Bank Wars Episode VI: Return of the OCC
It has been a while since there was any movement on the Bank Wars front, but that changed today. Acting Comptroller Keith Noreika delivered…
It has been a while since there was any movement on the Bank Wars front, but that changed today. Acting Comptroller Keith Noreika delivered a speech on the OCC’s plan for the fintech charter at the members only (as I learned the hard way) Exchequer Club in Washington, D.C. The speech, at least in its prepared form, answered some questions about the OCC’s posture towards fintech and the efforts by the Conference of State Bank Supervisors (CSBS) and the New York Department of Financial Services (NYDFS) to stop the OCC from issuing charters. The speech also introduced new questions about how the OCC plans to register fintech firms which may have implications for the viability of the charter and the diversity and quality of financial services available to the American public. In this piece we will look at the contents of the Noreika’s remarks and some of the questions raised by them.
What did the Acting Comptroller Say?
There will be (bank) war
Anyone hoping/fearing that the OCC was going to back down in the face of the CSBS and NYDFS lawsuits is going to be disappointed/relieved, because the OCC is going to fight. Acting Comptroller Noreika reaffirmed that ability of the OCC to grant special purpose charters under 12 CFR 5.20(e)(1), the provision the OCC relied on to justify the granting of non-depository charters. Acting Comptroller Noreika also said that the agency is “developing its litigation response and plans to defend this authority [12 CFR 5.20(e)(1)] vigorously.”
A strong defense of the National Bank System
More broadly, Acting Comptroller Noreika presented a full-throated defense of the national banking system and its ability to evolve to face new challenges. Citing Ninth Circuit and Supreme Court case law, Acting Comptroller Noreika argued against “defining banking too narrowly or in a stagnant way that prevents the system from evolving or taking proper and responsible advantage of advances in technology and commerce.” The Acting Comptroller argued for a functional approach to defining the business of banking, where “companies that offer banking products and services should be allowed to apply for national bank charters…if they choose and if they meet the criteria and standards for doing so”(emphasis in original).
While Acting Comptroller Noreika supported a national charter as an option for fintechs, he was clear that it wasn’t and shouldn’t be the only option, listing state bank charters, state licensing, and bank partnerships as other possibilities that should be available.
The Acting Comptroller pushed back on the narrative advanced by opponents of the charter that expanding the national banking system would harm consumer protection. The Acting Comptroller pointed out that over the past ten years there have been significant changes to the laws applying to national banks (including presumptive fintech national banks) governing consumer protection. These changes include what he views as the expansion of consumer protections under Title X of Dodd-Frank, including the prohibition on “abusive” practices and the preservation of state law that is “more protective” than Dodd-Frank. He also pointed out that that ability of the OCC to preempt state law has been “clarified” and that numerous state consumer protection laws apply to national banks and would apply to fintech firms that obtained national bank charters.
Noreika also pushed back on the concern that granting fintech lenders the ability to export their home state law governing interest would result in “unchecked” “abuse”. The Acting Comptroller pointed out that existing national and state banks can export their home state’s laws and there is not widespread abuse. He argues that this, is because banks are closely regulated and supervised, and that “tak[ing] unfair advantage of their customers” is inconsistent with a bank being safe and sound.
A swipe at state financial institutions
Not content with playing defense on consumer protection, Noreika also went on offense against the narrative that state regulation is inherently more protective of consumers. For example, he argued that “large-scale, short-term consumer lending abuse” occurs in the state licensed and regulated space, not among national banks.
Granting fintech firms charters does not hurt banks
Noreika also took on the argument that giving charters to fintechs would harm banks. The Acting Comptroller argued that banks compete with non-bank fintech firms who are not subject to the same level of regulation. Making fintech firms banks would bring them into the banking regulatory fold and “level the [regulatory] playing field”, helping banks compete.
The OCC (claims to) have the authority, but will it be used?
While Acting Comptroller Noreika clearly asserted that the OCC does have the authority to issue charters to non-depository institutions, he hedged on whether the OCC would actually use it. Per the Acting Comptroller, the OCC hasn’t decided whether it will actually grant any charters to non-depositories under 12 CFR 5.20(e)(1). Additionally, there apparently haven’t been any applications for such a charter. Whether this is due to a lack of interest or regulatory uncertainty is unclear.
There is another authority however
While the Acting Comptroller was perhaps a bit coy about whether the OCC would use its authority under 12 CFR 5.20(e)(1), he was more clear that the OCC has authority to charter both full-service and special purpose national banks under other authorities. Noreika made clear that the OCC was considering whether to use those authorities to charter fintech firms.
While Noreika’s speech did clarify some issues, it also raised some questions about the viability of the fintech charter specifically and the regulation of fintech more generally.
What is abusive?
The speech pushed back on the notion that extending national bank charters to fintech firms would lead to an expansion of “abusive” practices. But what constitutes abusive in this context? The Acting Comptroller’s speech mentions short-term consumer credit specifically and cites to OCC and Pew work on payday lending.
What is it about payday lending does the OCC consider abusive? While the rate of interest a national bank can charge is left to the bank’s home state law, there is the risk that the OCC would rely on other criteria to punish banks engaged in expensive but legal lending, including “unsafe and unsound lending” and “reputational risk” (similarly to what is alleged to have occurred under “Operation Choke Point”.
Limiting access to the charter based only on the expense of the credit offered risks forgoing one of the major advantages of fintech firms: the ability to offer credit to borrowers who are too risky or difficult for traditional banks to serve. If the OCC intends to limit access to the charter on the basis of criteria not expressly illegal, it should say so explicitly, and cite the authority it relies on to do so. This will allow for a public debate on the costs, benefits, and legality of such a determination.
What is the charter going to require?
An open question is what, specifically, the OCC will require from a firm that obtains a non-depository charter. While the OCC has consistently maintained that fintech banks will be “regulated and supervised like similarly situated national banks”, there is still ambiguity as to just what that means and how consistently it will apply across firms. For example, in the speech, Noreika emphasized that fintech firms obtaining charters “where appropriate” will be subject to a formal requirement for financial inclusion. Clarifying the ambiguity around OCC expectations, and applying them as uniformly as possible would be beneficial and consistent with good government.
While the question of whether the OCC will issue a 5.20(e)(1) non-depository charter is up in the air, Acting Comptroller Noreika seems to be much clearer on the possibility of fintech firms using traditional charters. Of course, those charters have certain requirements that may make them less attractive or viable for fintech firms, including the requirement the firm become an FDIC-insured depository. While traditional charters would address much of the legal risk uncertainty than the non-depository charter, there is a real concern that they will not be a viable option for fintech firms without forcing those firms to change their business models for regulatory rather than business reasons.
Conclusion…I mean To Be Continued
Acting Comptroller Noreika’s speech is striking for the amount of continuity it shared with the statements of former Comptroller Curry. The new (albeit acting) leadership of the OCC is not abandoning the fintech charter effort, and it doesn’t appear to be making it more forward-leaning. To the extent there was any change, it was the reiteration of existing, more traditional charter options to provide an entry point for fintech firms to become national banks. The speech may well leave the states just as bellicose as before and advocates of more aggressive action by the OCC more frustrated. However, the speech is not the end, it is merely the prelude to the next episode of Bank Wars.