Last December, the Office of the Comptroller of the Currency (OCC) – part of the Department of Treasury- proposed a “National Bank Charter for Fintech Companies”. The exploration stirred up a hornet’s nest of public officials that were not too pleased the OCC would think outside the box about financial innovation. The deadline for comments was January 15, 2017, and have been made publicly available here. Crowdfund Insider has already published several interesting respondents including the concern emanating out of the State of New York and the more thoughtful comments coming from the think tank Mercatus.
The current Comptroller, Thomas Curry, is expected to depart when his term is up this April. With leadership up in the air at the OCC, the fate of a National Fintech Charter is unknown as well.
Some observers have posited that, if crafted correctly, a Fintech charter could be a significant improvement not just for Fintech firms but for both consumers and businesses who could receive better services at a lower cost. Creating a more competitive and efficient environment for financial services could benefit the entire economy. Other pundits are concerned about the potential for additional, costly government oversight. Of course, there is a group that prefers to avoid change. These are largely traditional banks and state regulators that see a National Fintech Charter as undermining their relevance while adding competition.
Below are some anecdotal excerpts from almost 100 comments posted online. Links to each comment are included if you would like to read more.
“In considering issues of consumer protection and safety and soundness through the relatively opaque chartering process, it is important that the OCC establish a fair and level competitive playing field to address the concern that FinTech SPNBs would be able to offer services and products in direct competition with full-service banks, but subject to a more limited and less burdensome regulatory regime both with respect to the regulation of the particular service or product and, potentially, with respect to the accompanying enforcement risks of noncompliant products and services.”
John Court, Christopher Cole & Christopher B. Killian; The Clearing House Association L.L.C., the Independent Community Bankers of America, and the Securities Industry and Financial Markets Association
“We applaud the OCC for its work to support this responsible innovation. The proposed special purpose national bank charters present marketplace lending with an additional path to continue to grow and serve consumers and small businesses nationwide more efficiently, fairly, and affordably. Although the term “marketplace” is sometimes used to refer to fintech lending broadly, for purposes of this comment letter we use it to refer the model of two-sided marketplace platforms, which connect borrowers and investors rather than traditional models of lending from a balance sheet.”
Richard H. Neiman Head of Regulatory & Government Affairs Lending Club
“As OCC considers the issuance of a special purpose national bank charter, it should, no doubt, consider how the recipient addresses, or plans to address, financial inclusion. The financial inclusion topic is likely unfamiliar and new to many of the firms potentially examining the OCC chartering process. In that regard, firms new and old would benefit from additional guidance on OCC’s working definition of “financial inclusion,” how firms will be scored against OCC’s financial inclusion framework and what those firms should proactively focus on as they approach OCC for initial exploratory conversations.”
Frank Altman & Nick Elders, Community Reinvestment Fund, USA
“Our office is concerned that a primary consequence of the proposed charter would be to exempt fintech and other companies from critical state-level consumer protection laws, especially state interest rate caps and fee limits. The federal charter would remove their activities from the traditional regulation by the states. In addition, we are concerned that the scope of the proposed charter is not limited to the developing “fintech” companies that the charter is intended to help, but appears to potentially cover a much broader range of companies, including established industries engaged in high-interest lending practices.”
Thomas J. Miller Attorney General of Iowa, Office of the Attorney General of the State of Iowa
“The patchwork of state financial services laws among the US states requires many fintech companies to engage in extensive regulatory analysis on a state-by-state basis to determine whether a business or product line is subject to licensure in any given jurisdiction. Managing compliance and reporting obligations in dozens of differing regimes can be challenging even for established businesses.”
Juan Suarez, Head Legal Counsel, Coinbase, Inc.
“We view the prospects of a special purpose Fintech national bank charter as an important step for improving the United States’ Fintech ecosystem in line with the efforts of the OCC’s global peers in the UK, Australia, China, and the UAE, to name a few. We believe that, from a public policy perspective, it is far better for financial services regulators to be active participants than onlookers. Protection of consumers, small businesses, and the financial system itself will be more effective if carried out by supervisors who are fully informed and knowledgeable.”
Prof. Cornelius Hurley, Director, Online Lending Policy Institute Inc.
