U.S. agency invites fintech firms into special bank charter

Financial-technology firms in the U.S. will be permitted to apply for special bank charters under a regulatory policy change that Republican lawmakers have already warned against.

The Office of the Comptroller of the Currency will open its doors to non-traditional financial companies that are willing to meet some of the rigors of regulated banking, including capital, liquidity and consumer-protection rules, according to a draft policy statement released Wednesday.

“Providing a path for fintech companies to become national banks can make the financial system stronger by promoting growth, modernization and competition,” the OCC said in a document explaining its decision.

The action amounts to partial rejection of a request from House Financial Services Committee Chairman Jeb Hensarling and other Republicans on the panel, who said in a March 10 letter that Congress would consider overturning any change if the agency insisted on rushing.

The draft policy — open for a 30-day public comment period — would not allow products “with predatory features” or that inappropriately mingle banking and commerce. The OCC also defended its “broad authority” to make the move without a new law from Congress or any formal rule process, saying it’s doing nothing more than expanding a longstanding practice.

Legal Authority

Comptroller Thomas Curry delivered a similar argument at a fintech event last week, saying his agency was within its legal powers to grant the limited charters in the same way it has been doing it “for decades” with other types of specialized firms that limit their business to a narrow aspect of banking. He said this wouldn’t be a “ticket to light-touch supervision.”

Hensarling’s letter to Curry, a few days after the speech, said the OCC needed to give the public a chance to respond and to let the next comptroller weigh in. Curry’s term expires next month, and President Donald Trump will be able to nominate a replacement.

“We will work with our colleagues to ensure that Congress will examine the OCC’s actions and, if appropriate, overturn them,” the Texas lawmaker said in the letter, though it’s not clear how Congress would overturn something that isn’t a formal rule. The regulator did meet one of the letter’s requests: to allow for more comment.

Democrats’ Criticism

Democrats, including Senator Sherrod Brown of Ohio, have also expressed concern about the OCC’s fintech charter plans, questioning whether the agency has the legal authority to issue them. It’s up to Congress to take action on fintech, not the OCC, Brown wrote in a January letter to Curry, adding that a charter could allow predatory practices to spread more quickly.

Brian Marshall, policy counsel at the Washington-based advocacy group Americans for Financial Reform, said he’s “still unconvinced” the OCC has made its case that it doesn’t need congressional action to grant the charters.

“They are not citing actual legal authority for this proposition,” said Marshall, who added that he’s also concerned about consumer protections — especially after the leadership of the agency changes hands.

Granting OCC special charters — issued to national banks that engage in a limited range of banking activities and don’t take deposits — would be one of the most significant steps by U.S. regulators to try to bring fintech firms under the government’s watch. The OCC, like other regulators, is under pressure to promote safety without stifling innovation.

Many new technologies have popped up without the government restrictions that established financial firms are subjected to. While charters won’t be required for firms to keep lending, the government is looking to provide a framework that companies will embrace.

Clear Standards

For some companies, a charter would provide a clear set of national standards, as opposed to the patchwork of local and state rules that many have complained are burdensome and confusing for small companies trying to grow. Being designated as a national banks could help extend fintech firms’ reach by giving confidence to potential customers and investors wary about new business models.

To apply for a charter once the policy is finalized, fintech firms must submit business plans that includes financial projections and risk analysis. Companies that don’t have a business record will get more scrutiny, the OCC said. They also may have to provide details about how they would manage changes to their original plan, like different growth rates or operating costs. It’s uncertain how long the process will take, but the agency will first grant conditional approvals before giving full charters.

The OCC’s move has been a long time coming. The agency announced in October that it was setting up an innovation office to handle advances in financial-services technology, and said in December that it intended to open up chartering for fintech firms.

LendingClub Letter

LendingClub Corp., which bills itself as the “world’s largest online credit marketplace,” said in a January letter that a “direct relationship with the OCC” would make government supervision simpler and encourage partnerships with more traditional banks.

But Brian Knight, a fintech policy analyst at George Mason University’s Mercatus Center, said the agency’s plan missed an opportunity.

“While there are some good ideas here and it is important that the OCC is starting to wrap its head around this issue, this doesn’t go far enough to fully embrace what regulating these fintech firms should be,” Knight said. The OCC’s load of requirements “shows that they are still a little too trapped in their old ways.”

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