WASHINGTON — Both banks and fintech firms have a lot of questions about the Office of the Comptroller of the Currency's proposed new charter, including exactly how the agency will ensure nonbanks don't get a leg up on bank competitors.
In an attempt to answer some of these inquiries, American Banker submitted several questions to OCC Chief Counsel Amy Friend. Following are her edited responses.
State regulators and community banks worry that the charter will allow fintech companies to avoid many of the rules that banks have to comply with. How can the OCC guarantee it will impose strict requirements on these nationally chartered fintech companies?
AMY FRIEND: Certain laws apply to all national banks, and the OCC will apply those laws to fintech companies that receive a special-purpose national bank charter.
Other laws apply to banks depending on the activities they conduct and whether or not they are insured. As a baseline expectation, we will require capital, liquidity, sound governance and a robust business plan as a foundation for any company we charter, as set out in our chartering handbook.
As we noted in the paper published on Dec. 2, the OCC is particularly focused on consumer protection and financial inclusion. Where the laws in these areas do not apply, the OCC will determine how to fashion appropriate conditions to hold these banks to our high standards and expectations of fair treatment and fair access — a critical component of our mission.
State regulators say that the OCC might not have the authority to supervise these companies, because just performing one of the functions of a bank does not make it a full bank. Some also say that modern payments companies do not pay checks in the traditional sense of the term. How would you respond to these arguments?
The National Bank Act requires a firm to be engaged in bank-permissible activities — in order to obtain a national bank charter. The type of bank-permissible activity varies depending on the type of institution.
For example, there are special-purpose national banks operating today — national trust banks — that conduct only bank-permissible trust activities. In addition, the OCC's rules … require that special-purpose national banks other than trust banks engage in one of the three core banking activities of taking deposits, paying checks, or lending money.
The OCC has the authority to determine what powers are within the business of banking … the so-called powers clause in the National Bank Act. Over the more than 150 years of its history, the OCC has used that authority to find that new activities, or traditional activities done using new technology, are bank permissible. So it is clear that the three core banking activities — taking deposits, paying checks and lending money — can evolve with technology and business over time. The 20th-century invention of credit cards is the 19th-century form of lending money. Taking a picture of a check with a cellphone to make a deposit today is the 21st-century version of handing a check to a teller.
There are also concerns that the chartering process will be very ad hoc, with few formal requirements for companies that want to apply. How will the OCC ensure the process is transparent? What parts of the charter application will be made public, and will there be a period of public comment?
The OCC published an update to its chartering process in September 2016 in the form of a 128-page booklet. The booklet details the process for any company interested in a national bank charter. It explains in detail what the process is. It is not an ad hoc process. These applications are subject to a 30-day comment period, during which interested parties, including members of the public, may file comment. In addition, the review process is described beginning on page 38 of the booklet and includes field investigations conducted by OCC examiners that is intended to develop background information and determine whether:
- The organizing group is capable of successfully implementing the business plan.
- Executive officers are knowledgeable and can execute the proposed business plan in a safe and sound manner.
- The financial projections are realistic for the proposed market.
- The organizers have made any major changes to the business plan that were not reported previously to the OCC.
The OCC will issue a policy specifically related to chartering special-purpose national banks. The agency has been thoughtful and transparent in its approach to responsible innovation and the decision to make special-purpose charters available to fintech companies, and have invited public comment at each step.
If the requirements for applying for a charter remain somewhat general, are you concerned that succeeding comptrollers might it use in a much more laissez-faire way, allowing fintech companies to obtain a national charter with very few restrictions?
The OCC's charter application process is comprehensive and public. It is spelled out in detail as part of the OCC's licensing manual, and the agency will be publishing a policy regarding evaluation of fintech applications for special-purpose national bank charters.
Could companies whose business models weren't listed in the paper — like mortgage lenders, installment lenders or payday lenders — could be considered eligible for the charter?
The national banking charter does not dictate business models, but to be clear, the OCC took steps in the early 2000s to eliminate abusive practices common to payday lenders at the time. As a result, abusive payday lending was virtually eliminated in the federal banking system. The agency has no intention of allowing these abusive practices to return.
Where major payday lending exists today, it exists through state-licensed lenders. The comptroller has said that he encourages banks to meet the small-dollar, short-term credit needs of customers, but banks must do so with heightened risk management to protect against the abuses and risks the agency identified.
Is there any anticipation that a charter could be granted before the end of the comptroller's term in April?
It is possible. The OCC carefully vets all applications for charters, and encourages applicants to engage in meaningful discussions with the agency before filing. Once a completed application is filed, the OCC seeks to make a decision within 120 days, or as soon as possible thereafter.
As you mentioned in the paper, nationally chartered institutions become automatic members of the Federal Reserve System. Does this mean these companies could have access to the discount window? Have you been in talks with the Fed to discuss its involvement?
The Federal Reserve is in the best position to answer questions about laws and rules it administers. We will continue to collaborate closely with our fellow federal banking agencies, including the Federal Reserve, FDIC and CFPB. While the authority to grant a national bank charter is an authority granted to the OCC alone, we understand that doing so implicates other regulatory responsibilities and we will work closely with our fellow regulators.