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Acting Comptroller of the Currency Keith Noreika, in remarks on July 19 to the Exchequer Club, confirmed that the OCC is continuing to consider its proposal to allow financial technology (fintech) companies to apply for a special purpose national bank (SPNB) charter.  Since the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced, there has been considerable speculation as to what position the OCC would take on the proposal.

In his remarks, Acting Comptroller Noreika referenced the lawsuits filed by the New York Department of Financial Supervision and the Conference of State Bank Supervisors challenging the OCC’s authority to grant SPNB charters to fintech companies.  He indicated that in these lawsuits, the OCC plans to “vigorously” defend its authority to rely on its regulation at 12 C.F.R. section 5.20(e)(1) to grant SPNB charters to nondepository companies.  He also countered arguments that granting SPNB charters to fintech companies would disadvantage banks and create consumer protection risks.  (As we have previously observed, both lawsuits present a lack of ripeness and/or no case or controversy problem.)

At the same time, referring to the proposal as “a good idea that deserves the thorough analysis and the careful consideration we are giving it,” Mr. Noreika was noncommittal about what the OCC’s ultimate position would be.  Despite his statement that the OCC plans to defend its charter authority in the lawsuits, Mr. Noreika also stated that “the OCC has not determined whether it will actually accept or act upon applications from nondepository fintech companies for special purpose national bank charters that rely on [section 5.20].  And, to be clear, we have not received, nor are we evaluating, any such applications from nondepository fintech companies.  The OCC will continue to hold discussions with interested companies while we evaluate our options.”

Acting Comptroller Noreika suggested that fintech companies consider seeking a national bank charter by using other OCC authority “to charter full-service national banks and federal savings associations, as well as other long-established special purpose national banks, such as trust banks, banker’s banks, and other so-called CEBA credit card banks.”  According to Mr. Noreika, the state plaintiffs in the lawsuits had conceded that the OCC has such other authority.  Observing that many fintech business models may fit into the established categories of special purpose national banks “that do not rely on the contested provision  of regulation, section 5.20,” he stated that “we may well take [the states] up on their invitation to use these [other] authorities in the fintech-chartering context.” (emphasis included).

Many years ago, we were successful in converting a consumer finance company to a national bank and had no difficulty in obtaining OCC approval.  Nonbanks engaged in interstate consumer lending should consider conversion as an option since it enables the converted bank to (1) export throughout the country “interest” (as broadly defined under the OCC’s regulations) as permitted by its home state, (2) disregard non-interest state laws that impair materially the exercise of national bank powers, and (3) accept FDIC-insured deposits, which generally are the lowest cost source of funds.  Nonbanks engaged in non-financial activity or with affiliates engaged in such activity may be limited to SPNB conversions due to activity restrictions in the Bank Holding Company Act.

The OCC’s proposal to create a fintech charter would, if finalized, help some companies partially avoid the negative impact of the Second Circuit’s decision in Madden v. Midland Funding.  (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.)  It would also help some fintech companies deal with the risk of a court or enforcement authority concluding that the fintech company, and not its bank partner, is the “true lender.”  Treating a nonbank as the “true lender” would subject the nonbank to usury, licensing, and other limits to which its bank partner would not otherwise be subject.

The “true lender” risk, which is not confined to the fintech space but can arise in many bank-partner-model arrangements, is a live issue.  In litigation currently ongoing in federal district court in Colorado, two state-chartered banks are seeking to enjoin enforcement actions brought by the Colorado Uniform Consumer Credit Code Administrator against the banks’ nonbank partners that market and service loans originated by the banks and purchase loans from the banks.  The Administrator has alleged that because the banks were not the “true lenders” on the loans sold to the banks’ partners, the loans are subject to Colorado law regarding interest, not the law of the states where the banks are located.

Unfortunately, as set forth in Alan Kaplinsky’s article for American Banker’s BankThink, the possibility that the OCC might charter SPNBs (or deposit-taking fintech national banks) does not fully address the Madden and “true lender” risks facing fintech companies, their bank partners, or other entities involved in “bank-model” lending programs.  The SPNB proposal has not been adopted and may be overturned in litigation.  It does not extend to non-fintech companies.  In many respects, it includes burdensome provisions.  And Madden risks would remain for loan purchasers.

We believe that recent developments, both in Colorado and elsewhere, highlight the need for the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

 

 

 

In a letter dated July 18, 2017 to Acting Comptroller Noreika purporting to respond to Acting Comptroller Noreika’s July 17 letter, Director Cordray continued to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.”  We shared how we would respond to Director Cordray’s question, pointing out the many flaws in his rationale for questioning the existence of “any plausible basis” for safety and soundness concerns arising from the CFPB arbitration rule.

