OCC pulls back curtain on fintech charter requirements
WASHINGTON — In a long-awaited guidance document, the Office of the Comptroller of the Currency on Wednesday released more information on how it plans to evaluate and supervise fintech companies seeking a bank charter.
Without giving a complete set of specifics, the 22-page licensing manual supplement offers a road map to applicants on how the agency plans to address issues ranging from capital requirements to financial inclusion plans and supervision.
“This supplement explains how the OCC will apply the licensing standards and requirements in existing regulations and policies to fintech companies applying for special purpose national bank charters,” the OCC said in a statement accompanying the supplement, which will be subject to public comment until April 14.
The announcement comes during a fraught time for the fintech charter, which has faced strong opposition from House Republicans who want to see a delay until a new comptroller is appointed by President Trump. Comptroller Thomas Curry’s term will expire next month, though he is set to stay in position until his successor is confirmed by the Senate.
Along with the supplement, the OCC also published a response to more than 100 comment letters it has received on a blueprint for the charter released in December. In it, the agency responded to numerous criticisms, ranging from concerns about federal preemption to doubts that the OCC has the statutory authority to charter fintechs.
The OCC also committed to three guiding principles in implementing the charter. It promised not to allow “the inappropriate commingling of banking and commerce,” nor to sanction “products with predatory features” or facilitate “light-touch” supervision of companies applying for the new charter. Critics of the charter have argued that it could be used to allow a large retailer like Walmart into the banking system, or give payday lenders access to federal preemption.
The supplement suggests that fintech companies that opt for a charter would be subject to banklike requirements on topics ranging from business structure, compliance and risk management controls.
Supervision, for example, will “follow a risk-based approach commensurate with the size and complexity of the institution,” the OCC said. This could involve “frequent contact” with directors and executives. Like national banks, chartered fintechs will have an assigned “portfolio manager” in charge of leading examinations of the institution.
Fintech companies will also be assigned Camels ratings like traditional banks, based on capital levels, asset quality, liquidity and other factors. They would also be charged assessments to be determined at the time the institution’s application obtains preliminary approval.
But the OCC noted that fintechs could face special additional requirements on a case-by-case basis, including possible mandatory resolution plans.
“In the case of an uninsured bank, the OCC can impose special conditions similar to those in laws that apply by statute to insured banks only," the agency said.
The OCC could, for instance, apply the spirit of certain rules affecting banks but not fintechs, “taking into account any relevant differences between a full-service bank and” the fintech company.
The agency gave some clues about how it would enforce financial inclusion requirements on fintech companies.
A company would have to detail its financial inclusion plan as part of the chartering process, including “proposed goals, approaches, activities, and milestones for serving the relevant market and community,” the OCC said. They would not be subject to the Community Reinvestment Act, a 1970s-era law that requires banks to make loans in their communities, though the economic inclusion requirements are intended to get at the same issue.
“Some applicants may have a business model incorporating financial inclusion as an integral aspect of the products and services they provide, and in those cases, the applicant should identify and discuss with the OCC the aspects of its business plan," the OCC said.
The agency suggested certain ways that a fintech company could expand a financial inclusion plan — including specifying the types of markets its products would reach, investments in certain funds or organizations and participation in subsidized loan programs.
However, the agency also noted that a fintech company would have to obtain approval from the agency if its inclusion plan were to change — as well as subject it to public review.
The OCC also said, in response to comments, that it would not budge on requirements for a financial institution to disclose any major change to its business plan publicly.
“The OCC recognizes that certain deviations may be necessary and desirable to meet changes in market conditions or to introduce technological innovations that improve the customer experience,” said the paper. “However, new banks are particularly vulnerable to significant internal and external risks until they achieve a certain level of stability and profitability.”
Capital requirements would also be determined on a case-by-case basis, the OCC said. Fintech companies under the charter would have to face the same minimum capital requirements as banks, but in some cases the OCC could raise the bar, based on factors including revenue and overall risk.
“The risks posed by an [fintech] with limited on-balance-sheet assets or nontraditional strategies may not be fully captured in its reported assets and off-balance-sheet exposures,” the OCC said. “As a result, additional approaches may be necessary to determine the minimum amount of capital needed to support the bank’s activities.”
Fintech companies would also have to face liquidity requirements and provide detailed recovery and exit plans.
“The OCC is aware that many companies and business models have not yet operated in stressed conditions,” the supplement said. “As a result, the OCC expects any charter applicant to consider and address … projected borrowing capacity under normal and adverse market conditions.”