Critical Question: Inquiry and Analysis on Whether an Uninsured Nationally Chartered Fintech Bank Charter Can Export Interest Rates as a National Bank?
The Comptroller of the Currency (“OCC”) presented a White Paper in December 2016 on Exploring Special Purpose National Bank Charters for Fintech Companies (“White Paper”).1 Comptroller Tom Curry noted that he had asked the OCC staff “to examine the agency’s authority to grant special purpose national bank charters to fintech companies and the conditions under which [the agency] might do so.”2 The OCC solicited public comment in connection with its study of the fintech issues. Additionally, the OCC published a draft supplement to the Comptroller’s Licensing Manual in March 2017 on Evaluating Charter Applications From Financial Technology Companies.3
One critical question is whether the OCC intends to charter nationally chartered fintech companies which are uninsured but which have access to the Fed’s payment system and which can export interest rates and fees for consumer and commercial lending products relying on the most favored lender doctrine and the authority under Section 854 of the National Bank Act (“NBA”) and the related judicial decisions supporting exportation of interest rates and fees from the state where the national bank is located.
In the White Paper, the OCC pointed out that “many special purpose national banks are operating today—primarily trust banks and credit card banks.”5 For purposes of this article’s inquiry and analysis, note that trust banks chartered by the OCC historically have been uninsured which means that they are taking trust only deposits, but not retail deposits and are not insured by the Federal Deposit Insurance Corporation (“FDIC”). On the other hand, federally chartered thrifts trust charters historically were insured by the FDIC as part of an arrangement whereby the parent company of the federally chartered thrift made a single deposit in the thrift which was sufficient to qualify for FDIC insurance. Credit card banks also are typically FDIC-insured.
The issue of whether a fintech charter granted by the OCC would be federally insured has been a point of great interest. In the White Paper, the OCC noted that “if a national bank is not insured, the provisions in the FDIA governing the receivership of insured depository institutions would not apply.”6 The OCC, however, had already anticipated this issue and goes on in the White Paper to note that, “The OCC recently issued a proposed rule that would address this regulatory gap by establishing a framework for the receiver- ship of an uninsured national bank under the receivership provisions in the NBA. The proposed rule primarily focuses on uninsured national trust banks, but specifically contemplates application to other special purpose national banks.”7
The OCC clearly contemplates that fintech charters could be chartered as uninsured entities and be liquidated and resolved, if necessary, by the OCC. Additionally, the OCC in the White Paper noted that, “some statutes, however, apply to a national bank only if it is FDIC-insured and, therefore, would not apply to an uninsured special purpose bank.”8 The OCC noted that retention of records requirements under the FDIA only apply to insured depository institutions as does the Community Reinvestment Act (“CRA”).9 Likewise, certain safety and soundness standards of the FDIA do not apply to uninsured national banks but the OCC was quick to note that “the FDIA’s principal enforcement section, 12 U.S.C. 1818, generally would apply to any national banking association, including any uninsured national bank.”10
So, under the White Paper construct, it is possible that a nationally chartered fintech company could be uninsured, not involved with the taking of deposits and be subject to many but not all banking laws and be subject to conservatorship/receivership by the OCC, not by the FDIC. Indeed, it might also be possible to charter such an entity which would be permitted to take trust deposits or non-retail deposits, or deposits only greater than $250,000. That could make the proposed nationally chartered fintech charter analogous to the so-called “credit card bank” charter previously issued by the OCC and the states which is expressly exempt from the definition of bank under the Bank Holding Company Act.
One other element concerning the characteristics of such an uninsured entity is whether it would become a member of the Federal Reserve, and have access to the Fed payment system. In the White Paper, the OCC stated that, “With rare exceptions, all national banks, including insured and uninsured trust banks and other special purpose national banks, are required to be members of the Federal Reserve System.”11 And, further noted that,”[s]ince most special purpose national banks would be member banks, the statutes and regulations that apply to member banks also would apply to them.”12 Based upon that general overview, it would appear that nationally chartered fintech charters, even if uninsured, would be expected to become members of the Federal Reserve.
What does not appear to be expressly ad- dressed in the White Paper is whether an uninsured nationally chartered fintech charter would be permitted to export interest rates as is permitted to a national bank under Section 85 of the National Bank Act and the Marquette decision13 and its progeny. The Marquette decision, one of the most significant banking decisions during the past 50 years, laid the foundation for a nationwide credit market in the U.S. in all forms of consumer finance including credit cards as well as mortgages. The upshot of the Marquette decision is that a national bank is permitted to “export” the interest rates of the home state where the national bank is located and preempt any conflicting state usury law that otherwise would apply.14 For example, a national bank located in Delaware generally will not be bound by a consumer usury rate cap under state law15 and so the national bank could lend to consumers based in a jurisdiction such as Arkansas which historically was bound by low usury rate ceilings and the Delaware contract rate would apply even if it is higher than what is otherwise permitted under the Arkansas usury rate.
