Financial Industry Alert | March.07.2017
In his remarks at the LendIt Conference in New York, Comptroller of the Currency Tom Curry discussed the special purpose national bank charters to be granted by the OCC to fintech companies and addressed the various questions, criticism and challenges that have been made since the OCC's fintech charter announcement (click here to read Orrick's previous client alert regarding this announcement).
In response to comments challenging the OCC authority and the wisdom of issuing such charters, Curry said, in no uncertain terms, that the OCC will be issuing special fintech charters. Curry said that the OCC has authority under the National Bank Act to grant special purpose national bank charters to fintech companies "engaged in the business of banking," including to firms that do not take deposits. Curry emphasized that limited purpose charters have been issued for decades. He also said that the OCC has the knowledge of the relevant models, the experience and the appropriate resources that will allow it to successfully oversee the fintech chartered entities.
The question whether firms with fintech charters will be subject to regulation under the Bank Holding Company Act is still under discussion by the OCC and the Federal Reserve.
Fintech Charter Requirements
Curry said that fintech chartered firms will not be required to obtain special purpose national bank charters and that extremely high standards would be imposed on firms that are granted charters. Such a charter is not for everyone, and Curry expects that there will be fintechs that prefer to operate under a state licensing model.
There is a recognition at the OCC that fintech chartered firms are different from brick-and-mortar banks, and those differences will be taken into account in setting standards. Fintech chartered firms will be subject to regular on-site supervision by experienced examiners focused on safety and soundness and compliance with law, and with appropriately calculated capital and liquidity protections (which have not yet been specified, but which Curry suggested will be tailored to the model of a low-asset fintech platform).
A supplement to the OCC's licensing manual will be published and will describe the capital, liquidity and other standards and the business plan to be required of firms with fintech charters. Financial inclusion is a responsibility of all federally chartered institutions and will be a responsibility of fintech chartered firms as well. Similarly, the Bank Secrecy Act requirements related to money laundering will also apply to such firms.
Curry made clear that a sound business plan, with rigorous compliance measures and controls, will be key to obtaining a fintech charter. The plan must describe, among other things, the risks of the business, including diversification of risk and funding sources, particularly if volatile, and how to provide for a "soft landing" for customers in the event of a failure. The plan will need to show that the fintech will not be engaging in predatory lending and other abusive practices. Fair access and fair treatment to customers will be required. Fintech chartered firms will also be required to support the needs of the communities they serve through financial inclusion.
The OCC's new Office of Innovation will explain to fintech chartered firms what is required to be in place. Curry stated that the evaluation of the plans will be an individualized process. The OCC has also been advising prospective charter applicants on applicable Bank Secrecy Act and AML requirements.
State Consumer Protection Laws/ Usury CeilingsLike any OCC chartered institution, state law consumer protection laws will continue to apply to fintech chartered firms. The area where the sharpest difference may remain with several states is on interest rate preemption. Curry noted that since the time of President Lincoln, federal law has provided for national banks to be able to charge the interest rate of the state in which the bank is organized without regard to the interest rate limits that may be imposed by the states where the borrowers reside. The ability of fintech chartered firms to do the same is "consistent with history and law." However, Curry noted that the question of whether interest rates can legally be exported will ultimately be resolved by the courts (or possibly legislation). The OCC's view is that it is important to recognize that if a loan was valid when the loan was made, then the loan cannot thereafter become invalid and that banks must be able to make loans and to sell those loans to third parties without changing the terms of the loans. In response to a question about whether the OCC would issue a formal interpretive opinion on the Madden vs. Midland Funding case, Curry noted that though the OCC stated to the Supreme Court that Madden was wrongly decided by the Second Circuit, the OCC cannot overrule the courts.