On March 15, 2017, the Office of the Comptroller of the Currency issued a “Draft Supplement” to the Comptroller’s Licensing Manual, entitled “Evaluating Charter Applications from Financial Technology Companies” (Supplement). The OCC’s Supplement is designed to provide substantive standards and procedures for the OCC’s evaluation of an application by a fintech company for a charter as a special purpose national bank. In conjunction with the Supplement, the OCC released a summary of the comments the OCC received in response to its December 2016 paper, Exploring Special Purpose National Bank Charters for Fintech Companies. Last month we provided a high level summary of the Draft Supplement and other related developments.
The Supplement provides guidance as to how the OCC applies its existing chartering procedures to a fintech company that submits an application to operate, either directly (through a change in the company’s corporate identity) or through an affiliate, as a special purpose national bank. In this post, we provide a closer analysis of the Supplement by addressing a handful of key issues for a fintech company that is considering whether to prepare an application to the OCC to operate as a special purpose national bank.
Although styled as a “Draft Supplement,” our analysis treats the OCC’s ‘draft’ as if the ‘Supplement’ (the OCC’s own term) has been adopted in substantially the form proposed.
- In What Business Can a SPNB Engage?
SPNBs Must be in the Business of Paying Checks or Lending Money.
The OCC is embarking on an initiative to invite a fintech company to obtain a federal charter to engage in one or more of the “core banking functions,” and the Supplement announces a fresh perspective on this initiative. For the purposes of the Supplement, the OCC defines the term “SPNB” as a type of special-purpose bank that does not take deposits within the meaning of the FDI Act, and thus may operate as an uninsured national bank, engaging in the core function of paying checks or lending money (or both) as well as other non-deposit activities permissible for a national bank.
The OCC insists that the “character of the national bank charter” is constant, and an SPNB is “subject to the laws, regulations, and federal supervision that apply to all national banks.” However, the Supplement signals that the OCC is prepared to exercise its discretion in order to facilitate (or push back on) the banking ambitions of each fintech company applicant as the company migrates to an SPNB. For example, the Supplement explains that (i) some members of the organizing group, proposed management, and board of directors of a fintech company SPNB will need experience relevant to the SPNB’s products and services and/or experience in regulated financial services; and (ii) a fintech company SPNB’s ongoing review of its business plan must accommodate new or existing technologies.
In this context, we believe that a fintech company should ready itself for the “iterative process” of subjecting itself to OCC oversight, spanning (i) application review; (ii) preliminary conditional approval; and (iii) ongoing supervision; and in each phase, the company’s management team and business plan will be rated under still-evolving standards.
- What of the Separation of Banking and Commerce?
That an SPNB, as defined in the Supplement, would engage only in now up to two “core” banking functions and other activities permissible for a national bank is taken as a given.
The OCC appears to shore up the separation of banking and commerce. First, the Supplement states that the OCC “will not approve proposals [from fintech companies (or others)] that would result in an inappropriate commingling of banking and commerce.” Then the Supplement states: “The OCC will also collaborate with other regulators as necessary to avoid the inappropriate mixing of banking and commerce.” The extent to which the OCC’s process for reviewing an application could develop into an interagency process is unclear.
- Will Fintech Companies Be Held to Higher or Additional Standards?
Although the OCC states that the agency will use “its existing chartering standards and procedures as the basis for processing applications for all national banks,” the Supplement indicates that the OCC may apply those standards and procedures to a fintech company applicant in a manner that imposes additional burdens when the company applies to operate as an SPNB. For example, all national bank applicants must comply with certain minimum leverage and risk-based capital requirements. According to the Supplement, “these requirements, which measure regulatory capital levels relative to an entity’s assets and off-balance-sheet exposures, may not be sufficient for measuring capital adequacy for some [fintech companies].” As such, the OCC may choose to impose higher minimums or additional measures of capital on a special purpose national bank applicant.
Additionally, the OCC advises that “[p]roposals from companies without an established business record are subject to a higher degree of scrutiny to evaluate whether the proposed bank has a reasonable likelihood of long-term success.” Thus, a startup fintech company’s application may face a stricter review than that of an established fintech company.
- How Will the OCC Supervise an SPNB?
With Centralized Oversight.
The Supplement states that an Assistant Deputy Comptroller will command “[c]entralized oversight of SPNBs,” under which an examiner-in-charge for each SPNB will be responsible for coordinating supervisory activities.
- What is a Financial Inclusion Plan?
The FIP is a Core Component of the SPNB’s Business Plan—Enabling the OCC to Impose Requirements on an Uninsured SPNB Commensurate with Requirements that Apply to Other National Banks.
As its title indicates, the FIP demonstrates the fintech company SPNB’s commitment to financial inclusion by addressing how the bank “proposes to engage with its relevant market and community, including any underserved populations, and how the [SPNB] proposes to identify and address that community’s financial needs.” In its December 2016 paper, the OCC explains that the “OCC’s statutory mission includes ensuring that national banks treat customers fairly and provide fair access to financial services…For insured depository institutions, this mission is advanced, in part, through the [Community Reinvestment Act] framework[.]” Noting that SPNBs are not subject to the Community Reinvestment Act (CRA), the OCC states it still “expects an applicant seeking a special purpose national bank charter that engages in lending activities to demonstrate a commitment to financial inclusion that supports fair access to financial services and fair treatment of customers.” SPNBs providing services other than lending will also need to demonstrate financial inclusion with regard to such services.
Involving the community and consumer groups interested in, or affected by, the company’s core banking functions may prove helpful in developing a FIP. In particular, an applicant’s FIP should:
- Describe the products or services that will foster financial inclusion;
- Identify the relevant market and community, including by describing the methods for arriving at those definitions;
- Establish milestones to achieve its financial inclusion objectives; and
- Set forth the terms and conditions under which the special purpose national bank SPNB charter will provide lending or financial products and services to consumers or small businesses.
The Supplement outlines some of the factors the OCC will consider when reviewing an applicant’s FIP, including the applicant’s:
- “Ability, efforts, and commitment to meet various community financial needs;”
- Policies, procedures, and practices regarding its proposed financial products and services; and
- “Investments, partnerships, ongoing outreach, and collaboration strategies, or expected participation in governmentally insured, guaranteed, or subsidized loan programs that the applicant will use to achieve its financial inclusion objectives.”
The OCC will require a SPNB to implement its FIP as a preliminary conditional approval of its SPNB charter. The condition will remain in place until the OCC removes or modifies the condition. While the condition remains in place, the OCC will review the SPNB’s implementation of its FIP during the examination process.
If the OCC were to adopt a ‘final’ version of the Supplement to the Comptroller’s Licensing Manual that substantially departs from the current version, then we’ll update our analysis accordingly.
We and our colleagues at DWT will continue to be closely engaged with this area and will continue to provide updates regarding the OCC’s innovation efforts. You can continue to follow our updates here.