OCC Creates New Special Purpose National Bank Charter as Comptroller Curry's Term Comes to an End
After months of speculation, the Comptroller of the Currency has issued for public comment a draft Supplement to its Licensing Manual ("Supplement") to accept applications for a special purpose national bank ("SPNB") charter from financial technology ("fintech") companies that engage in banking activities and that meet the OCC's chartering standards. The comment period on its draft Supplement ends on April 14, 2017.
The action by Comptroller Thomas J. Curry comes amidst concerns expressed by members of Congress as well as some state regulators about the creation of an SPNB, and coincides with the expiration of the Comptroller's term that ends on April 1, 2017.
The OCC process of creating an SPNB commenced over a year ago and the OCC now has determined that it could create an SPNB charter through its existing statutory and regulatory authority, bypassing a potentially extensive administrative regulatory rule making procedure. Applicants should be guided by the requirements of 12 CFR 5.20 as well as the provisions of the Comptroller's Licensing Manual in determining whether or not to seek an SPNB.
Activities of an SPNB
Activities that are permissible for an SPNB include those that are allowed for national banks under the OCC's regime of laws and regulations, judicial precedent, or those that the OCC separately has determined to be permissible. The SPNB must engage in lending money or paying checks, but it cannot engage in taking deposits. The OCC has determined that the National Bank Act is flexible enough to allow it to approve novel or new activities, but an applicant will have to make the legal and business basis for such approval.
The filing procedures will be similar to those for a regular national bank charter and include publication requirements, public comments on the application, submission of a business plan, qualification of the organizers, background checks and other standard requirements.
All applications will be reviewed in light of the OCC's standards and policy considerations, of which safety and soundness of the banking system is paramount. Additional standards include serving the credit needs of the community (determining the fintech's community could be a challenge), ensuring compliance with all applicable laws and regulations, and providing fair treatment of its customers. The OCC will not approve any application that inappropriately commingles banking and commerce as these contain risks associated with non-banking activities, among other concerns. This could be a challenge for those fintechs that are owned by non-bank commercial entities.
Evaluating an Application
SPNB status can provide many benefits to an applicant, not the least of which is having one regulator versus having to comply with several state regulatory entities. To think that becoming an SPNB would provide all the benefits of a national bank without most of the obligations imposed on a national bank, however, would be a serious mistake. The examination and regulatory regime for SPNBs should not be considered "national bank light."
The OCC's enforcement of the FTC Act with regard to unfair or deceptive acts or practices will be applied to SPNBs as well. And, obtaining a national bank charter will not relieve the SPNB of various state consumer protection laws. The Supplement states that "state laws that address anti-discrimination, fair lending, debt collection, taxation, zoning, crime, and torts, generally apply to national banks and would also apply to SPNBs."
Protection of the Banking System
The first and foremost concern of the OCC is to ensure the safety and soundness of the national banking system. While being flexible in viewing novel approaches to new products and services, the OCC will impose a regime of strong regulation and examination on SPNBs.
To determine whether the OCC's standards and policies are met, in reviewing the application, the OCC will consider whether the proposed bank:
- has organizers and management with appropriate skills and experience;
- has adequate capital to support the projected volume and type of business and proposed risk profile;
- has a business plan that articulates a clear path and a timeline to profitability; and
- includes in its business plan, if applicable, a Financial Inclusion Plan that has an appropriate description of the proposed goals, approach, activities, and milestones for serving the relevant market and community.
Officers and directors are critical to the success of a traditional national bank as well as an SPNB. They must be well qualified and have experience in relevant areas. While specific experience in financial services is important for a fintech SPNB, it also might be important for one or more of the officers or directors of a proposed bank with novel technology-based products or services to have experience with those activities.
As is the case with any financial institution, a sufficient amount of capital is an important element to protect the bank from failing. What amount of capital is sufficient for an SPNB? The proposed Supplement states that "an SPNB will be subject to the minimum leverage and risk-based capital requirements in 12 CFR 3, which apply to all national banks." Each SPNB could pose different risks based on its business plan, which might require additional capital or the use of different metrics by the OCC to protect against such risks. The amount of capital will be determined by the OCC's evaluation of the applicant's business plan, the risks created by the plan, and how management proposes to mitigate those risks.
As would be applicable to traditional national banks, the OCC requires an applicant to submit a business plan, which would include: a description of the business; a marketing plan; a management plan; what are the proposed records, systems, and controls; a financial management plan; monitoring and revising the plan; alternative business strategies; and financial projections. Because applicants for an SPNB charter may have structures and business models that differ from those of traditional, full-service national banks, the Supplement provides additional guidance on specific parts of the business plan.
Financial Inclusion Plan
What must be included in the Business Plan is a financial inclusion plan. The OCC's statutory mission includes ensuring that national banks provide fair access to financial services and treat customers fairly. The OCC agrees that many fintech companies have significant potential to expand access to financial services. To help ensure that this potential is realized, the OCC would expect a formal commitment to, and plan for, financial inclusion from SPNBs engaged in lending activities or providing financial services to consumers or small businesses.
The nature of the commitment would depend on the entity's business model and the types of products or services it intends to provide. This commitment could be fulfilled by providing innovative products or services designed to address the needs of low and moderate income individuals. Additionally, actions such as supporting and participating in financial literacy and credit counseling services could be part of a financial inclusion plan.
An SPNB provides an opportunity for a fintech entity to eliminate compliance with most state regulations in favor of dealing with a single financial institution regulator. Usury rates can be exported, but abusive practices and predatory lending will not be allowed. In exchange for greater flexibility in providing innovative products and services and having to deal only with a single regulator, that single regulator will impose a strict regime of laws and regulations similar to that which currently is applied to all national banks.
If you would like further assistance in navigating this new era of using technology to provide unique financial products and services for businesses and consumers, please contact Thomas Brooks at (202) 552-2356 | firstname.lastname@example.org.