“The OCC’s decision to issue special purpose bank charters to Fintech companies9 is recognition that the current regulatory environment must evolve to provide different options for meeting the financial needs of consumers and small businesses. FIN believes the OCC’s decision to issue special purpose charters to Fintech companies can foster responsible innovation, including through partnership with other chartered institutions, and maintain traditional policies separating banking and commerce. While any one FIN member may not seek a special purpose charter, the coalition nonetheless supports the OCC’s leadership and vision in driving this regulatory discussion.”
Brian Peters, Executive Director, Financial Innovation Now
“A bank charter carries with it significant weight and responsibilities. It brings instant credibility and is why it is so important to ensure that any special purpose special purpose charters are subject and held to the same high regulatory standards as full-service national banks. Consumers expect the same level of protection regardless of provider and OCC should ensure that no regulatory gaps occur. The OCC must also ensure fintech institutions adhere to equivalent charter responsibilities, including anti-money laundering and CRA-like financial inclusion responsibilities, backed by vigorous examination.”
Robert Morgan, Vice President, Emerging Technologies, American Bankers Association
“Online lending platforms offer consumers the ability to access and evaluate more credit opportunities than those that may be available in their neighborhoods. By encouraging the growth of responsible, compliant online lending platforms, such as Avant, regulatory agencies can help encourage beneficial competition in both the online and traditional lending industries generally. This will lead to more lending opportunities for borrowers and ultimately lower rates and better pricing for consumers.”
Albert Goldstein, Chief Executive Officer, Avant, Inc.
“With respect to the risks associated with this Initiative, we believe that they largely reside in the possibility that FinTech firms will opt not to pursue such a charter if it subjects firms to disproportionate regulatory and oversight burdens that are not tailored to the actual risks posed by non-deposit-taking, limited financial services activities. For example, if regulatory expectations around capital and liquidity requirements are not calibrated to the business model and do not take into account, for some models, the lack of runnable liabilities and the absence of Deposit Insurance Fund exposure, then FinTech firms will be largely deterred from pursuing a charter and the public policy benefits listed above will not be achieved. The same would hold true if regulatory requirements under a special purpose national bank charter exceed those imposed on traditional financial service providers engaged in the same line of business or put a chartered FinTech firm at a significant disadvantage to those firms that are unchartered.”
Daniel Gorfine, VP, External Affairs and Associate General Counsel, OnDeck Capital, Inc
“The U.S. cannot remain passive while other countries move forward to implement regulatory regimes accommodative to FinTech. That’s not to say that the U.S. should “hurry” in its efforts to support innovation. Given the complexity of the U.S. regulatory system and the diverse number of actors involved in the financial system, moving towards a 21st century regulatory framework — or frameworks — will take time. As U.S. regulators and policymakers continue to promote responsible innovation, however, they need to remain mindful of developments occurring elsewhere, apply lessons learned and possibly adapt or modify workable initiatives to fit the U.S. system.”
Jackson Mueller, Associate Director & Aron Betru, Associate Director Managing Director; Center for Financial Markets Milken Institute
“Fintech companies of all kinds, including those in the mortgage market, need to understand clearly the OCC’s goals, standards, and expectations in order to provide more substantive feedback and to be able to make fully informed decisions about the charter. As such, MBA urges the OCC to provide much more detailed information about the charter and the chartering process in response to the many frequently asked questions and comments received. Given the open questions, we recommend that the OCC issue a detailed Advance Notice of Proposed Rulemaking before moving to any proposed rule.”
Pete Mills, Senior Vice President Residential Policy and Member Services, Mortgage Bankers Association
“As it stands now full-service commercial banks enjoy many competitive advantages in the lending sector when compared to non bank fintech firms. Commercial banks have access to an implicit government subsidy through federal deposit insurance and government lending windows, which yields these banks a much lower cost of capital and greater ability to scale. Commercial banks also enjoy federal pre-emption of certain licensing and regulatory requirements that enable them to operate uniformly across the country. To compete effectively in the lending arena and provide consumer access to desired fintech solutions, fintech firms should have the option to obtain a FinTech Charter. Healthy competition in lending would fill the gaps that traditional banking leaves behind and makes the banking system more efficient and more competitive, both of which benefit consumers.”
David Klein, CEO & Co-Founder, CommonBond, Inc.
“As someone without a background in finance what struck me when I began learning about this industry was how inefficient it was. With 50 states, many of which have their own licensing, fee and interest rate requirements, there was no way for an online platform to operate in a uniform manner. Despite that many platforms have been able to get some traction albeit in a less than ideal way. I would like to draw your attention to a study done in 2014 by Thomas Philippon of the Stern School of Business at NYU . When I read this paper I was staggered by the fact that the unit cost of financial intermediation has not improved much at all over the last 100 years. With all the advances in technology, I would have thought that financial intermediation would have become many times more efficient during this time.”