In his July 17 letter to Director Cordray, so the OCC could complete its analysis of the arbitration rule’s impact on the federal banking system, Acting Comptroller Noreika repeated his prior request for the data used by the CFPB to develop and support its proposed rule.  Despite questioning Acting Comptroller Noreika’s basis for raising safety and soundness concerns, Director Cordray wrote in his July 18 response that “we are happy to share the data underlying our rulemaking.  I understand that our teams are in communication and we are in the process of assembling the data your staff has requested.”

Perhaps choosing to wait to respond to Director Cordray’s question until the OCC has reviewed the CFPB data and completed its analysis, Acting Comptroller is reported to have said only the following in a prepared statement released yesterday:

“Consenting to share the data is important progress.  I look forward to working with the OCC staff to conduct an independent review of the data and analysis in a timely manner to answer my prudential concerns regarding what impact the final rule may have on the federal banking system.”

The CFPB final arbitration rule was published in today’s Federal Register and has an effective date of September 18, 2017 and a mandatory compliance date of March 19, 2018.  The rule’s publication is a trigger for the filing of a petition with the Federal Stability Oversight Council to set aside the rule.

 

The letter-writing war between Director Cordray and Acting Comptroller Keith Noreika continues.  Director Cordray sent a letter dated July 18, 2017 to Acting Comptroller Noreika in which he purports to respond to Acting Comptroller Noreika’s July 17 letter to Director Cordray and continues to question how there could be “any plausible basis for [Acting Comptroller Noreika’s] claim that the arbitration rule could adversely affect the safety and soundness of the banking system.”  To support his conclusion, he relies on the CFPB’s economic analysis of the rule which “shows that its impact on the entire financial system (not just the banking system) is on the order of less than $1 billion per year.”  He then compares this to banking industry profits last year of over $171 billion.  He also points to the mortgage market (in which the use of pre-dispute arbitration provision is prohibited) which he states “is larger than all other consumer financial markets combined” and states that nobody suggests that the lack of arbitration poses a safety and soundness issue.  He states, “So on what conceivable basis can there be any legitimate argument that this poses a safety and soundness issue?”

Although I am sure that Acting Comptroller Noreika will respond to Director Cordray’s question, let me try to respond myself.

First, why is it a “given” that the CFPB’s cost estimates are reasonable?  The CFPB said it could not quantify expected costs of additional state court class actions and just assumed that they would be less than the costs of additional federal court class actions.  Shouldn’t the OCC be entitled to review the CFPB’s methodology and to conduct its own study of costs?  Let’s not forget that it is the OCC and the other prudential banking regulators, not the CFPB, that is responsible for ensuring the safety and soundness of the banking system.

Second, while banking industry profits last year were $171 billion, there is no assurance, as Director Cordray implies, that industry banking profits will continue to increase.  Indeed, during the last economic recession, particularly during 2008 and 2009, banking industry profits were minuscule with many banks sustaining large losses.  Furthermore, in assessing the impact of the arbitration rule on safety and soundness, it is not enough to focus on the industry as a whole.  Those numbers include the overwhelming majority of banks that are community banks who are rarely the target of class action litigation.  Instead, the CFPB and the OCC should focus on the larger banks that are often targeted by the class action lawyers.  As we learned from the economic crisis of 2008-2009, the failure of one large bank could have a domino effect and result in multiple failures which certainly would create safety and soundness concerns.  The point is that while the CFPB has estimated costs to the industry for the arbitration order, it has not conducted, and it lacks the expertise and experience to conduct, a study to assess the impact of the rule on bank safety and soundness.

Director Cordray has also overlooked why arbitration came into vogue about 15 or 20 years ago.  It was because banks and other consumer financial services providers were being crushed by an avalanche of class action litigation.  At the time, it was becoming a safety and soundness issue.  There is every reason to expect a similar avalanche of litigation to occur sometime after the compliance date of the rule.  Indeed, things may actually be worse now than they were 15 years ago because of the enactment of new federal and state consumer protection laws, like the TCPA, where there is no cap on class action liability.

Finally, Director Cordray’s reference to the mortgage industry is misplaced.  While arbitration provisions are prohibited in mortgages, the Uniform Mortgage Instruments contain language requiring a borrower to provide notice to the lender of a dispute and an opportunity to resolve the dispute before the borrower may participate in any litigation.  That language would potentially preclude a class from being certified.

