On July 30, the U.S. Department of the Treasury ("Treasury") and the Office of the Comptroller of the Currency ("OCC") provided important guidance on a broad range of issues confronting the fintech industry. Treasury released a long-awaited report titled A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation (the "Treasury Report").
Following a specific recommendation in the Treasury Report, the OCC formally announced that it would begin to accept applications for special purpose national bank charters, and it provided guidance on the procedures and standards that would govern such applications through the issuance of a Licensing Manual Supplement for Special Purpose National Banks (the "Manual Supplement"). Taken together, the Treasury Report and the OCC announcement reinforce the commitment of the federal government to promote the growth of the fintech industry.
The Treasury Report
The Treasury Report is the fourth in a series of four reports addressing the federal government's approach to financial regulation. In particular, the Treasury Report addresses the role of nonbanks in the U.S. economy, with a particular focus on how fintech companies have used new technology to deliver financial services to U.S. consumers and businesses. The Treasury Report takes firm positions on many legal and regulatory issues affecting the fintech industry, and includes concrete policy recommendations designed to address these issues.
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Support for the role of nonbank fintechs in lending. The Treasury report voices strong support for the role of nonbank fintech companies in lending. It acknowledges that innovative lending platforms represent a significant part of both the consumer and small business loan market, and "are experiencing rapid rates of growth and market penetration." It also notes that "[e]arly evidence indicates that these new lending channels have provided opportunities to expand credit to underserved segments."
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Legal and regulatory certainty for bank partnership model. The Treasury Report also addresses two key legal issues confronting fintech companies operating within a "bank-partnership model."
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Madden v. Midland Funding, LLC. In Madden, the Second Circuit held that the National Bank Act did not preempt state usury claims against a third-party purchaser of a defaulted debt, where there was no ongoing relationship with the bank to the loan or the borrower. The Treasury Report expresses concern that this ruling creates undue uncertainty over the marketability of loans to nonbank entities. The Report echoes an amicus brief filed by the United States in Madden, which took the view that Madden was wrongly decided. The Treasury Report also notes a study conducted in the wake of Madden that suggests a negative impact on access to credit in locations within the Second Circuit. To eliminate any uncertainty caused by Madden, the report recommends that Congress codify the doctrine that a loan "valid when made" remains valid despite assignment to a non-bank third party, and urges regulators to use available authority to the same end. We have previously covered the Madden decision here and the United States' amicus brief here.
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True lender. The Treasury Report also recognizes that some recent court decisions that have relied upon the so-called "true lender doctrine" to treat a nonbank partner as the lender, rather than the bank that actually originated the loan. The Treasury Report notes the uncertainty on the contours of this doctrine and it recommends that Congress reject the doctrine's application by codifying that the bank's partnership with a nonbank does not affect the bank's status as the lender with respect to loans it originates. Even without additional legislation, the Report recommends that "federal banking regulators … reaffirm (through additional clarification of applicable compliance and risk-management requirements, for example) that the bank remains the true lender under such partnership arrangements."
The Treasury department's views on both of these issues represent the clearest indication to date of the federal government's position on the viability of the bank partnership model.
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Regulatory oversight of third-party relationships. The Treasury Report acknowledges that federal regulators currently exercise extensive regulatory authority over third-party relationships between banks and nonbank fintech companies. The Treasury Report recommends that regulators evaluate their approach to third-party relationships with an eye towards more efficient oversight that is better tailored to the nature of particular types of third-party relationships. Continued engagement between the industry and regulators could facilitate this process.
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Harmonizing state law. The Treasury Report addresses the patchwork of state licensing and oversight confronting the fintech industry. To harmonize state laws, the Treasury Report notes efforts to develop model laws pertaining to licensing and bank oversight, as well as the National Multistate Licensing System. The Treasury Report urges states to accelerate efforts to develop uniform laws, and suggests action by Congress if states are unable to achieve "meaningful harmonization" within the year.
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OCC special purpose national bank charters. The Treasury Report endorses the OCC's proposal to accept applications for special purpose national bank charters. Such charters are viewed as an "attractive option for firms interested in the benefits of having a single primary federal regulator." The Report specifically recommends that the OCC move forward with accepting applications for such charters. As discussed below, however, much remains to be determined concerning the criteria for obtaining such charters and the benefits of doing so.
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Limited discussion of blockchain and distributed ledger technology. The Treasury Report includes only a limited treatment of blockchain and distributed ledger technologies. It states that "[t]hese technologies, as well as digital assets, are being explored separately in an interagency effort led by a working group of the Financial Stability Oversight Council. The working group is a convening mechanism to promote coordination among regulators as these technologies evolve."
The OCC Announcement
Immediately following the release of the Treasury Report, the OCC announced that it would proceed with its intention to accept applications for special purpose national bank charters. It also issued the Manual Supplement setting forth the application standards and process for obtaining a special purpose national bank charter. As stated by the OCC: "This Supplement applies specifically to the OCC's consideration of applications from fintech companies to charter a special purpose national bank that would engage in one or more of the core banking activities of paying checks or lending money, but would not take deposits and would not be insured by the Federal Deposit Insurance Corporation." We previously addressed potential issues raised by such special purpose bank charters here.
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Legal challenges on the horizon. In response to previous announcements by the OCC regarding its intention to accept special purpose national bank charter applications, the Conference of State Bank Supervisors ("CSBS") and other state regulators filed suit last year challenging the OCC's authority to issue such charters. These challenges were dismissed on ripeness grounds, but are likely to be revived now that the OCC has elected to accept applications. It may be wise for other stakeholders—for example, fintech companies interested in seeking a charter—to pursue opportunities to participate in these lawsuits.
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Case-by-case evaluation of business plan. Although the Manual Supplement outlines broad considerations for evaluating applications, it does not identify specific, substantive criteria. The application process requires submission of a comprehensive business plan and the OCC will evaluate each applicant's business plan on a case-by-case basis to ensure that its purposes, business model, products and services, and risk management framework merit a charter.
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Demonstrated understanding of federal legal requirements, including Bank Secrecy Act and AML. The Manual Supplement makes clear that an applicant must demonstrate a sophisticated understanding of legal and regulatory requirements. For example, the OCC specifically notes that a business plan must adequately assess risks relating to Bank Secrecy Act and anti-money laundering requirements, among other things. Potential applicants should become well versed in these requirements before applying for a charter.
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Capital and liquidity requirements. The Manual Supplement also notes the importance of capital and liquidity requirements in order to "assess the strength of an individual bank" and to "maintain the safety and soundness of the entire banking system." Although this is a standard consideration in evaluating a bank's model, there is reason to believe that the issue may be more nuanced for special purpose national bank charters. This is because special purpose banks are likely to differ substantially from traditional banks, and from each other, in their services and business models. It remains to be seen how the OCC will apply these considerations in practice.
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Emphasis on financial inclusion. Finally, the Manual Supplement emphasizes that the OCC will consider applications with an eye towards "fair treatment of customers and fair access to financial services." Applicants will be required to demonstrate affirmatively how their business plans accord with this mission.
