WASHINGTON — The Office of the Comptroller of the Currency’s proposal to require fintech charter applicants to draft and comply with a financial inclusion plan appears to have more teeth than similar Community Reinvestment Act requirements for banks.
The OCC has made it clear that it is not seeking to institute CRA requirements on nonbanks, in part because the 1970s-era law is widely considered outdated in how it promotes financial inclusion. Instead, the agency has sought to create a new system under which fintechs detail how they plan to promote financial inclusion, and the OCC holds them to those goals.
But the financial inclusion requirements may effectively be tougher than CRA, and easier for the agency to take significant action against.
“If you don't do well on CRA, you get a bad CRA rating,” said Julie Williams, the former chief counsel at the OCC, who now is a senior official with IBM's Promontory Financial Group. But “if the special-purpose national bank doesn't comply with the financial inclusion plan, then the OCC can take enforcement action. That is actually more than what the OCC can do if a bank doesn't do well on the CRA.”
At issue is how the OCC is trying to implement the spirit of CRA to companies that are not covered by it.
“Part of the OCC's charter requires us to assess how well our banks are meeting credit needs and having fair treatment of the customers,” Comptroller of the Currency Thomas Curry said at American Banker’s Retail Banking Conference last month. “That took us down the path of outlining what we would call a financial inclusion plan.”
“It's not CRA, but CRA is really derived from the same statutory requirement,” Curry added. “We're basically trying to fashion something that would work in the fintech arena.”
The blueprint published by the OCC last monthits, its most detailed proposal yet, said that any financial inclusion plans would have to be submitted and approved as a condition for charter approval.
“Most bank charters have CRA compliance as a secondary component, but here it's clearly front and center,” said Brian Korn, a partner at Manatt, Phelps & Phillips. “As opposed to something that you have to comply with once you are already approved.”
In addition, if the chartered fintech company does not apply its financial inclusion plan to the OCC’s satisfaction, the agency would be able to strike the firm with enforcement actions.
To be sure, receiving a bad CRA rating can be harmful, including to a bank's reputation. An enforcement action, however, is more serious.
During his talk at the conference, Curry acknowledged that the CRA-like proposal comes with consequences, but he argued that the reinvestment law itself does, too.
“There will be an appropriate opportunity to pose regulatory directive action, so it's not toothless,” Curry said. But “I'd say that the CRA itself isn't toothless, either.” An unsatisfactory CRA record could “have the potential for impeding business objectives, [and] expansionary activity in particular."
The draft licensing manual leaves the door open to unconventional financial inclusion plans, acknowledging that certain fintech companies are built around the idea of extending credit, for instance, to underserved groups.
“In those cases, the applicant should identify and discuss with the OCC the aspects of its business plan that address its financial inclusion goals,” the agency said.
But there, too, observers said fintechs might face higher standards in making their case to the agency.
Banks are also “required to set forth how you plan to comply with the CRA,” Korn said. “But it's generally not as much a creative writing exercise as what the OCC has put forth.”
It is also unclear which type of financial inclusion plan or business model will be most likely to win the OCC over.
“Will the OCC be satisfied with, ‘We will fund financial literacy programs,’ or will the OCC say, ‘No, you need to make some loans here’?” said Brian Knight, a senior research fellow at the Mercatus Center.
Ultimately, for supporters and critics of the charter alike, the OCC’s blueprint remains vague — and time is running out for the agency to clarify. Curry, who has spearheaded the agency’s efforts on fintech, has a term that ends in early April.
“The regulator using its discretion to impose this might present some challenges in consistency, continuity and enforcement,” Knight said.