In remarks last week at Georgetown University’s Institute of International Economic Law’s Fintech Week event, Acting OCC Comptroller Keith Noreika provided the “latest on our thinking regarding a charter for fintech companies that offer banking products and services.”

The Acting Comptroller began his remarks by expressing his “optimism about banks, fintech companies, and the business of banking as a whole.”  He also confirmed the OCC’s efforts to explore and support innovation, including by developing “a framework for OCC participation in bank-run pilots that allow banks to develop and test products in a controlled environment.”  He indicated that “[t]he idea behind our effort is to create principles that support the industry’s need for a place to experiment while furthering the OCC’s understanding of innovative products, services, and technologies. Information gathered in the pilots can inform OCC policies and help make sure that we are ready to supervise the new activity when rolled out on a larger scale.”

With regard to the OCC’s proposal to allow fintech companies to apply for a special purpose national bank (SPNB) charter, the Acting Comptroller first observed that because there was so much interest in the proposal, he felt it was important to provide an update on where we are in that process and to correct some misperceptions that I see out there.”

He then referenced his remarks in July 2017 in which he confirmed his view “that companies that offer banking products and services should be allowed to apply for national bank charters so that they can pursue their businesses on a national scale if they choose, and if they meet the criteria and standards for doing so.  Providing a path for these companies to become national banks is pro-growth, can reduce regulatory burden for those companies, and can bring enhanced services to millions of people served by the federal banking system.”

He also observed that national bank charters “will never be compulsory and should be just one choice for companies interested in banking,” existing as an option alongside other choices such as “becoming a state bank or state industrial loan company, or operating as a state-licensed financial service provider.”  He added that “[a] fintech company also has the option to pursue partnerships or business combinations with existing banks, or it could even consider buying a bank, if that makes sense.”

The Acting Comptroller commented that while such options exist, “[i]f, and it is still an if, a fintech company has ambitions to engage in business on a national scale and meets the criteria for doing so, it should be free to seek a national bank charter. That includes pursuing a charter under the agency’s authority to charter special purpose national banks or the agency’s long-existing authority to charter full-service national banks and federal saving associations, as well as other long-established limited-purpose banks, such as trust banks, bankers’ banks, and other so-called CEBA credit card banks.”  He observed that many fintech and online lending business models are a good fit for such categories of national bank charters, and noted that there was some interest in fintechs becoming full-service banks, trust banks, or credit card banks.

The Acting Comptroller described the OCC’s proposal to use its authority to charter nondepository fintech companies as “a work in progress,” and noted the challenges to such authority by the Conference of State Bank Supervisors and the New York Department of Financial Services and the OCC’s defense of its authority even though it has not yet decided whether it will exercise that specific authority.  He commented that before the OCC reaches a decision, it needs “to be certain that the companies expressing interest in becoming a national bank fully understand just what it means to be a bank” and that “[t]alking about and applying for are a long way from approval of an application, and even further away from resulting in the kind of harm and abuse suggested.”

He labeled the argument being made by opponents of the SPNB charter that it may be a “slippery slope toward the inappropriate mixing of banking and commerce” a concern “that I think has been exaggerated with the intent of scuttling our idea for a fintech charter.”  He commented that the suggestion “that such mixing would result in destabilizing the market and increase consumer abuses” is an idea that “has been blown out of proportion.”

He then described the process that the OCC might use in considering SPNB charter applications. The OCC would consider every application on its own merits.  Issues it might consider are whether: (1) the business plan is sound, (2) the proposed management team passes muster, (3) the proposed company has adequate capital and liquidity, (4) the proposed company has adequate processes for ensuring that it operates in a safe and sound manner, provides fair access, and treats customers fairly, and (5) the proposed company has a good chance to succeed.

The Acting Comptroller noted that there already are “dozens of examples where commercial companies are allowed to own banks at the state and federal levels without such abuse and harm—national credit card banks, state merchant processing banks, state-chartered ILCs” and commented that commercial companies are allowed to own such banks “for good reason—they support legitimate business goals and deliver valued products and services to their customers.”  He also stated that if a chartered bank does not meet the Bank Holding Company Act’s definition of what it means to be a bank for the purposes of the Act, “its parent company would not become a bank holding company solely by virtue of owning the bank, and therefore, nonbank holding companies, commercial entities, or other banks could own such banks under the law.”

He also indicated that he wanted to make it “crystal clear” that the chartered entity regulated by the OCC “would be a bank, engaged in at least one of the core activities of banking—taking deposits, paying checks, or making loans” and that those “who suggest that the OCC is considering granting charters to nonfinancial companies are wrong, and the more sophisticated ones know it.”  He cautioned that fear should not prevent “a constructive discussion of where commerce and banking coexist successfully today and where else it may make sense in the future.”