Keith Noreika, the Acting Comptroller of the Currency, has sent a letter dated July 17 to Director Cordray asking him to delay publication of the CFPB’s final arbitration rule in the Federal Register.  The July 17 letter responds to Director Cordray’s July 12 letter to Mr. Noreika.  In his July 12 letter, Director Cordray responded to Mr. Noreika’s July 10 letter in which he stated that OCC staff had expressed safety and soundness concerns arising from the proposed arbitration rule’s potential impact on U.S. financial institutions and their customers.

In addition to raising safety and soundness concerns, Mr. Noreika’s July 10 letter asked Director Cordray to provide the data used by the CFPB to develop and support its proposed arbitration rule.  In his July 17 letter, Mr. Noreika repeats his data request, commenting that “despite your prior telephonic and in-person assurances that we would have access to the CFPB’s data, your July 12 letter ignores my request.”  While stating that he “appreciate[s]” Director Cordray’s assurances in his July 12 letter that the final arbitration rule does not have any safety and soundness impact on the federal banking system, Mr. Noreika also observes that “the CFPB, by design, is not a safety and soundness prudential regulator.”

Mr. Noreika explains that he asked the OCC’s Economics Department to analyze the proposed rule for its impact on the federal banking system when he became aware of the proposal several weeks after becoming Acting Comptroller and, so that the OCC could complete its review, was asked by the OCC’s chief economist on July 5 to request the CFPB data.  Mr. Noreika adds that he “had hoped to discuss this request with [Director Cordray] prior to the release of the Final Rule, but the timing of the release of the Final Rule was not shared with me in advance.”  While expressing appreciation for Director Cordray’s offer in his July 12 letter to have the CFPB staff review its arbitration study and rulemaking analysis with OCC staff, Mr. Noreika states that such review would “be helpful, but not sufficient, to allay my concerns.”

Mr. Noreika, in his July 17 letter, not only repeats his request for the CFPB data, but also asks Director Cordray to delay publication of the final arbitration rule in the Federal Register “until my staff has had a full and fair opportunity to analyze the CFPB data so that I am able to fulfill my safety and soundness obligations.”  Mr. Noreika’s request for the publication delay is undoubtedly tied to the timing in the Dodd-Frank Act for an agency that is a member of the Financial Stability Oversight Council (FSOC) to file a petition with the FSOC to set aside a CFPB final regulation.  A member agency can file such a petition with the FSOC if the member agency “has in good faith attempted to work with the Bureau to resolve [safety and soundness or financial system stability] concerns” and files the petition no later than 10 days after the regulation has been published in the Federal Register.  If a petition is filed, any member agency can ask the FSOC Chairperson (i.e. Treasury Secretary Mnuchin) to stay the effectiveness of a regulation for up to 90 days from the filing.

 

The OCC announced that its Office of Innovation will host office hours for national banks, federal savings associations, and financial technology (fintech) companies from July 24 through July 26, 2017 at the OCC’s district office in New York City.  According to the OCC, the office hours are intended to “provide an opportunity for meetings with OCC officials to discuss financial technology, new products or services, partnering with a bank or fintech company, or other matters related to financial innovation.”

The OCC stated that its staff “will provide feedback and respond to questions” and that each meeting will be no longer than one hour.  Persons wishing to meet with the OCC can request a meeting through July 5 and are expected to indicate the reason for their interest in having the meeting.  The OCC plans to hold office hours in other cities at later dates.  (An initial round of office hours meetings took place in San Francisco last month.)

Last October, the OCC announced that it was creating the Office of Innovation to serve as an office dedicated to responsible innovation and to implement a formal framework to improve the agency’s ability to identify, understand, and respond to financial innovation affecting the federal banking system.  The announcement followed the OCC’s release last spring of a white paper, “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.”  The white paper was part of an initiative announced by former Comptroller Thomas J. Curry in August 2015 to develop a comprehensive framework to improve the OCC’s ability to understand innovation in the financial services industry, and to help national banks and federal savings associations in the face of  increasing competition from fintech companies.  In December 2016, the OCC announced its proposal to allow fintech companies to apply for special purpose national bank (SPNB) charters and, in March 2017, it issued a draft supplement to its existing Licensing Manual for SPNB charters as well as its responses to comments received on its SPNB charter proposal.

It is unclear whether the latest office hours announcement can be read as an indication of continuing OCC support for the SPNB charter proposal following Mr. Curry’s departure.  Last month, Keith Noreika was appointed by President Trump to serve as Deputy Comptroller and began serving as Acting Comptroller on May 5.  It has since been widely reported that President Trump will nominate Joseph Otting to replace Mr. Curry as Comptroller.  Neither Mr. Noreika or Mr. Otting is known to have yet taken a public position with respect to the SPNB charter.

