Financial technology companies will soon have a new business model to consider – one that will allow them to avoid the various licensing and other regulatory requirements in the states where they do business. The Office of Comptroller of the Currency (“OCC”), the federal banking agency responsible for the supervision of national banks, announced on December 2nd that it will start granting limited or special purpose national bank charters to fintech companies. There are, however, strings attached. A fintech company electing such a charter will be subject to many of the same rigorous safety and soundness standards that currently apply to traditional banks.
The OCC’s white paper released in connection with this announcement notes that a special purpose national bank has the same status and attributes under federal law as a full-service national bank. This means that the OCC’s new “fintech charter” will allow a fintech company to comply with just a single set of federal standards rather than a host of different state laws, which is something fintech companies have been seeking for some time. In this regard, a fintech charter would receive the benefits of federal preemption of state laws to the same extent as full-service national banks. Thus, an alternative online lender with such a charter would not be subject to any state consumer finance licensing requirements. Moreover, such a lender would be able to extend online loans to consumers residing in any state based on the usury laws of the state where the lender is located.
Notably, the OCC’s announcement comes at a time when some states are scrutinizing the online marketplace for financial products and services to determine how to adequately regulate these online activities in order to protect their citizens from potential abuse. For example, in Virginia, legislation (H.B.1443) has just been introduced that would subject out-of-state online lenders making loans to Virginia residents to the licensing and interest rate restrictions under the state’s consumer finance statutes. Currently these requirements apply only to lenders located in Virginia. In other states, officials have brought enforcement actions against online lenders for failing to obtain a license under existing consumer finance statutes. See, e.g., Minnesota v.Integrity Advance, 870 N.W.2d 90 (2015). Again, the OCC’s new charter would allow fintech companies to avoid these issues, although certain state laws, such as prohibitions on unfair and deceptive acts and practices, would continue to apply.
To be sure, many fintech companies already take advantage of federal preemption through partnerships with banks. In other cases, fintech companies use a contractual choice-of-law provision to extend online loans to consumers in different states relying on a single state’s usury laws. Both of these approaches, however, involve certain legal uncertainties. The OCC’s new special purpose charter would eliminate these uncertainties for fintech companies operating under the new special purpose charter.
The OCC highlights in its white paper how technological innovation has made financial products and services more accessible and easier to use. It also highlights that consumer preferences and demands continue to evolve, particularly with the entry of 85 million millennials into the financial marketplace. The OCC clearly is seeking to respond to these trends by creating a special purpose national bank charter tailor-made for fintech companies. The OCC recognizes the importance of technological innovations, and is particularly interested in how these innovations expand financial inclusion to reach unbanked and underserved populations. (The OCC has the statutory authority to grant a special purpose national bank charter to an entity that conducts at least one of the three core banking functions: receiving deposits; paying checks; or lending money.)
The OCC did not announce exactly what it will require of a fintech company seeking this new charter. Indeed, the white paper seeks comments from stakeholders by January 15th to inform the development of a formal agency policy for evaluating fintech charter applications. Such a policy undoubtedly will require fintech companies to present a detailed business plan, meet certain capital and liquidity requirements, demonstrate a commitment to financial inclusion of individuals and businesses, and satisfy other safety and soundness requirements. Of course, the devil will be in the details. The OCC recognizes, however, that some of the requirements that apply to full-service national bank charters may not, or should not, apply to fintech charters, particularly because a fintech company will not accept deposits and thus will not be an insured depository institution. The OCC is evaluating the appropriate way to modify existing bank charter requirements for fintech charter applicants. Fintech companies may want to take advantage of the official comment period to provide their input to the OCC on this important issue before the January 15th deadline.
In sum, the OCC’s fintech charter should capture the attention of fintech companies interested in a more seamless regulatory framework for delivering their products and services. Such companies will have to closely examine their business objectives and assess whether they have the resources to support the enhanced regulatory requirements associated with having a bank charter, and whether the benefits of such a charter outweigh the costs.