In December 2016, the Office of the Comptroller of the Currency (OCC) published a policy paper seeking comment on a proposal to issue special purpose national bank (SPNB) charters to engage in financial technology (fintech) activities (Fintech Paper).1 After consideration of those comments, on March 15, 2017, the OCC published a draft supplement to the Comptroller’s Licensing Manual (Supplement) that sets forth the details of the OCC’s proposal to accept and evaluate applications from fintech companies for SPNB charters.2 As discussed further below, the Supplement and an accompanying summary of responses to comments on the Fintech Paper (Summary)3 outline the OCC’s attempt to balance a number of sometimes competing priorities, including enabling a flexible charter for the evolution of financial services, promoting consistency in supervisory oversight and safety and soundness principles, retaining a level playing field among charter types and supporting consumer protections and financial inclusion. Although the OCC has not historically solicited comment on supplements to its Licensing Manual, it invites comments on the proposed Supplement through close of business on April 14, 2017.
In terms of scope, the OCC indicates that the term “SPNB” in the Summary and the draft Supplement means a national bank that engages in a limited range of banking activities, which must include one of the core banking activities, but does not take deposits and is not insured by the Federal Deposit Insurance Corporation (FDIC). While some commenters have questioned the OCC’s authority to grant such a charter, it remains steadfast in its analysis of its underlying authority. Accordingly, fintech companies seeking SPNB charters will need to demonstrate that, in lieu of taking deposits (otherwise a core banking activity), they are engaged in at least one of the other two core banking activities — paying checks or lending money. In this regard, the OCC may consider a proposed SPNB to be engaged in such a core banking activity if the SPNB is conducting a modern form of such activity. For example, the OCC considers issuing debit cards or facilitating other forms of electronic payments the modern equivalent of paying checks. A variety of other financial activities may also be permissible within the SPNB. The OCC would not preclude an SPNB from engaging in fiduciary activities, but an entity engaged solely in such activities would be subject to the requirements for a limited purpose trust bank rather than an SPNB.On the other hand, notwithstanding that the OCC promulgated the Supplement and accompanying Summary in response to a perceived need for a federal vehicle for a variety of nationwide fintech initiatives, the OCC took pains to address concerns that an SPNB would enable evasion of a number of other supervisory concerns, stating that:
- The OCC will not allow the “inappropriate” commingling of banking and commerce.
- The OCC will not allow products with predatory features, nor will it allow unfair or deceptive acts or practices.
- The OCC will require chartered fintech companies to meet the same standards for safety and soundness, fair access and fair treatment of customers that all federally chartered institutions must meet.
While the second point above is unremarkable, the first raises a number of questions as to what type of commingling of banking and commerce might be considered “inappropriate.” Many of the nation’s leading fintech companies have extensive operations that might otherwise be considered commercial. Applying a standard comparable to the criteria for qualifying as a financial holding company could disqualify many fintech companies from eligibility as an SPNB, but the fact that the OCC does not reference the financial holding company standard may signal that it is willing to consider some level of commercial activity in holding company affiliates.
By contrast, the OCC’s reference to general safety and soundness standards is unambiguous: “There will be no ‘light-touch’ supervision of companies that have an SPNB charter.”
Additional Consumer Protection Concerns
Several commenters raised concerns that granting a national bank charter to fintech companies would allow them to avoid state consumer protection statutes such as those prohibiting unfair or deceptive trade practices. Others felt that the federal charter would remove state visitorial powers, thereby making it more difficult to investigate and prosecute violations of state law. Further, commenters were concerned that preempting state usury caps could invite predatory lending practices.
The OCC did not find these arguments persuasive. The OCC highlights that fintech companies under a national charter would be subject to robust consumer protection regulation and uniform federal oversight. In addressing state preemption concerns, the OCC states that the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 clarified the scope of federal preemption for national banks and that the OCC acts within its bounds in regulating all national banks, which would include SPNBs. Further, the agency points out that under the current preemption framework, state laws, including certain consumer protection provisions, would apply to SPNB-chartered fintech companies to the same extent that they would apply to other national banks.
Chartering Standards and Conditions
The OCC’s governing statutes, regulations and policies prescribe standards for evaluating applications for national bank charters. The same standards that apply to the evaluation of applications for traditional national bank charters will apply to the evaluation of SPNB charters, including consideration of whether the applicant will contribute to a safe and sound banking system, provide fair access to financial services and promote fair treatment of customers.
