Goodwin Insights May 10, 2017

Goodwin’s Fintech Bank Charter Symposium: Tips and Takeaways

On May 3, Goodwin’s Financial Institutions and Technology Groups hosted a symposium at its San Francisco office on the Office of the Comptroller of the Currency’s (OCC) proposed Fintech bank charter. This new charter would be utilized to allow national banks which have lending and payments-related powers but not the authority to take deposits. Goodwin partners Bill Stern and Mike Whalen served as panelists.

Working with Regulators

Flynn shared his experience with the OCC as a sophisticated safety and soundness-focused bank regulator, and he discussed the trade-off between having one regulator that may establish a permanent on-site presence at a bank versus being subject to 50 state regulators that may be on site at a bank only periodically. A Goodwin panelist then briefed the audience on the recent suit filed by the Conference of State Bank Supervisors (CSBS) against the OCC alleging the federal banking agency does not have the authority under the National Bank Act to charter banks that do not receive deposits unless Congress explicitly authorizes otherwise.

The OCC appears to rely on a 2003 rule to claim the authority to grant a Fintech bank charter to companies offering tech-enabled lending and/or payments products and services. The 2003 rule provides that the OCC may grant bank charters to applicants that either receive deposits, pay checks (which the OCC interprets as encompassing various payments activities) or make loans.[1] The CSBS’ suit is the first court challenge of this rule. It seems likely that the earliest the OCC may finalize the application process for its new charter is later this year or sometime in 2018.  The panelists agreed that the timing of this suit may very well be a plus, since it may force the federal courts to consider the OCC’s authority before the agency begins to consider applications for special purpose national banks engaged in Fintech activities.

Charter Benefits

Whalen highlighted the two main benefits that OCC Fintech bank charter holders would enjoy, which together would likely allow national banks under such a charter to offer products and services nationwide with uniform terms and charges without being subject to an often confusing assortment of state laws.

First, because an OCC Fintech bank would be organized under federal law, state laws that interfere with its federal payments and lending powers would be preempted, meaning they would not apply. For example, state laws on licensing (e.g., money transmitter, lender, broker, credit repair organization, servicer, debt collector), product terms, disclosures and fee restrictions would likely be preempted.

Second, a bank operating under this new charter would have the authority to charge the interest rate, and fees considered components of interest (e.g., late fees, NSF fees, annual fees), that the “most favored lender” may charge in the state where the bank is “located” to borrowers across the country notwithstanding the laws in other states that purport to limit these rates and fees. This means, for example, that banks located in states that allow banks to charge higher interest rates for various products  (e.g., Utah, South Dakota, California, Delaware) could charge the interest rates permitted in their location state to borrowers residing in other states with more restrictive interest rate laws (e.g., New York) without having to comply with these more restrictive laws.[2] [3]

Application Process

Stern walked through the entire application process – from prefiling meetings to approval. He then gave some tips on what organizers should be prepared to present at pre filing meetings, including the draft business plan and qualifications of the organizers and proposed senior management. Stern also gave an overview of the general elements of the business plan:  a description of the business, including planned business lines and products and services; a marketing plan; financial projections; an analysis of risk; plans for risk management systems and controls; and a financial inclusion plan. Stern noted that the OCC must approve the business plan before a charter would be granted. Banks would also be expected to adhere to their business plans and seek OCC approval to deviate from them, at least in the first few years to, for example, add new business lines or grow materially faster or larger than projected.

The panel also focused on the required financial inclusion portion of a business plan. According to the OCC’s draft Licensing Manual Supplement, the financial inclusion plan must show how “the applicant will provide fair access to financial services and promote fair treatment of customers.”[4] In its white paper, the OCC offers that “financial inclusion” may mean that “individuals and businesses have access to useful and affordable financial products and services that meet their needs.”[5] Thus, it appears that the OCC may be looking for applicants to offer affordable products and services to underserved groups and expects financial inclusion plans to describe the proposed goals, approach, activities and milestones to that end. Beyond this, the OCC did not set out what specifically should be included in such a financial inclusion plan. Now that its comment period has closed, the OCC will hopefully provide additional guidance as it works to finalize the Licensing Manual Supplement.

The development of a business and financial inclusion plan will not be a one-shot action. It is very likely that for an institution to obtain approval for a Fintech charter, the business and financial inclusion plan development process will be an iterative process with the OCC.

Stern also provided a high-level explanation of how the OCC’s capital adequacy rules work, including example capital calculations based on assumptions about balance sheet composition, and he spoke about scenarios under which the OCC could increase ratio requirements. On cost, Stern broke out the major cost categories so attendees could begin preparing their own estimates.

Conclusion

Flynn ended the night emphasizing that Fintech national banks would be required to meet the OCC’s high supervisory standards. They likely would have to demonstrate a sustainable culture of compliance that includes a top-down, enterprise-wide commitment to understanding and adhering to applicable laws. All national banks must have a compliance management system that includes an anti-money laundering program and (if operating in the consumer finance space) a consumer compliance program that covers all applicable laws (e.g., UDAAP, TILA, CLA, ECOA, FCRA, EFTA, BSA, GLBA, SCRA, FDCPA, RESPA, HMDA, SAFE, HPA). Fintech chartered national banks should be prepared for this standard of supervision as an ongoing activity by the OCC.

Goodwin will host a New York City session of the Fintech Bank Charter Symposium at its office in The New York Times Building on June 8.


Panelists 
William Stern

Bill Stern
Bank Charters and Partnerships Vertical Lead – Fintech Practice
wstern@goodwinlaw.com
+1 212 813 8890

Michael P Whalen

Mike Whalen
Fintech Practice Co-Lead
mwhalen@goodwinlaw.com
+1 202 346 4315


According to PitchBook and SNL, Goodwin is one of the 5 most active U.S. law firms advising on publicly disclosed Fintech deals, and has represented more than 25% of companies on the 2016 Forbes Fintech 50 list. With over 200 lawyers practicing in Financial Institutions and Technology, we have experts in every area of Fintech, including Alternative Lending, Payments, Digital Currency and Blockchain Technology, Wealth Management/Advising, Insurance, Bank Charters and Partnerships, and Transactions.


[1] 12 C.F.R. § 5.20(e)(1).

[2] For example, a national bank headquartered in State X, which allows lenders in its state to charge 30% interest, may charge its borrowers in State Y 30% interest even though State Y’s criminal usury cap is 25%.

[3] Under certain circumstances, Madden v. Midland Funding, LLC, 786 F. 3d 246 (2d. Cir 2015), may impact the interest nonbank buyers of bank-originated loans may charge borrowers residing in Second Circuit states (New York, Connecticut and Vermont), unless the selling bank retains some continuing interest in the loans.  It is unclear what position other courts might take regarding this issue.

[4] Comptroller’s Licensing Manual Draft Supplement – Evaluating Charter Applications from Financial Technology Companies, pg. 13.

[5] Exploring Special Purpose National Bank Charters for Fintech Companies, pg. 12, fn. 30.