Moody’s is out with a note commenting on the Office of the Comptroller of the Currency’s recent announcement it will offer Special Purpose Bank Charters for Fintech firms. The move by the OCC was in recognition of the growing importance of Fintech and the movement of banking to digital platforms. The OCC is not the first down this path as the UK has been issuing charters for digital charter banks for some time now.
Moody’s believes that Fintech bank charters will be good for marketplace lending platforms. The published note (embedded below) points to the fact that many marketplace lenders use partner banks to fund consumers loans to accommodate the convoluted regulatory environment. For platforms like Lending Club and Prosper this also empowers retail investors to participate in this asset class – unlike most other online lenders. The marketplace lending origination model is designed to exempt these lenders from state usury and licensing law requirements, because banks are exempt from those laws owing to federal preemption. Moody’s states;
“If marketplace lenders were able to obtain bank charters and originated their loans under them, these types of legal risks should be eliminated for their newly originated loans.”
Moody’s also believes there are risks to this approach and it is not clear if marketplace lenders will pursue these Fintech charters.
“…it is unclear whether marketplace lenders will seek the charters given their accompanying regulatory requirements, or whether the OCC would approve them … Operating through partner banks or via state licenses carries costs and risks for lenders, but operating under a bank charter could be more expensive and restrictive. A bank charter could also introduce new risks stemming from bank regulators’ oversight. The OCC stressed that any Fintech company granted a charter would be held to “the same high standards” of safety and soundness, fair access, and fair customer treatment as other national banks.”
It is an interesting thesis and certainly one that will be under review at the two dominant marketplace lending platforms.
See Moody’s Research Note below.
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