State Bank Regulators to the OCC: "Innovation" Starts in the States
The Conference of State Bank Supervisors ("CSBS") has sued the Office of the Comptroller of the Currency ("OCC") to stop the OCC from further action in granting Special Purpose National Bank ("SPNB") charters to "fintech" companies. CSBS is a national organization composed of state financial institution regulators who regulate state-chartered financial institutions, as well as non-depository entities engaged in lending activities in their jurisdictions.
While a fintech entity is not explicitly defined, state regulated entities that use technology in innovative ways to provide loans to individuals and businesses could be considered fintech companies that might be eligible to obtain an SPNB charter from the OCC. A primary purpose for a fintech lender to obtain an SPNB charter would be to have one national regulator instead of having to comply with the different laws and regulations of 50 states.
The U.S. has a dual banking system. The OCC charters national banks which have the ability to operate in more than one state but have a single regulator. State-chartered banks are regulated by the state in which they are chartered (and regulated by the FDIC as its federal regulator to protect insured deposits), although they also can operate in more than one state. Creating an SPNB would transfer oversight of a fintech entity from a state regulator to a national regulator, creating political as well as legal clashes.
Generally, the CSBS position on the creation of SPNBs is that a federal charter for fintech companies will harm consumers and the U.S. financial system by:
- putting the OCC in the position of arbitrarily picking winners and losers in the fintech marketplace;
- weakening consumer protections by once again pre-empting existing, effective state laws;
- exposing taxpayers to the risk of fintech failures; and
- exceeding the legal limits of the OCC's chartering authority.
The primary claim by CSBS is that there is no legal authority for the OCC to grant a charter for an SPNB. In its complaint, the CSBS argues that Congress must specifically authorize these new charters, as it did in the cases of specifically allowing the OCC to charter trust companies and credit card companies. It argues that the major step of creating a new type of national bank charter cannot be based merely on regulatory language, but if a new charter is to be authorized it must be done by Congressional action. It claims that Congress has not taken this necessary legislative step.
The CSBS also claims that the process in which the OCC proposed to create these new charters did not follow the necessary steps required by the Administrative Procedure Act ("APA"). The OCC did publish various concepts and proposals of how it should deal with innovative technology companies that engage in lending to consumers and businesses, and it did request that the public provide comments on OCC's considerations. However, because no notice of the OCC proposal was published in the Federal Register and the OCC took this action without using the formal rulemaking process that is required by the APA, CSBS says that the OCC action is flawed.
The OCC claims that it does have the legal authority to grant these new types of charters and bases its authority on its regulation in 12 CFR 5.20(e)(1). That regulation stipulates requirements as to how a national bank is organized and the criteria the OCC considers in the application process. This regulation was amended in 2003 to add the specific language: The bank may be a special purpose bank that limits its activities to fiduciary activities or to any other activities within the business of banking. A special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money.
When the final rule was published by the OCC in 2003 under normal APA proceedings, in the accompanying comments to the regulation, the OCC stated that "this proposed change was to clarify that a limited purpose national bank may exist with respect to activities other than fiduciary activities, provided the activities in question are part of the business of banking. Some commenters expressed concern that this provision was too broad and that the expansion of the limited purpose charter had the potential to exclude from state oversight entities conducting activities only loosely related to banking."
In response to the public comments to the 2003 amendment to this regulation, the OCC agreed that further clarification was necessary and stated "we have amended this provision to require limited purpose national banks to conduct at least one of the following core banking functions: (1) Receiving deposits; (2) paying checks; or (3) lending money."
This is the foundation upon which the OCC bases its legal authority to issue SPNB charters. Its action is not dependent on the process of a formal rulemaking, but is based on what it thinks is existing authority that guides it to process applications for a national bank charter.
The proposal to create SPNBs is not without political concerns. The CSBS is a powerful trade association composed of all the state financial institution regulators. While there are similarities in how banks are regulated among the states, the states have been considered laboratories where new types of financial instruments and activities can be tested. As an integral part of state government, these regulators also are close to many of their Members of Congress so their voices typically are heard by federal legislators. Additionally, other financial institution trade associations have expressed concern over the substance and process the OCC is using to create SPNBs.
As a result of the OCC proposal to create SPNBs, some opposition has developed on both sides of the Congressional aisle. Many House Republicans and some Senate Democrats have questioned the actions of the OCC in moving forward with the SPNB proposal. While Comptroller Thomas Curry has been the force behind the OCC's efforts, his term in office has expired. It is expected that he will continue in office until a replacement has been nominated by the President and approved by the Senate, but will a new Comptroller continue the effort to provide these new charters? As the effort by the OCC does not constitute a formal rulemaking, it would be easy for a new Comptroller unilaterally to slow down or even eliminate the policy decision to create SPNBs.
Will the CSBS prevail in its suit against the OCC? If litigation continues, it will be lengthy. Will the threat of Congressional intervention serve to slow the OCC's efforts to issue an SPNB charter? Will this be a major issue in the confirmation hearings of a proposed Comptroller of the Currency? Will a new Comptroller continue to move forward to create an SPNB charter? There are no firm answers to any of these questions, but we will continue to closely monitor whether fintech entities will be allowed to obtain a national bank charter.
If you would like more detailed information on the development of SPNBs, please contact Thomas A. Brooks at (202) 552-2356 or firstname.lastname@example.org.
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