Once this principle was established by the Supreme Court ruling in Marquette then state chartered banks petitioned Congress for parallel authority so that a state chartered bank could export its home state rates to other jurisdictions and the home state rate would apply even if it were higher than the host state usury rate where the borrower was located. Congress codified this result in Section 27 of the FDIA.16 Generally, states have equivalent authority to export interest rates and other related fees in the same manner available to national banks due to additional interpretations and positions established over the years after the Marquette decision.17
With the Fintech chartering issue presently percolating at the OCC, many of banking’s first principles need to be reexamined again because of the novelty of the potential charter. It bears noting with respect to exportation of rates powers, there is a potentially significant difference in the governing language of Section 85 of the NBA concerning exporting rates and Section 27 of the FDIA. A close reading of Section 85 shows that the operative term is [national] association in the section and the power to conduct the rate exportation is reserved to a national bank association. By contrast, a close reading of Section 27 of the FDIA shows that the operative term is state chartered insured depository institution in the section and the power to conduct the rate exportation is reserved to an insured depository institution. Specifically, Section 27 provides:
In order to prevent discrimination against State- chartered insured depository institutions, including insured savings banks, or insured branches of foreign banks with respect to interest rates, if the applicable rate prescribed in this subsection exceeds the rate such State bank or insured branch of a foreign bank would be permitted to charge in the absence of this subsection, such State bank or such insured branch of a foreign bank may, notwithstanding any State constitution or statute which is hereby preempted for the purposes of this section, take, receive, reserve, and charge on any loan or discount made, or upon any note, bill of exchange, or other evidence of debt, interest at a rate . . . allowed by the laws of the State, territory, or district where the bank is located . . . .18
What does the difference in text in Section 85 of the NBA and Section 27 of the FDIA mean and does it have any legal consequences? One interpretation would be that Congress expected that all banks using the exportation powers would be insured banks. Congress, with its decision to limit the power to insured state depository institutions, must have concluded that only insured national banks would ever have the power to export rates under the Marquette decision. Since Congress was looking to equilibrate the powers of the state chartered banks to those of national banks in the realm of interest rate exportation, it devised language that limited the state chartered entities to those that were insured. Congress must have concluded that all national banks always would be insured and therefore to equilibrate the exportation power of national banks and state banks, it need only authorize state insured depository institutions to export such interest rates.
Yet, what happens now if a plain reading of the text of Section 85 suggests that the operative term is association which is meant to be a national bank association and, therefore, the power to export rates turns on whether the entity is a national bank, not on whether the national bank is insured? Indeed, in pertinent part, Section 85 states that, “Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located.”19
The simple answer may be that the OCC would be able to charter uninsured nationally chartered fintech banks which might be able to rely on the plain text of Section 85 to export their home state interest rates to all other states provided that the core lending functions associated with the under- writing were done in the home state of the fintech bank. That outcome would disturb the equilibrium in place between state chartered insured banks under Section 27 and national banks under Section 85 because uninsured state banks, including any type of limited purpose state chartered fintech version, would not be able to export home state interest rates.
Would the OCC charter nationally chartered fintech uninsured banks, which could export interest rates, and have access to the Fed payments system as a Fed member and be subject principally to OCC regulation? There would not appear to be any restriction preventing the OCC from doing so. The OCC, as a matter of policy, could indicate that it would only approve fintech business plans for insured banks that wished to export consumer credit interest rates and fees. A different policy to charter uninsured fintech charters, even if such charters were only restricted to consumer lending exportation, could possibly spark additional litigation from state interests which are already challenging the general legal authority of the OCC to use the NBA to charter special purpose fintech banks.20
Alternatively, what is old may become new again, in that the Marquette line of cases might be opened up again for further judicial review and scrutiny. For example, there might be litigation over whether a bank exporting consumer interest rates and fees must be federally insured. Essentially, there might be an anti-fintech charter litigation effort to seek to obtain a judicial gloss on Section 85 to have the word, association, read to mean only insured national bank associations.
It is also possible that some other extrapolations of the Marquette progeny might come back to the forefront for reexamination. For example, there might be litigation over whether a national bank exporting interest rates for commercial products can rely on the Marquette reasoning to preempt any state usury law or comparable restriction that might have a bearing on permissible commercial lending interest rates and fees. Generally, the reasoning of the Marquette decision and its progeny is expected to apply in the same manner for commercial lending exportation as to consumer lending exportation, but might there be something different about the peer to peer platform or fintech space which would cause a revisiting of some of these principles.21 We have already seen some of this with the Madden decisions22 and other so-called “true lender” analysis that disrupt long standing contractual law doctrines as they are applied in the ecommerce world.
