Is the OCC's fintech charter really 'perfect' for mortgage lenders?
WASHINGTON — As suspense builds over which financial technology firm will be the first to apply for a special-purpose federal charter from the Office of the Comptroller of the Currency, a side discussion has emerged over which financial services sector has the most to gain — or lose — from the new licensing option.
An OCC official turned heads earlier this month when he suggested the charter may be best tailored for lenders — including mortgage companies and marketplace lenders — that are interested in certain aspects of federal chartering but not in becoming a full-fledged traditional bank.
“Some lending activities include what we’ve seen from online lenders today and the marketplace lenders. Also, I think we’re starting to see lot of interest in the charter from existing mortgage lenders, which obviously, I think the charter may be perfect for that,” Stephen Lybarger, deputy comptroller of licensing at the OCC, said during a legal conference in Washington Jan. 12.
Despite state legal challenges of the charter, Comptroller of the Currency Joseph Otting says he still expects a company to formally apply this quarter. The charter is designed to afford benefits such as the avoidance of state licensing. But those benefits are narrower than those of a commercial bank, thus relieving fintechs of certain regulatory hassles. For example, the charter likely will not include Federal Deposit Insurance Corp. backing of deposits.
Lybarger highlighted the lack of deposit insurance as a draw for firms that are not interested in obtaining all the powers — and regulatory burdens — of becoming a traditional bank.
“The unique thing is . . . we don’t expect those banks to take deposits and we don’t expect them to be insured,” he said.
Some industry watchers concur that the charter may correspond best with the profile of a nonbank digital lender, which has access to liquidity other than deposits.
Lenders may benefit most from the ability of a federal charter to export interest rates across state lines. OCC-chartered banks only must apply the interest-rate rules of their home state, avoiding usury caps in other states.
"By applying for the OCC charter, the federal preemption does give fintechs more certainty," said Crystal Sumner, head of legal and compliance at Blend, a digital mortgage technology vendor.
Others agreed that the preemption ability of a digital lender was one of the most attractive aspects to the OCC's charter. Yet that benefit may still be uncertain for marketplace lenders that sell loans across state lines.
“A big part of the value proposition is that it removes the ambiguity as to the legality of the loan, at least as an initial matter,” said Brian Knight, a senior research fellow in the Financial Markets Working Group with the Mercatus Center at George Mason University.
However, Knight added that the greater “challenge” is whether that preemption benefit lasts for the life of the loan and still applies if the debt is sold to another buyer or securitized. A 2015 court ruling in the case Madden v. Midland Funding does not guarantee "valid-when-made" status for loans sold to a buyer in another state.
“For example, if you’re a marketplace lender and you get the OCC’s charter, the question becomes when you want to sell the loan or get that loan in whole or in part off the books, is the buyer going to get the loan as valid-when-made?” Knight said. “If the loan does not remain valid, it harms the buyer and the national bank because no one will buy the loans.”
Lybarger said the first firm to seek the OCC charter would likely need to show that it already has substantial experience under its belt operating in the financial services space.
"One of the key things, I think, that we are looking towards with this particular charter is, coming out the gate with it, is work with existing companies ... and [to have] something that we can already evaluate," he said.
This likely means the company would already have a near-national presence through state chartering. Even then, Sumner said, the OCC charter would still benefit a digital lender with only having to answer to one federal supervisor.
"If you have a national existence now, you're still dealing with 50 different states and regulatory regimes," she said.
Still, many mortgage lenders question the value of the charter if they have already received licenses from most states. They worry that OCC supervision could end up being too demanding to be worth the benefits, even without the regulatory trigger of FDIC-insured deposits.
With this special-purpose charter, “the OCC is going to think they’re regulating a bank and will go into safety and soundness when there are no deposits to protect,” said Jeff Bode, chief executive and president of the nonbank lender Mid America Mortgage Inc. “I looked at it briefly and I just thought, ‘I don’t want to be regulated in that way.’ I’d rather deal with the various states.”
Bode's company, based in Addison, Texas, began offering a digital mortgage called Click n’ Close last year. The company already has a national presence, with licenses in 47 states and the District of Columbia.
But Bode said that if Mid America Mortgage were licensed in fewer than five states, “I’d be willing to take that risk” of an OCC charter.
Others note that the OCC charter could restrict a mortgage lender's future options if, for example, the lender wanted to expand its liquidity resources and accept consumer deposits down the road in order to make more loans. In that case, the fintech charter would not be sufficient; the company would have to reapply to become a full-blown bank.
For that reason, some observers said, the OCC charter may end up being more suitable for firms that do not provide credit, such as a payments company that is merely processing transactions. However, there is lingering uncertainty for payments companies, too, since the Federal Reserve has yet to make a much-anticipated ruling on whether OCC-chartered fintech firms will be allowed into the Fed's payment system.
The OCC's charter could better suit a “a payments company because it wouldn’t have that need, per se” to hold deposits, said Laurence Platt, a partner at Mayer Brown’s Washington office. “But if you’re already a licensed lender and things are going OK, there’s not a lot of pressure to make the move."
But the lower cost of funding through deposits is partly why some fintech firms are now turning their attention to the FDIC, which is considering an application from Square to form an industrial loan company. The FDIC has not approved an ILC application in more than a decade, but many fintechs now see the FDIC as another pathway to becoming a bank under new leadership at the agency.
FDIC Chairman Jelena McWilliams has repeatedly promised to give ILC applications a fair review, like any other deposit insurance application.
“The OCC really started this conversation with work on the special-purpose charter, but today I would say that both the OCC and FDIC are working thoughtfully to build better ‘on-ramps’ into the regulated federal banking system,” said Nat Hoopes, executive director at the Marketplace Lending Association. “There are always going to be both costs and benefits to becoming a bank, and I’d say that companies are thoughtfully and appropriately exploring all options.”