Among the more than 20 bills that the House Financial Services Committee is scheduled to mark-up this Wednesday, October 11, is a bill to provide a “Madden fix” as well as several others relevant to consumer financial services providers.

These bills are the following:

  • H.R. 3299, “Protecting Consumers’ Access to Credit Act of 2017.  In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  The bill would add the following language to Section 85 of the National Bank Act: “A loan that is valid when made as to its maximum rate of interest in accordance with this section shall remain valid with respect to such rate regardless of whether the loan is subsequently sold, assigned, or otherwise transferred to a third party, and may be enforced by such third party notwithstanding any State law to the contrary.”
    This language is identical to language in a bill introduced in July 2017 by Democratic Senator Mark Warner as well as language in the Financial CHOICE Act and the Appropriations Bill that is also intended to override Madden.  Like those bills, H.R. 3299 would add the same language (with the word “section” changed to “subsection” when appropriate) to the provisions in the Home Owners’ Loan Act, the Federal Credit Union Act, and the Federal Deposit Insurance Act that provide rate exportation authority to, respectively, federal savings associations, federal credit unions, and state-chartered banks.  In the view of Isaac Boltansky of Compass Point, the bill is likely to be enacted in this Congress.
  • H.R. 2706, “Financial Institution Consumer Protection Act of 2017.”  This bill is intended to prevent a recurrence of “Operation Chokepoint,” the federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed. Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  The bill includes provisions that (1) prohibit a federal banking agency from (i) requesting or ordering a depository institution to terminate a specific customer account or group of customer accounts, or (ii) attempting to otherwise restrict or discourage a depository institution from entering into or maintaining a banking relationship with a specific customer or group of customers. unless the agency has a material reason for doing so and such reason is not based solely on reputation risk, and (2) require a federal banking agency that requests or orders termination of specific customer account or group of customer accounts to provide written notice to the institution and customer(s) that includes the agency’s justification for the termination.  (In August 2017, the DOJ sent a letter to the chairman of the House Judiciary Committee in which it confirmed the termination of Operation Chokepoint.  Acting Comptroller Noreika in remarks last month, in which he also voiced support for “Madden fix” legislation, indicated that the OCC had denounced Operation Choke Point.)
  • H.R. 3072, “Bureau of Consumer Financial Protection Examination and Reporting Threshold Act of 2017.”  The bill would raise the asset threshold for banks subject to CFPB supervision from total assets of more than $10 billion to total assets of more than $50 billion.
  • H.R. 1116, “Taking Account of Institutions with Low Operation Risk Act of 2017.”  The bill includes a requirement that for any “regulatory action,” the CFPB, and federal banking agencies must consider the risk profile and business models of each type of institution or class of institutions that would be subject to the regulatory action and tailor the action in a manner that limits the regulatory compliance and other burdens based on the risk profile and business model of the institution or class of institutions involved.  The bill also includes a look-back provision that would require the agencies to apply the bill’s requirements to all regulations adopted within the last seven years and revise any regulations accordingly within 3 years.  A “regulatory action” would be defined as “any proposed, interim, or final rule or regulation, guidance, or published interpretation.”
  • H.R. 2954, “Home Mortgage Disclosure Adjustment Act.”  The bill would amend the Home Mortgage Disclosure Act to create exemptions from HMDA’s data collection and disclosure requirements for depository institutions (1) with respect to closed-end mortgage loans, if the institution originated fewer than 1,000 such loans in each of the two preceding years, and (2) with respect to open-end lines of credit, if the institution originated fewer than 2,000 such lines of credit in each of the two preceding years.  (An amendment in the nature of a substitute would lower these thresholds to fewer than 500 closed-end mortgage loans and fewer than 500 open-end lines of credit.)
  • H.R. 1699, “Preserving Access to Manufactured Housing Act of 2017.”  The bill would amend the Truth in Lending Act and the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) to generally exempt a retailer of manufactured housing from TILA’s “mortgage originator” definition and the SAFE Act’s “loan originator” definition.  It would also increase TILA’s “high-cost mortgage” triggers for manufactured housing financing.
  • H.R. 2396, “Privacy Notification Technical Clarification Act.”  This bill would amend the Gramm-Leach-Bliley Act’s requirements for providing an annual privacy notice.  (An amendment in the nature of a substitute is expected to be offered.)