Peter Renton, Co-founder and Chairman, Founder and CEO, LendIt Conference LLC Lend Academy LLC
“While many states have made admirable efforts to align their regulations with technological innovation, state laws, by and large, were drafted for a “bricks and mortar” banking environment that did not envision online service delivery. Complying with 50 state laws adds substantial costs and complexity and makes consistency of online product offerings more difficult. State-level requirements for mortgage lenders, unsecured consumer lenders, money transmitters and so on vary widely from state to state, notwithstanding the welcome efforts of the Uniform Law Commission to provide uniformity among state laws. Several states require bricks and mortar presence, and state laws vary on permissible interest rates, origination fees, and payment terms. The costs of continuously evaluating and complying with these different regulatory regimes must be passed on to consumers and specific financial products might not be permissible in every state. Moreover, the process of applying for licenses and the time frame for the states to review such license applications differs from state to state, particularly as not all states use the Nationwide Multistate Licensing System (“NMLS”) for license applications.”
Robert S. Lavet, General Counsel, Social Finance, Inc. (SoFi)
“Bank regulators should be focused on minimizing systemic risk, while providing a diverse and strong banking system that embraces innovation. Iowa banks can provide this bridge between entrepreneurialism and safety and soundness. As such IBA members are concerned that trying to fit fintechs, which are often venture capital startups, into conventional prudential bank regulation could end up with yet another layer of inconsistent oversight as the OCC is set up for more conventional bank regulation. Any lack of consistent regulation of these organizations will present fintechs with a marketplace advantage of federal preemption the “bank” charter gives them while potentially placing consumers at significant risk.”
Robert L. Hartwig, Legal Counsel, Iowa Bankers Association
“Commercial and residential real estate professionals throughout the country have reported to NAR about the challenges in obtaining financing for all types of clients, and we view the developments in fintech as an exciting new option for serving consumers. NAR policy has consistently supported the many innovations in financial services aimed at increasing lending to individuals and businesses. Both REALTORS and their clients are consumers of these products: from an individual buying his or her first home to a small business accessing financing for continued growth, REALTORS are their client’s partner throughout the transaction. Access to affordable financing is critical to the success of the residential and commercial real estate sectors and the economy as a whole.”
William E. Brown, 2017 President, National Association of REALTORS
“The National Bank Act gives ace authority to issue charters to institutions engaged in the business of banking which cannot occur without the taking of deposits. In the white paper ace relies upon its rule, 12 C.F.R. Section 5.20(e)(1 )(i), relating to special purpose charters provided for banks conducting at least one of three core banking functions including receiving deposits, paying checks, or lending money. Congress has authorized ace to charter special purpose institutions engaged in non-depository banking functions, but under a narrow scope, and only upon careful examination. WBA is concerned that the chartering process outlined in acc·s white paper exceeds that chartering authority and lacks precedent in acc·s chartering history. At a minimum, WBA requests that ace engage in formal rulemaking and clarify its statutory authority to charter an entity that engaged in non-depository banking functions.”
Rose Oswald Peels, President/CEO, Wisconsin Bankers Association
“As stated in our November 2016 comment letter to the OCC, state bank regulators oppose the creation of a special purpose national bank charter for financial technology (fintech) and other nondepository companies because:
- The OCC lacks statutory authority to issue such a charter;
- Such a charter will distort the marketplace for financial services, with a federal agency arbitrarily picking winners and losers;
- The issuance of such a charter creates tremendous uncertainty and risks pertaining to access to critical government resources, including the payments system and the federal safety net; and
- The preemptive effect of this charter nullifies the states’ ability to protect consumers.”
Michael Townsley, Senior Analyst & Policy Counsel, Conference of State Bank Supervisors
“We commend the OCC for its willingness to consider what it can do to foster innovative means of providing financial services. The OCC sets a model for other agencies by asking whether the current regulatory structure is unduly impeding competition and inclusion and by looking for ways to remove any impediments it finds. As the OCC’s proposal recognizes, a fintech charter has the potential to benefit consumers while also strengthening the national bank system, the affected companies, and the country’s economic growth and dynamism.”