 

 

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The Office of the Comptroller of the Currency has issued a new bulletin (2017-21) containing fourteen frequently asked questions to supplement OCC Bulletin 2013-29 entitled “Third-Party Relationships: Risk Management Guidance.”   The 2013 bulletin provided updated guidance for managing operational, compliance, reputation, strategic, and credit risk presented by third-party business relationships of national banks and federal savings associations.

In the new bulletin, the OCC observes that many banks have recently developed relationships with financial technology (fintech) companies in which the fintech companies perform or deliver services on behalf of a bank or banks and therefore meet the 2013 bulletin’s definition of a third-party relationship.  The OCC states that, as a result, it would expect bank management to include such fintech companies in the bank’s third-party risk management process.  The FAQs include the following specifically addressed to fintech companies:

  • Is a fintech company arrangement considered a critical activity?
  • Can a bank engage with a start-up fintech company with limited financial information?
  • How can a bank offer products or services to underbanked or underserved segments of the population through a third-party relationship with a fintech company?

The FAQs also specifically address bank arrangements with marketplace lenders, in particular the question “What should a bank consider when entering into a marketplace lending arrangement with nonbank entities?”  The OCC’s guidance includes the following:

  • For compliance risk management, banks should not originate or support marketplace lenders that do not have adequate compliance management processes and should monitor the marketplace lenders to ensure that they appropriately implement applicable consumer protection laws, regulations, and guidance.
  • When banks enter into marketplace lending or servicing arrangements, because the banks’ customers may associate the marketplace lenders’ products with those of the banks, reputation risk can arise if the products underperform or harm customers.
  • Operational risk can increase quickly if the banks and the marketplace lenders do not include appropriate limits and controls in their operational processes, such as contractually agreed-to loan volume limits and proper underwriting.
  • To address the risks created by marketplace lending arrangements, a bank’s due diligence of marketplace lenders should include consulting with the bank’s appropriate business units, such as credit, compliance, finance, audit, operations, accounting, legal, and information technology.
  • Contracts or other governing documents should set forth the terms of service-level agreements and contractual obligations, and significant contractual changes should prompt reevaluation of bank policies, processes, and risk management practices.

The CFPB recently announced that it has begun to examine service providers on a regular, systematic basis, particularly those supporting the mortgage industry.  Previously, the CFPB has only examined some service providers on an ad hoc basis.  The change represents a significant expansion of the CFPB’s use of its supervisory authority and will substantially increase the number and types of entities facing CFPB examinations.  On June 13, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Expansion of its Supervisory Program to Service Providers – What You Need to Know.”  More information and a link to register is available here.

 

 

 

The American Bankers Association and numerous media sources, including Politico and American Banker, have reported that the White House has announced that President Trump will nominate Joseph Otting to serve as Comptroller of the Currency.  According to these reports, Mr. Otting is a former president and CEO of California-based OneWest Bank, where he worked with Steven Mnuchin, who now serves as Secretary of the Treasury. 

Mr. Otting is reported to have worked in banking for several decades, including at various other banks before joining OneWest Bank.  If confirmed by the Senate, Mr. Otting will replace Acting Comptroller Keith Noreika, who was appointed as Deputy Comptroller by President Trump last month and began serving as Acting Comptroller on May 5, 2017 after the departure of Comptroller Thomas J. Curry.

 

The New York Department of Financial Supervision (DFS) has filed a complaint in a New York federal district court to stop the Office of the Comptroller of the Currency (OCC) from implementing its proposal to issue special purpose national bank (SPNB) charters to fintech companies.  The lawsuit follows the filing of a similar action earlier this month by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.

Like the CSBS lawsuit, the DFS lawsuit challenges the OCC’s proposal on the grounds that:

  • The National Bank Act (NBA) does not allow the OCC to charter non-depository financial services
  • The OCC’s decision to issue SPNB charters to fintech companies, by enabling non-depository charter holders to disregard state law, violates the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police power to regulate financial services and products delivered within a state

In defending its authority to charter SPNBs that do not take FDIC-insured deposits, the OCC has relied on 12 C.F.R. Section 5.20(e)(1) which allows the OCC to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money.  Similar to the CSBS lawsuit, the relief sought by the DFS lawsuit includes a declaration that the OCC lacks authority under the NBA to issue SPNB charters to fintech companies that do not take deposits, a declaration that 12 C.F.R. Section 5.20(e)(1) is null and void because it exceeds the OCC’s authority under the NBA, and an injunction prohibiting the OCC from issuing SPNB charters as proposed.

