Innovative lending: paving the way for a new national bank charter

November 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

Recently, the Office of the Comptroller of the Currency (OCC) proposed a regulation to implement the basic legal framework for receiverships for any national bank that is not insured by the Federal Deposit Insurance Corporation (FDIC). All FDIC-insured national banks that are closed by the OCC are required to have the FDIC appointed as receiver.

Is the OCC using its proposed regulation regarding receivership powers to dissimulate or foretell its efforts to create a national charter for innovative lenders?

The proposed rule notes that the OCC supervises 52 national trust banks it has chartered that are not insured by the FDIC, and it requests comments on the creation of a framework where the OCC would act as a receiver of these trust banks and other OCC-chartered banks that are not insured by the FDIC. Prior to the creation of the FDIC, the OCC conducted receiverships of national banks pursuant to the provisions of the National Bank Act.

It addresses the most common questions that would be applicable in a receivership regime for failed financial institutions and the proposal closely tracks how the FDIC operates as a receiver of failed insured depository institutions. For example, issues such as notice to the public of the appointment of a receiver, how claims are submitted and the priority of how those claims are paid, the powers and duties of the receiver, the source of funds to pay the claims, and the status of fiduciary and custodial assets and accounts all are discussed and comments are solicited with a 14 November 2016 deadline.

Why is the OCC concerned about a new receivership regime when it currently supervises trust banks which, historically, have little risk of failure? Its stated basis for the proposal is twofold. First, because of the recent financial crisis, regulators need to focus on the need for a framework for dealing with faltering uninsured national banks. Second, the OCC states that a receivership framework would provide clarity to market participants as to how they will be treated in a receivership, “be it an uninsured trust bank or another uninsured special purpose bank”.

But, trust banks are not risky enterprises and the only special purpose banks that are mentioned by the OCC in the proposal are those that are used to facilitate a transition within a larger financial company or a consolidation over a limited timeframe. What are these OCC-chartered banks that are not trust banks to which the proposal refers?

While the proposal deals exclusively with the proposed receivership framework, the phrase “uninsured special purpose bank” is a critical element of the background narrative articulated in the proposal. The OCC notes that other than being created for a short time to facilitate a consolidation, the OCC rules provide that a special purpose bank can be chartered if it performs “at least one of the three core banking functions, namely receiving deposits, paying cheques, or lending money”.

Typically, innovative lending entities (also frequently described as FinTech entities, marketplace lenders or alternative lenders) do not receive deposits or pay cheques, but they do lend, or facilitate the lending, of money. Consequently, under current OCC rules, an entity that only lends money could be eligible to receive a special purpose national bank charter from the OCC.

In March of this year, the OCC published its ‘Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective’ report. Its goal was to solicit public comments to provide the OCC a better perspective on innovations being used by marketplace lenders, so it could develop a framework for identifying and evaluating financial innovation.

In conjunction with, and in furtherance of, that effort, the OCC is now asking for comments on whether a special purpose charter could be used creatively to deliver banking services. And, it asks whether the proposed receivership framework would be appropriate for dealing with a failed special purpose bank.

Lest one be unsure about the OCC’s laying the groundwork for a national charter for innovative lenders, in a speech to an innovative lending conference on the same day that the proposed receivership framework rules were published, Comptroller of the Currency Thomas J. Curry asked whether innovative lenders should be regulated and if so, who should regulate them. He then stated that “to some extent, the conversation about whether there should be a national substantive law or a federal license or charter for marketplace lenders and FinTech firms is part of answering the question of ‘who’ should regulate the activity. If a firm merited a federal bank charter, the question would be resolved as it would be squarely under the primary federal supervision of the OCC”.

Prior to moving forward with any proposal to create a special purpose non-insured bank charter, the OCC must lay the groundwork for how such special purpose banks will be treated if they fail and have to be closed by the OCC. The proposal for a receivership framework begins that discussion and provides that direction.

The question appears to be not if, but when the OCC will issue a national bank charter to an innovative lender. While the proposed receivership framework is the first step in that process, much discussion and rulemaking will occur prior to the issuance of any new type of bank charter. Questions relating to which laws and regulations (a Treasury Department White Paper published in May 2016 identified 15 laws and regulations) that could be applicable to such entities and what new laws and regulations might be needed must be resolved.

The OCC acknowledges that it is responsible for assuring the safety and soundness of any entity it charters and it will enforce compliance with all policies, procedures, laws and regulations to ensure fair access to financial services and fair treatment of customers by these entities. It remains to be seen whether this oversight will be so burdensome to innovative lenders that it would devalue a new type of charter.

The proposal notes that many of the uninsured national trust banks are subsidiaries or affiliates of a full-service insured bank or an affiliate of an insured state chartered bank. Such special purpose banks can also be subsidiaries of bank holding companies.

Can a new special purpose national bank that engages only in lending and not deposit taking or paying cheques become a subsidiary or affiliate of an existing insured bank or holding company? This precedent has been set with the treatment by the OCC of national trust banks. And, with the creation of a receivership regime, the OCC acknowledges that some of these new special banks that engage only in lending will fail and the OCC will have the powers to deal with these failures.

If newly chartered special purpose lending banks will have a reduced regulatory burden than existing insured banks, does this present an opportunity for existing insured banks to transfer some of their lending activity to such a new entity in order to reduce its regulatory costs and compliance? If the answer is yes, this could be a significant opportunity for both large banks and community banks. Whether or not this becomes a reality will be the subject of future discussions and rulemaking processes by the regulators.

Thomas A. Brooks is of counsel at Clark Hill PLC. He can be contacted on +1 (202) 552 2356 or by email: tbrooks@clarkhill.com.

Thomas A. Brooks

Clark Hill PLC