Whether the OCC proposed fintech charter will prove to be a popular chartering choice or not remains to be seen and it is likely to turn less on the type of legal authority and power available to the charter and instead would turn more on how the charter is supervised by the OCC, both as part of the application process and on an ongoing basis. A lot of the issue may come down to the process that the OCC intends to use and follow to implement a CRA type requirement on fintech charters, as part of a financial inclusiveness requirement, since an uninsured bank would not be subject to CRA, by its terms. While fintech applicants no doubt would cooperate with requests to show the positive community effect that would result from chartering a federally chartered fintech entity, at the same time, it is highly un- likely that fintech applicants would want to operate in an arena where new CRA concepts are developed, executed and evaluated for effectiveness. Simply put, the OCC might not have other avenues as readily available to try different community impact testing outside of the traditional CRA measurements of lending, investment, grants/services as the OCC would in connection with developing new policies and approaches for community impact/community investment associated with a fintech charter.
The lack of certainty associated with the CRA obligations of a fintech charter may cause applicants to abandon the fintech OCC route and instead take a close look at the industrial loan charter (“ILC”)/industrial bank process in Utah and Nevada, as well as, as earlier noted, consider using a credit card bank as a limited purpose entity to accomplish what also might be possible to obtain through a fintech charter. If the fintech charter is going to be authorized by the OCC, it needs to be clear about the CRA type restrictions that it will require so that applicants have some sense of predictability about those requirements. The OCC also must decide whether it will charter uninsured fintech charters, but permit them to follow a credit lending exportation business plan even if that same type of power likely would be unavailable under Section 27 for a state uninsured fintech limited purpose charter.
Congress can always overrule any of these agency policies and interpretations and there may be greater involvement by Congress with the more active use of the Congressional Review Act to review agency guidance.23 However, it seems far more likely that the OCC, not Congress, will shape the next 30 years in the bank payments space depending on what the OCC permits as matter of regulation as a fintech charter and the type of business plan to support that same model.
In conclusion, the fintech environment will continually evolve but the likely type of entrepreneurial firms and “tech” management would not be the “usual” type of business enterprises that would fit comfortably into a heavily regulated chartering system by the OCC or any other bank regulator. The bank regulatory framework would include great scrutiny of fintech capital levels which the regulators would demand to be at high levels with certain high quality aspects, along with other various corporate requirements, including limitations on interaffiliate transactions. To the extent that there may be a further gap between federally chartered fintech companies being able to use Section 85 exportation as uninsured entities as compared to options available at the state level, there may be unwanted additional attention or controversy/litigation which would make the fintech chartering pathway less safe to fintech companies. It may mean more attention being paid to ILCs, credit card banks or to bank platform arrangements established and maintained with fintech companies, although there are pragmatic business drawbacks due to the sharing of operational profits and the risk to the fintech entity if the bank no longer continues offering the arrangement. Additionally, with some business models, especially ones involving only commercial lending products, the fintech company may choose to move ahead with obtaining state licensing, which generally should be required in a few states for lending purposes but it could be a protracted licensing process particularly if private equity owners or related funds control the fintech company.
1. Office of the Comptroller of the Currency, Exploring Special Purpose National Bank Charters for Fintech Companies, at 1 (Dec. 2016).
2. Id.
3. Office of the Comptroller of the Currency, Draft Manual Supplement for Evaluating Charter Applications from Financial Technology Companies (Mar. 2017).
4. 12 U.S.C. § 85.
5. Office of the Comptroller of the Currency, Exploring Special Purpose National Bank Charters for Fintech Companies, at 2 (Dec. 2016).
6. Id. at 6.
7. Id.
8. Id.
9. Id.
10. Id.
11. Id. at 6(7.
12. Id. at 7.
13. Marquette Nat’l Bank of Minneapolis v. First of Omaha Serv. Corp., 439 U.S. 299 (1978).
14. Id.
15. See Ark. Code Ann. § 4-57-102; Ark. Const. amend. LXXXIX, § 3; Del. Code Ann. tit. 6, § 2301.
16. 12 U.S.C. § 1831d(a).
17. See Smiley v. Citibank (S. Dakota), N.A., 517 U.S. 735 (1996). See also General Counsel’s Opinion No. 10; Interest Charges Under Section 27 of the Federal Deposit Insurance Act, 63 FR 19258-01.
18. Id. (emphasis added).
19. Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132 (1980); 12 U.S.C. § 85; Greenwood Tr. Co. v. Com. of Mass., 971 F.2d 818 (1st Cir. 1992).
20. Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, No. 17-cv-763, (D.D.C. filed Apr. 26, 2017); General Counsel’s Opinion No. 11, Interest Charges by Interstate State Banks, 63 FR 27282-01.
21. See Sawyer v. Bill Me Later, Inc., 23 F. Supp. 3d 1359 (D. Utah 2014).
22. Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), cert. denied, 136 S. Ct. 2505 (2016).
23. 5 U.S.C. § 801.