The Office of the Comptroller of the Currency (OCC) appears to be plowing ahead with its proposal to allow non-bank financial technology companies, known as fintechs, to acquire national bank charters. The agency recently released a white paper called Exploring Special Purpose National Bank Charters for Fintech Companies. It asked for public comments; the comment period recently closed.
So why is this a big deal and why am I writing another piece about it? The OCC’s proposal would revolutionize the regulation of financial institutions. Like the Federal Reserve Board and the Federal Deposit Insurance Corporation, the OCC has regulated banks, not non-bank financial companies, for decades. If the OCC moves forward, it needs to make sure it is equipped to regulate a different type of financial company. And to become equipped for this task, it would need to adopt comprehensive and vigorous oversight of fintechs.
Surveys have found that fintechs offer high interest-rate loans with hidden features to customers, many of whom are underserved consumers and small-business owners. Sound familiar? Remember the supposed wonders of subprime mortgage lending?
The National Community Reinvestment Coalition (NCRC) has serious concerns that payday lenders and other abusive lenders may try to take advantage of these charters if the OCC is not careful.
The OCC national charter has historically preempted state law, including many vital laws that cap interest rates and provide other important protections. In addition, the Community Reinvestment Act (CRA) would not apply to fintechs since they are uninsured institutions.
In a comment letter to the OCC, NCRC maintains that it would consider supporting an OCC charter for fintechs only if the OCC does not preempt state law and it adopts comprehensive regulation including CRA-like requirements and vigorous fair lending and consumer protection enforcement.
In its white paper, the OCC discusses the importance of financial inclusion for underserved populations. NCRC urges the agency to require financial inclusion plans as part of fintech applications for charters. The application process would also include a public comment period.
The financial inclusion plans would describe how the fintech will serve people of color and low- and moderate-income customers. Financial inclusion plans would be similar to the recent pledges that NCRC and its members negotiated with KeyBank, and Huntington and Fifth Third banks, committing that they make more than $90 billion in loans and investments to those communities. If, and only if, the OCC does this right, fintech charters could be opportunities to secure new pledges and more responsible loans, investments, and services for traditionally underserved communities.
Additional requirements for comprehensive supervision of fintechs must include:
- Financial inclusion plans should be for a time period of two to three years and should be renewed at the expiration of their term. A new public comment period should be required before plans are renewed. The plans should contain measurable goals such as the percent of home loans to low- and moderate-income borrowers and communities. The goals should be benchmarked against peer lending levels and demographic data.
- Only responsible loans should be counted in financial inclusion plans. For home lending, they should be qualified mortgages as established by the Consumer Financial Protection Bureau. The consumer and small-business loans in plans should be required to abide to standards ensuring ability to repay, sustainability, and customers being able to afford necessities as determined by residual income analysis.
- Fintechs that do not lend include those that are payment processors and those that are financial advisors, but they too should be required to develop financial inclusion plans.
- Fintechs should be required to engage in CRA-related community development lending and investment to support affordable housing and economic development. They should also offer grants and support housing and small business counseling.
- NCRC’s proposed financial inclusion plans would establish procedures for delineating geographical areas the fintechs would serve that are similar to assessment areas on CRA exams. They would establish goals in geographical areas in which they make substantial amounts of loans or engage in other activities.
- NCRC urges the OCC to require fintech compliance with state usury caps. The OCC white paper says the OCC is considering requiring compliance with the objectives of various statutes as a condition of receiving a charter even if the statute does not directly apply to the fintech.
- The OCC must require clear and comprehensive disclosures for consumer and small-business loans such as “all-in” annual percentage rates that include all fees.
- For fintechs that offer financial advisory services, the OCC must require that they comply with the Department of Labor fiduciary rule. Fintechs that are payment processors must also comply with CFPB guidance. Finally, OCC must not allow forced arbitration.
The OCC appears intent on offering a charter for fintechs, but before upending decades of federal regulation, it needs to carefully consider how to ensure that fintechs would be supervised rigorously and would be responsible institutions in serving the credit needs identified by communities in a safe and sound manner.