We have commented that because the OCC has not yet finalized the licensing process for fintech companies seeking an SPNB charter, the CSBS is likely to face a motion to dismiss on grounds that include a lack of ripeness and/or no case or controversy.  The DFS is likely to also face a motion to dismiss on similar grounds.  Perhaps anticipating an argument that it lacks standing to bring the lawsuit because it cannot show actual harm, DFS alleges not only that the OCC proposal would undermine its ability to protect New York consumers but also that the OCC’s actions will “injure DFS in a directly quantifiable way.”  DFS alleges that because its operating expenses are funded by assessments levied on New York-licensed financial institutions, every company that receives an SPNB charter “in place of a New York license to operate in this state deprives DFS of crucial resources that are necessary to fund the agency’s regulatory function.”

This allegation does not seem sufficient to overcome the lack of ripeness and/or no case or controversy problem that the DFS lawsuit presents.  Indeed, the DFS filed its lawsuit after the architect of the SPNB charter proposal, former Comptroller of the Currency Thomas Curry, was replaced by Acting Comptroller Keith Noreika.  Mr. Noreika has not yet taken any public position with respect to the SPNB charter.  It will not be until the next Comptroller of the Currency is nominated by President Trump, confirmed by the Senate, and takes a position on the SPNB charter that we will be able to realistically assess whether the OCC will continue to pursue the SNPB charter proposal, let alone finalize it.

 

 

 

The Treasury Department has issued a press release announcing that Treasury Secretary Mnuchin plans to appoint Keith A. Noreika as a Deputy Comptroller and designate him the First Deputy Comptroller of the OCC.  Effective May 5, 2017, Mr. Noreika will serve as Acting Comptroller.  Comptroller Thomas J. Curry has been serving under an extension since the expiration of his term on April 9, 2017.

The OCC also issued a press release announcing that Mr. Curry will step down and Mr. Noreika will become Acting Comptroller on May 5.

Mr. Noreika’s background is described in both press releases.

 

 

The Conference of State Bank Supervisors has filed a complaint in D.C. federal district court to stop the Office of the Comptroller of the Currency (OCC) from implementing its proposal to issue special purpose national bank (SPNB) charters to fintech companies.

In comments filed on the OCC’s proposal, the CSBS and others asserted that the proposal would allow fintech companies to avoid state consumer protection laws and make it more difficult for states to enforce such laws by removing their visitorial oversight.  Commenters also asserted that the OCC lacks authority to charter SPNBs that do not take FDIC-insured deposits, citing its authority under 12 C.F.R. Section 5.20(e)(1) to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money.

The lawsuit follows the OCC’s publication of a summary of the comments it received on its proposal in which it disagreed with commenters’ concerns regarding state consumer protection laws and the OCC’s authority.  The grounds on which the CSBS challenges the OCC’s proposal in the lawsuit include the following:

  • Both Section 5.20(e)(1)  and the OCC’s decision to issue SPNB charters to fintech companies are inconsistent with the National Bank Act because the NBA does not allow the OCC to charter entities that do not receive deposits unless they are carrying on a special purpose expressly authorized by Congress.
  • The OCC’s decision to issue SPNB charters to fintech companies is a “rule” that was made without compliance with the Administrative Procedure Act and is an arbitrary and capricious action that does not constitute “reasoned decision making” as required by the APA.
  • The OCC’s decision to issue SPNB charters to fintech companies, by enabling nonbank charter holders to disregard state law, violates the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police powers necessary to regulate nonbank  providers of financial services and protect consumers and the public interest from unsound and abusive financial practices.

The relief sought by the CSBS includes a declaration that the OCC lacks authority under the NBA to create and issue SPNB charters to fintech companies that do not take deposits or to issue Section 5.20(e)(1) and an injunction prohibiting the OCC from creating or issuing any SPNBs pursuant to Section 5.20(e)(1).

When it issued the summary of comments on its proposal, the OCC also issued a draft supplement to its Licensing Manual to describe the licensing process it envisions for fintech companies seeking an SPNB charter.  However, it has not yet issued a final supplement or indicated that companies can begin submitting charter applications.  (The OCC invited comments to be filed on the draft supplement by April 14, 2017.)  As a result, CSBS is likely to face a motion to dismiss on grounds that include a lack of ripeness and/or no case or controversy.