Definition of a bank at center of OCC charter complaints

News
January 17, 2017

The question of what constitutes a bank is at the heart of the opposition by industry groups, consumer advocates and state regulators to a landmark financial technology proposal.

At stake is a regulatory step that could shape the future of finance for Americans.

Though the proposal by the Office of the Comptroller of the Currency to extend to fintech startups some privileges that banks receive under federal law is only a white paper, the regulator kept an open comment period similar to a proposed rule, given the intense interest.

Tuesday was the deadline to submit comments on the proposal, which could lead to a national charter.

Some online lenders, payment companies and other fintech firms have sought the charter because it would allow them to sidestep costly state-by-state regulations.

But state bank regulators and consumer advocates, along with the Independent Community Bankers of America, argued that the charter proposal would undercut consumer protections as well as safety and soundness.

Perhaps most importantly, critics also raised questions as to whether the National Bank Act directly granted the agency power to issue a charter geared toward financial services companies that may only perform one or two functions of a bank.

The sentiment was expressed in a letter sent last week to the bank regulator by the Senate Banking Committee’s senior Democrat, Sherrod Brown of Ohio, and former committee member Jeff Merkley (D-Ore.), who took aim at the proposal to grant startups some of the same privileges as banks.

“It is up to Congress to take action on these important matters,” the lawmakers wrote regarding chartering, citing special charter exceptions created by Congress for credit card banks and trusts.

The OCC’s basis for issuing special purpose charters for startups comes from an interpretation of the National Bank Act — the guiding document of much of U.S. banking law. It grants the agency discretion over issuing special purpose charters for companies engaged in “at least one of the following three core banking functions: receiving deposits, paying checks, or lending money.”

Still, it’s an area that state regulators, consumer advocates and other opponents of the charter proposal clearly feel they have a case to argue.

The Conference of State Bank Supervisors, the umbrella organization for state bank regulators who issue their own form of charters, argued that the OCC doesn’t have authority under the National Bank Act and could face a legal challenge.

“There’s a lot of things on the table that we’re considering right now,” said Jim Kurtzke, vice president of communications for the Conference of State Bank Supervisors, when asked if state regulators would consider a lawsuit to halt federal fintech chartering.

The ICBA echoed CSBS’ criticism.

“They lack explicit statute authority to do this,” said Chris Cole, the group’s executive vice president and senior regulatory counsel, in a phone call.

Marketplace lenders, who may seek charters to provide more clarity over their business models, defended the bank regulator’s ability to extend charters to startups engaged in bank-like practices.

“The NBA was written broadly, requiring simply that associations ‘carrying on the business of banking’ be granted charters,” argued Marketplace Lending Association executive director Nat Hoopes in the group’s submission to the OCC.

“The OCC and courts have taken the view that the ‘business of banking’ is not limited to the powers enumerated in the NBA and the OCC has discretion to authorize activities beyond those specifically enumerated so long as the OCC’s discretion is reasonable.”

Meanwhile, other bankers took a more favorable view of the approach — so long as the OCC applied similar or higher capital and liquidity standards than what banks have to follow.

“We agree with the Licensing Manual [for banks] that new banks must be able to meet a minimum tier 1 leverage ratio of 8 percent for the first three years of operation,” wrote the Consumer Bankers Association’s senior counsel, Dong Hong.

“In addition, many of these firms have never been through a full credit cycle. Therefore, it would be appropriate to impose higher liquidity standards.”

The American Bankers Association, Financial Services Roundtable and the Clearing House also expressed a desire to see specific capital and liquidity standards expressed by the OCC, but did not cite specific figures in their letters.

Researchers at George Mason University’s Mercatus Center pushed back on the banks' argument.

“[C]apital requirements can serve as a barrier to entry that protects incumbents from competition,” wrote Hester Peirce, Brian Knight and J.W. Verret. “The likelihood that capital requirements on fintech banks could serve an anticompetitive role is heightened by the proposal’s expectation that fintech banks will be required to have relatively more capital than their depository peers.”