borrowers. Under its chartering authority, the OCC has some discretion to selectively impose compliance requirements on applicants, as a condition of approval. Stakeholders in the small business lending industry may wish to address whether such perceived "gaps" exist and whether the OCC's suggested approach is reasonable. Note that the OCC's comments on applying consumer protections to small business lending are consistent with the view it articulated previously in its white paper on the opportunities and challenges of online marketplace lending.
How might the change in administration impact the OCC's initiative?
It is unclear how the new administration will approach the OCC's decision to begin accepting special purpose charter applications from Fintech companies. The incoming administration will have the opportunity to appoint a new Comptroller of the Currency because Comptroller Thomas Curry's term will end on April 1, 2017. While Comptroller Curry's replacement may also support a special purpose charter for Fintech companies, there may be changes to some of the charter expectations described above.