In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.  Yesterday, at the Online Lending Policy Summit in Washington, D.C., Acting OCC Comptroller Keith Noreika advocated a Madden “fix” as an example of an action Congress could take “to reduce burden and promote economic growth.”  Mr. Noreika stated that the OCC supports proposed legislation that would codify the “valid when made rule” and provide that a loan that is made at a valid interest rate remains valid at that rate after it is transferred.

During the Q&A following Mr. Noreika’s remarks, I asked whether the OCC would consider issuing an interpretive opinion to address Madden should Congress fail to act.  Unlike former Comptroller Curry, who we criticized for his reluctance to weigh in on the issue, Mr. Noreika responded that the OCC would “not be hesitant” to formally address the “valid when made” rule.

Mr. Noreika also was asked whether, as we have previously suggested, the OCC would address the risk posed by the theory that a bank making loans is not the “true lender” if a nonbank marketing and servicing agent acquires the “predominant economic interest” in the loans.  Unfortunately, Mr. Noreika stated that “true lender” guidance might be unnecessary at this time due to prior guidance issued during the tenures of former Comptrollers Hawke and Duggan.  Mr. Noreika acknowledged that the OCC’s views were not being followed uniformly by the courts, and we do not think the OCC has been sufficiently clear on the issue.  Accordingly, we remain hopeful that the OCC will involve itself here, as well, and will make it clear that Section 85 fully applies to loans made by national banks, even if a nonbank agent of the bank has the predominant economic interest in the loans.

With regard to the OCC’s special purpose national bank (SPNB) charter proposal, Acting Comptroller Noreika stated (as he previously did in July 2017) that the OCC is continuing to consider the proposal and intends to defend its authority to grant an SNPB charter to a nondepository company in the lawsuits filed by the NY Department of Financial Services and the Conference of State Bank Supervisors.  Remarking that “we will keep you posted,” however, he remained noncommittal about what the OCC’s ultimate position would be on implementing the proposal and again suggested that fintech companies consider seeking a national bank charter by using more established OCC authority such as trust banks and bankers’ banks.  For a fintech company that is not part of a corporate group engaged in nonfinancial activities prohibited by the Bank Holding Company Act, a standard national bank charter may remain a better option.

Indeed, we have previously suggested that a non-bank marketplace lender should consider conversion to a standard national bank.  Many years ago, two of my Ballard partners successfully converted a consumer finance company to a standard national bank with the right to export throughout the country “interest” (as broadly defined under the OCC’s regulations) as permitted by its home state and to accept FDIC-insured deposits.

Mr. Noreika also indicated that the OCC intends to revisit its guidance on deposit advance products, observing that its views on such products are not necessarily consistent with those of the CFPB.  In November 2013, the OCC issued final guidance that made it impractical for many banks to provide or continue to provide deposit advance services.  Since the CFPB’s final payday loan rule is expected to cover deposit advance loans, there will be a need to reconcile any new OCC guidance with the CFPB’s rule.

Finally, Acting Comptroller Noreika referenced his letter sent last month to House Financial Services Committee Chairman Jeb Hensarling in which he “added [his] voice to that chorus in letters to Congress denouncing Operation Chokepoint.”  “Operation Chokepoint” was a federal enforcement initiative allegedly involving both the DOJ and the federal banking agencies, that targeted banks serving online payday lenders and other lawful companies that have raised regulatory or “reputational” concerns.  A lawsuit brought by the payday lending industry, challenging Operation Chokepoint, is ongoing.  In a tone that conveyed strong conviction, Mr. Noreika indicated that it was not the OCC’s policy to direct banks to close entire categories of accounts without assessing the risks presented by individual customers or the bank’s ability to manage such risks. Mr. Noreika observed that “banks make the decisions to retain or terminate customer relationships, not the regulators, and not the OCC.”

I left the meeting much encouraged with the direction the OCC appears to be taking.

 

The Electronic Transactions Association (ETA) will hold its Annual FinTech Policy Forum on September 14, 2017 at Google’s DC offices.  The event will include commentary from industry leaders, Members of Congress, and regulators who will discuss the intersection of technology and public policy on such topics as privacy, data protection, Internet of Things (IoT), mobile technology, online small business lending, the continuing convergence of traditional and new players and helping the underserved.

On September 12, 2018 at 10:00am EDT, The Senate Committee on Banking, Housing, and Urban Affairs will hold an open session hearing entitled “Examining the Fintech Landscape.”  Witnesses will be: Mr. Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office; Mr. Eric Turner, Research Analyst, S&P Global Market Intelligence; and Mr. Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law.  The hearing will likely focus on a number of high-level topics including online lending issuance models, the push for federal charters, FinTech’s impact on credit availability, and the state licensure process.