Business Plan and Financial Inclusion Plan
Similar to applicants for a traditional national bank charter, all applicants for an SPNB charter must submit a business plan to the OCC. The business plan should discuss the risks inherent in the applicant’s chosen business model (e.g., concentration risk, compliance risk, reputation risk, strategic risk, operational risk and cybersecurity risk), the degree of risk the applicant is willing to assume (i.e., its “risk appetite”) and how the applicant plans to manage its identified risks in accordance with its risk appetite. Applicants may find details about each element to include in its business plan in the Interagency Business Plan Guidelines. In addition, recognizing that fintech companies seeking an SPNB charter may have structures and business models that differ from traditional full-service national banks, the Supplement offers further guidance to fintech companies on selected parts of the business plan.
If the SPNB’s business plan includes lending or providing financial services to consumers or small businesses, the OCC expects the SPNB to include a financial inclusion plan (FIP) within its business plan.4 The expectations for the FIP appear to be modeled on requirements applicable to insured depository institutions under the Community Reinvestment Act and should describe the fintech company’s proposed goals, approaches, activities and milestones for serving the financial needs of its relevant market and community, including any underserved populations such as low- and moderate-income individuals. The FIP will be made available to the public for comment during the application process, and if approved, will become an enforceable condition to the issuance of the charter. Further, an SPNB’s commitment to financial inclusion is ongoing. Accordingly, the OCC will require an SPNB to update its FIP from time to time as appropriate. Because only SPNBs that engage in lending or financial services to consumers or small businesses are subject to the FIP requirement, the implication is that the OCC contemplates the possibility of “wholesale” or “institutional” SPNBs that would not need to have a FIP.
Capital and Liquidity Requirements
SPNBs will be subject to the standard national bank leverage and risk-based capital requirements in 12 CFR 3. However, the OCC recognizes that 12 CFR 3 may not be sufficient for measuring capital adequacy for some SPNBs, especially those entities that have limited on-balance-sheet assets. Accordingly, the OCC may consider other financial metrics, such as an SPNB’s revenue and off-balance-sheet composition, and risks associated with the applicant’s business plan, such as credit risk, composition and market risk, in determining the SPNB’s capital requirements. Fintech companies desiring SPNB status should expect that charter approval will include a condition specifying continuing minimum capital requirements.
As with capital requirements, the OCC will consider the SPNB’s business model in assessing desired liquidity of the applicant. The OCC acknowledges that many fintech companies have not weathered a market downturn and expects any fintech company applying for an SPNB charter to address liquidity holistically including, for example, projecting borrowing capacity under normal and stressed conditions and establishing contingency funding plans. The OCC also notes that, to ensure adequate liquidity, the agency may impose customized requirements such as parent company guarantees or requiring the SPNB to maintain a certain amount of high-quality liquid assets.
Other Charter Conditions and Requirements
In response to comments encouraging clear chartering requirements as well as transparency and consistency in the chartering process, the OCC cites existing regulation and publications and the draft Supplement as resources for understanding the chartering process.5 In addition, applicants and prospective applicants may consult with OCC staff about the chartering process and requirements during customary prefiling meetings and through the OCC’s newly established Office of Innovation.6
The OCC also emphasizes that SPNB-chartered entities would be subject to the same standard requirements and conditions it imposes on all de novo national banks, including a prohibition against significant deviation from the chartered entity’s business plan without prior OCC nonobjection. While several commenters objected to this type of limitation on the institution’s ability to innovate, the OCC regards the significant deviation condition as an important tool for protecting new banks from undue risk and remained resolute in its decision to apply the condition to all de novo charters, including SPNB charters.
Further, the OCC retains discretion to impose additional special conditions of charter approval that depend upon the applicant’s unique circumstances such as its proposed business plan or the experience and quality of its management. For example, the draft Supplement indicates that the OCC may use its discretionary authority to compel non-FDIC-insured SPNBs to comply with certain statutes and regulations otherwise applicable only to insured banks, subject to modifications to account for differences in SPNB activities.
The OCC may impose conditions of approval directly in the agency’s preliminary approval letter (which grants the applicant approval to proceed with the organization of the bank), or the OCC may condition its approval on the execution of a separate operating agreement between the OCC and SPNB, which will impose certain operating safeguards on the SPNB. The OCC makes publicly available its conditional charter approvals — which conditional approvals will reference the existence of an operating agreement — if applicable, but neither the Summary nor the Supplement indicates that the OCC will make individual operating agreements publicly available.
The OCC’s proposed Supplement is consistent with its stated commitment to support responsible innovation in the federal banking system. Some may view the OCC’s actions as going too far in providing a vehicle for financial activities that could be achieved through other means; others may view it as not going far enough in accommodating financial innovation through a federally regulated vehicle. In either case, the OCC is signaling a desire to remain relevant and shape policy in an evolving financial services industry.