Response to Public Comments
Both in the summary of comments and in remarks delivered by Comptroller Thomas J. Curry at the LendIt USA 2017 conference earlier this month in New York, the OCC responded to more than 100 comments it received from the public concerning the use of SPNB charters by Fintech companies. In his remarks, Comptroller Curry specifically responded to commenters who questioned whether the OCC has legal authority to grant such charters by noting that “the National Bank Act does give the OCC the legal authority to grant national bank charters to companies engaged in the business of banking,” that this “authority includes granting charters to companies that limit their business models to certain aspects of banking,” and that this authority “is not circumscribed just because a company delivers banking services in new ways with innovative technology.” Comptroller Curry also addressed comments to the effect that the OCC does not have the requisite experience to supervise Fintech companies by noting that “[t]he OCC already supervises banks and service providers . . . who . . . push the limits of technology to serve customers better.”
The OCC responded to concerns raised by commenters that allowing Fintech companies to operate through a national bank charter would expose consumers to potential harm by permitting such companies to avoid state consumer protection laws by emphasizing that the OCC does not intend to permit SPNBs to offer products with predatory features or to engage in unfair or deceptive acts or practices. The agency also stated that its authority to enforce the Federal Trade Commission Act and other federal consumer protection laws enables it to address the same type of conduct that may be covered under state consumer protection laws. In addition, the OCC noted that certain state laws, such as those that address anti-discrimination, fair lending, and debt collection, are not preempted by federal law and would apply to SPNBs in the same way that they apply to all national banks.
The OCC also specifically addressed concerns raised by commenters that SPNB charters would be subject to less regulation by asserting that “[t]here will be no ‘light touch’ supervision.” The agency also noted that all “[n]ational bank charter applicants are held to the same chartering standards and procedures whether seeking to become a full service national bank, a national trust bank, or an SPNB.”
Commitment to Financial Inclusion Broadened
The December 2016 paper suggested that the OCC would require applicants for an SPNB charter proposing to engage in lending to make a commitment to financial inclusion, but the paper did not provide much detail on what that commitment would entail. The draft supplement significantly expands this requirement to cover SPNBs that will “provide financial services to consumers and small businesses” and not just those engaged in lending. The draft supplement is not prescriptive in terms of what type or form of commitment will be required. Rather, it indicates that the required commitment may vary depending upon business model and products. The draft supplement states that an applicant must be prepared to describe in a financial inclusion plan how proposed products and services will promote financial inclusion, identify its relevant market and community, explain how it identifies and defines the financial services needs of the community, establish milestones to measure progress, and describe the terms and conditions under which it will provide lending or financial products and services to consumers and small businesses. An applicant’s plan for promoting financial inclusion would be made publicly available and subject to public comment.
An SPNB must engage in at least one core banking activity and may also engage in other activities permissible for a national bank. However, as described below, the draft supplement states that it does not apply to banks engaged in deposit taking activities. Since the core banking activities consist of taking deposits, making loans and paying checks, the OCC expects that applicants for an SPNB charter will engage in lending or payment-related activities that may be considered the “modern equivalent” of paying checks. All activities conducted by an SPNB must be permissible for a national bank, but the draft supplement states that the OCC may consider whether activities that have not previously been determined to be part of or incidental to the business of banking are permissible. If an applicant proposes to engage in novel activities that the OCC has not previously reviewed, it should be prepared to discuss these activities with OCC staff in pre-filing discussions and to provide a legal analysis supporting their permissibility.
The draft supplement outlines the application process an applicant would need to follow to obtain an SPNB charter:
Pre-filing Meetings: The OCC expects that an organizing group would need to have an exploratory meeting and one or more formal pre-filing meetings with OCC staff. Prior to having a pre-filing meeting, the organizers of an SPNB should provide OCC staff with an overview of the proposed business plan.
Application: Following the pre-filing meetings, the organizers would submit a charter application including a business plan and, if applicable, a financial inclusion plan.
Business Plan: The draft supplement explains that applicants should follow the business plan format used for bank charter applications generally and, in particular, should provide a risk assessment that addresses the particular risks the organizers anticipate in connection with the proposed business model; additional information about records, systems and controls; a discussion of third party vendor management; an analysis of capital adequacy; an explanation of how the SPNB would address adverse market conditions, liquidity and funds management; and a plan for monitoring adherence to the business plan. The OCC indicated that in some cases it may require an applicant to present an alternative business strategy and address recovery planning.
Decision Criteria: When considering an application for an SPNB charter, the OCC indicated in the draft supplement that it would consider whether the organizers and management have appropriate skills and experience, whether the SPNB will have adequate capital, whether the business plan shows that the SPNB will have “a clear path and timeline to profitability,” and whether the organization, if applicable, has proposed an adequate financial inclusion plan. The OCC has stated that it may impose minimum capital requirements and other special conditions in connection with approving a particular proposal. With respect to qualifications of management, the OCC has indicated that it expects at least some proposed members of the board of directors and management to have regulated financial services experience but that other types of experience may be relevant depending upon the products or services to be offered. The OCC also specifically noted in the draft supplement that it does not intend to permit organizations to use the SPNB chartering process as a mechanism to avoid the consequences of an investigation or enforcement action by another regulator. The existence of an investigation or enforcement action may constitute grounds for denial of an SPNB charter application and, at a minimum, the OCC would expect an organizing group to ensure that it fulfills any obligation to remediate or pay penalties for any violations cited by another regulator.
“Full Service” Charters Subject to Existing Rules
The December 2016 paper noted that a Fintech company that proposes to accept deposits would be required to apply for and obtain deposit insurance from the Federal Deposit Insurance Corporation (FDIC) but did not otherwise address whether proposals by Fintech companies to organize a deposit-taking institution would be subject to special procedures applicable to Fintech charters. In contrast, the draft supplement states that, for purposes of the draft supplement, an SPNB is a national bank that engages in limited banking activities, including at least one core banking function, but does not take FDIC-insured deposits. The draft supplement also states that it does not apply to other types of special purpose charters described in existing OCC licensing policies, such as special purpose credit card banks and trust banks. However, the draft supplement further explains that it “is not intended to discourage” other ways of conducting business through a national bank charter, including a “full service” national bank that accepts deposits and provides other banking services, which presumably means that the OCC would review proposals by a Fintech company to charter a full service national bank under its existing licensing guidance regarding national bank charter applications.
The draft supplement also describes the supervisory framework for SPNBs, which will incorporate elements already in place for all national banks more generally. The draft supplement contemplates that SPNBs will be “housed in a common portfolio, assigned individual portfolio managers, and overseen by an [Assistant Deputy Comptroller], who will be based in Washington, D.C., and report to the Deputy Comptroller for Thrift and Special Supervision.” The OCC expects that the supervisory strategy for a particular institution will be tailored to its business and that newly chartered institutions will be subject to more frequent examination during their early years of operation. The guidance on supervisory expectations indicates that the OCC expects SPNBs to implement appropriate risk management and governance frameworks similar to those that apply to national banks generally.