The OCC announced on Tuesday, July 31, that it would begin accepting applications for special purpose national bank (SPNB) charters from Fintech companies engaged in the business of banking. The agency released a Policy Statement and a Supplement to its Licensing Manual addressing how it would consider applications from Fintech companies seeking to operate through an SPNB charter—or so-called Fintech charter.
Scope and Possible Benefits of Fintech Charter
The Licensing Manual Supplement applies specifically to applications submitted by a Fintech company to charter an SPNB that would engage in either or both of the core banking activities of paying checks or lending money but which would not take deposits and would not be insured by the Federal Deposit Insurance Corporation (FDIC). The Supplement notes that “[t]he OCC views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways” and provides as an example “facilitating payments electronically,” which the OCC characterized as “the modern equivalent of paying checks.” As a result, an SPNB charter may be an appropriate vehicle through which a nonbank lender or payments company may conduct business. The OCC specifically noted that qualifying Fintech companies may also apply to the OCC for a full-service national bank charter and other special purpose banks, such as trust banks, banker’s banks, and credit card banks.
The Licensing Manual Supplement is very similar to the draft Licensing Manual Supplement that the OCC released for comment in March 2017 and which we addressed in a client alert. In particular, the OCC continues to emphasize that an SPNB is a national bank subject to all laws, rules, regulations and federal supervision that apply to all national banks. As a result, an SPNB may avail itself of federal preemption of state laws, such as those requiring licensing, and may export interest to borrowers, in both cases, to the same extent as any national bank. Since an SPNB charter would not take deposits and would not be FDIC insured, acquiring control of such a charter would not subject a controlling shareholder to the requirements of the Bank Holding Company Act.
Financial Inclusion Commitment
The Licensing Manual Supplement requires that all applicants seeking an SPNB charter—not just those who propose to engage in lending—demonstrate a commitment to financial inclusion and address how the applicant will provide or support fair access to its financial services and fair treatment of customers. An Appendix to the Licensing Manual Supplement provides additional guidance on the financial inclusion commitment. In particular, an applicant must include a description of the proposed products, services and activities of the bank; its anticipated markets and communities, including underserved populations and communities as well as low- to moderate-income customers; and the goals, milestones, and measures against which the applicant’s performance under its financial inclusion commitment may be evaluated.
Qualifications of Directors and Management
An applicant must propose qualified directors and management, including persons who have experience in banking or broader financial services and other relevant experience depending upon the products and services to be offered. The Licensing Manual Supplement advises that, “[s]ince fintech companies are technology driven, having sufficient technical knowledge, skills and experience will be as necessary as having sufficient banking and financial experience.”
Business Plan Requirements
The Licensing Manual Supplement provides guidance on the required business plan that must be submitted in connection with an application. In addition to following business plan guidelines generally applicable to charter applications, the business plan must describe the proposed activities to be conducted by the SPNB, define the proposed market, include a risk management framework, describe the system of internal controls, and offer a risk assessment for the proposed bank. With respect to capital and liquidity, the Licensing Manual Supplement explains that ongoing capital levels must be commensurate with the risk and complexity of the proposed business and that SPNBs will be expected to meet all minimum capital requirements under the generally applicable risk-based capital rules and may be subject to additional capital requirements. The guidance states that organizers of an SPNB that will have limited on-balance sheet assets or nontraditional strategies that may not be fully captured in its on-balance sheet assets or off-balance sheet exposures taken into account for capital purposes will be expected to propose a minimum capital level. It also advises that the business plan should address capital adequacy and liquidity and funds management in detail, including under stressed conditions.
The Licensing Manual Supplement also emphasizes that applicants must provide a contingency plan that includes options to sell, wind down or merge with a nonbank affiliate if necessary.
The OCC did not directly address two separate lawsuits which were filed by the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS), both of which challenged the OCC’s authority to charter SPNBs other than trust banks and credit card banks, and both of which were dismissed for lack of standing and lack of ripeness. However, CSBS and NYDFS could choose to renew litigation, and other state regulators could follow suit. Following the OCC’s announcement, NYDFS Superintendent Maria T. Vullo released a statement in which she said that NYDFS “strongly opposes today’s decision by the Office of the Comptroller of the Currency to begin accepting applications for national bank charters from nondepository financial technology (fintech) companies.”
Treasury Fintech Report
In a separate but related development, the U.S. Treasury Department, also on Tuesday afternoon, issued its fourth report to President Trump under Executive Order 13772, which identified certain “Core Principles” to guide regulation of the U.S. financial system and directed the Secretary of the Treasury to issue reports to the President on how existing laws, regulations, policies and other actions support the Core Principles. The report, entitled “A Financial System that Creates Economic Opportunities, Nonbank Financials, Fintech and Innovation,” includes recommendations designed to “streamline” and “modernize” the regulatory environment. Among other matters, the report recommends that federal and state regulators work to establish a system similar to a “regulatory sandbox” to invite innovations from new and existing market participants, endorses the OCC SPNB charter, recommends harmonizing guidance related to bank partnerships with third parties, and urges Congress to adopt legislation codifying the “valid when made” doctrine, which would address the uncertainty created by the Madden v. Midland Funding case.