WASHINGTON — The Office of the Comptroller of the Currency’s most detailed blueprint yet for its special-purpose national bank charter for fintech companies appears to have eroded support for the idea among its backers and solidified opposition to it for its critics.
In comment letters responding to the OCC’s publication last month of details on the types of requirements it would impose on applicants for the fintech charter, the initiative was excoriated by consumer protection groups, community banks and state regulators, while receiving tepid backing from fintech companies and some financial institutions.
Many who are conceptually supportive of the fintech charter were disappointed by some of the steps the OCC said it would take to ensure that companies face similar regulatory restraints as traditional banks.
“The OCC’s proposal for SPNBs" — special-purpose nonbanks — "is overly burdensome,” said Brian Knight, a senior research fellow at the Mercatus Center. “Despite the different risk profiles presented by fintechs, the OCC’s proposal subjects them to many of the same requirements traditional depositories face, despite the fact that they are unnecessary to protect customers.”
In its latest announcement on the charter, issued in March, the OCC provided further details on how it would apply the spirit of the Community Reinvestment Act to the fintech chartering process, and institute other bank-like requirements such as higher capital levels. But it did not provide specific rate caps or standards that the companies would have to face.
The OCC’s plan did receive some praise. Two progressive lawmakers said they were satisfied with the agency’s move towards implementing CRA-like requirements on the firms by asking them to submit so-called “financial inclusion plans” to apply for the charter.
“We recognize that the proposal pushes [fintech] applicants to adopt measurable and enforceable financial inclusion goals by requiring them to identify milestones for meeting the financial services needs of their communities,” said Reps. Gregory Meeks, D-N.Y., and Cedric Richmond, D- La. “The proposal also allows for robust public participation as SPNB applicants develop their financial inclusion goals.”
The National Community Reinvestment Coalition urged the OCC to evaluate fintech companies’ financial inclusion plans separately from their overall business plans, and to make clear that all types of fintechs would be required to submit one.
“Because fintechs present novel and complex issues related to compliance with consumer protection and fair lending law, the OCC manual and fintech charter application must include a separate section entitled ‘Compliance with Consumer Protection and Fair Lending Laws,’ ” said John Taylor, the reinvestment coalition's president and CEO.
But other consumer advocates said the financial inclusion plan did little to reassure them that the OCC was not creating an opening for predatory actors to reach customers across the country without supervision from states.
“We believe it is essential for the OCC to strengthen its chartering guidelines by adding additional specific fair lending and consumer protection requirements,” said a coalition of six consumer protection groups. “Nothing in the proposal provides confidence that the chartering process will prevent repeats of past lapses in oversight against predatory lending.”
The letter was signed by the Center for Responsible Lending, the Leadership Conference on Civil and Human Rights, The Main Street Alliance, Americans for Financial Reform, NAACP and National Consumer Law Center.
The groups further asked for the OCC to “at a minimum outline specific consumer protection measures that charter applicants must abide by,” such as interest rate caps, default rate limitations set at no more than 5% and underwriting standards.
Even some fintech companies are calling for stronger consumer protection measures in the charter.
The agency should “go further in its expectations of special purpose charter recipients in order to ensure that the special purpose charter remains a ‘high road’ approach that closes gaps in consumer protections … and does not create a ‘back door’ to skirt consumer protection requirements,” said Richard Neiman, the head of regulatory and government affairs at Lending Club.
Lending Club urged the agency to adopt an annual interest rate cap of 36% and even suggested some standards for the fintech companies’ financial inclusion plans — for instance, the range of borrowers served or how profits are reinvested into communities.
“These measures would enable the OCC to ensure that the privileges of a national banking charter are granted only in the public interest and to institutions that are capable of meeting the obligations and responsibilities attending a national bank charter,” Neiman said.
But the financial inclusion plans and banklike requirements also irked advocates of a more laissez faire regulatory environment for fintech firms.
Knight argued, for instance, that fintechs should not be required to obtain approval from the OCC every time they sought to make amendments to their plans — just like banks do. That does not take into account the need for small firms to be nimble in order to survive, he said.
“These requirements exist to assure the OCC that each [chartered fintech] will not fail, but firm survival is not necessary for customer or systemic protection,” Knight said.
Another sticking point, which pitted banks against the fintech industry, was the question of capital and liquidity levels.
“The OCC offers no guidance on how these companies are to set capital levels if they have limited on-balance-sheet assets or off-balance-sheet exposures,” said Dong Hong, a vice president and senior counsel at the Consumer Bankers Association. “The agency also provides no information about how much additional capital, and in what form, an SPNB would have to hold to execute its recovery plan or exist strategy in the event of market or enterprise stress.
But fintech companies called for flexible standards that recognize the wide range of business models eligible for the charter.
“Fintech companies are often narrowly focused on specific services and market segments but often serve customers across the country,” said PJ Hoffman, the director of regulatory affairs at the Electronic Transactions Association. “It is critical for the OCC to approach this process with the understanding that applicants are not traditional banks, and should not, be held to all of the same expectations … specifically capital and liquidity requirements intended for deposit taking institutions.”
Some banking groups were satisfied with the OCC’s comment on financial inclusion and the separation of banking and commerce.
The American Bankers Association "supports the initiative of the OCC to facilitate responsible financial innovation,” Rob Morgan, the trade group’s vice president for emerging technologies, said in his comment letter.
But the ABA also warned that it would revoke its support if the charter were implemented in a manner that could create regulatory disadvantages for banks. “Effective implementation is of utmost importance and is critical to ABA’s support of this new charter,” Morgan said.
Echoing criticisms from several Republican lawmakers that the agency had acted in a nontransparent manner, Morgan added, “the OCC must take steps to ensure that the public has sufficient notice and a meaningful opportunity to comment, prior to approval, on any special purpose charter application that is filed.”
And there were some more antagonistic rumblings from bankers wary of the fintech industry.
“Their main purpose will be to take deposits and/or loans and compete without the true cost of capital with the goal to sell to Google or [“too big to fail”] entities,” said Gregory Shook, the president and CEO of the $377 million-asset Essex Savings Bank in Connecticut.
“During the next ten years they will be giving their product or service away just to obtain market share, which will hinder community banks, credit unions and others,” Shook added.
Some who even appeared to support the charter raised doubts that the OCC’s charter would truly benefit the fintech industry overall, instead of just a few established players.
“Those pursuing a special-purpose national bank charter will be a narrow group within a broader ecosystem of fintech innovators,” said Jennifer Tescher and Jeanne Hogarth, respectively CEO and vice president of the Center for Financial Services Innovation. “The OCC should ensure that its direct efforts and any indirect effects of its efforts do not have chilling effects for new innovators — especially ones too nascent to consider this charter at first.”
And a diverse coalition went so far as to call into question the OCC’s fundamental authority to issue the charter.
The New York State Department of Financial Services, which, among several other state regulators, has publicly opposed the OCC’s fintech chartering initiative for months, called out the agency for what it called “jurisdictional expansionism.”
“The National Bank Act authorizes the formation of associations to conduct the ‘business of banking,’ ” said New York’s superintendent for financial services, Maria T. Vullo. “It does not broadly authorize the OCC to regulate the entire financial system in this country.”
Vullo argued that the charter would preempt state-imposed safety and soundness standards, such as New York’s bonding, liquidity and capital level requirements.
In a similar line of reasoning, large banks are pushing the OCC to clarify its definition of the types of fintech companies eligible to become banks under the charter.
“The OCC should clarify what qualifies as a ‘fintech’ company and what would constitute ‘core banking activities’ for purposes of determining charter eligibility,” said John Court, the managing director and deputy general counsel of The Clearing House.
Small banks also argued the agency needed explicit authority from Congress to issue the charter.
“This would give Congress the opportunity to define the business of banking and consider all the policy implications of issuing a fintech charter,” said Christopher Cole and James Kendrick, respectively senior regulatory counsel and first vice president for accounting and capital policy at the Independent Community Bankers of America.