Effective July 31, 2018, the Office of the Comptroller of the Currency (“OCC”) officially opened the door for non-depository financial technology (“Fintech”) companies to apply for a special federal banking license. In the Release (NR 2018-74; the “Release”), Joseph M. Otting, the Comptroller, cited the broad regulatory and supervisory authority given to the OCC under the National Bank Act (12 U.S.C. 21 et seq.; the “Act”) over “the business of banking” (defined in the attendant regulations (12 C.F.R. 5) as the core functions of “deposit taking, paying checks, and making loans”), as the authority for his agency to issue such special banking licenses.
With an increasing number of Fintech entities and alternative lenders offering loans and other financial services regionally and nationally through both “brick and mortar” retail locations and online delivery systems, complying with the regulatory quilt of state and federal licensing, reporting, supervisory and monitoring requirements has become expensive and cumbersome. These regulatory obstacles have, in many cases, led to an “uneven playing field” for Fintech companies and impeded their growth and profitability.
The OCC’s decision, as outlined in the Release, emphasizes the importance of the continued evolution and development of the financial services industry. “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy”. Comptroller Otting continued, “Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
The Release puts an end to an ongoing legal dispute involving various state banking authorities in the United States who sought to prevent the exercise of the OCC’s authority over Fintech companies. Their objections, although grounded in whether the OCC has this authority under the National Bank Act, essentially boiled down to a “regulatory turf” war. Once an institution falls under the regulatory and supervisory authority of the OCC as a national bank, it is largely exempt from state regulations, examinations, and to an extent, even usury limits on certain of its loan products.
Although Fintech lenders are now eligible to apply for this special national bank charter, the question arises: Should they?
The advantages are substantial. A national bank can open branches nationwide. It also does not answer to the state banking regulators in the various states it operates. Instead, it is under the exclusive regulatory and supervisory authority of the OCC.  This makes expansion across state lines more cost-effective by eliminating separate licensing applications and periodic examinations by multiple state banking authorities. A national bank also can “export” its interest rate when making certain loans, such as credit card interest, which rate is set in the state where the national bank has its head office.
Despite the significant advantages that this new special purpose national bank license will offer, there is also a downside for unsuspecting Fintech companies. In the Policy Statement that accompanies the Release, the Comptroller writes, “Fintech companies that… receive special purpose national bank charters will be supervised like similarly situated national banks, to include capital, liquidity, and financial inclusion commitments as appropriate.” And, importantly, newly-licensed Fintech companies will be, “…subject to heightened supervision initially, similar to other de novo banks.” In short, they will be held to high standards when it comes to capital, liquidity, contingency planning, and “social good” legislation and regulations, such as the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.), the Fair Credit Reporting Act (15 U.S.C. 1681), the Fair Debt Collections Practices Act (15 U.S.C. 1692 et seq.), and others. Further, and importantly, national banks are subject to annual examinations by the OCC, the costs of which are assessed to the institution being examined. These examinations are thorough, long, and increasingly costly. OCC examiners are on site for the duration of the examination and in some cases, their presence can cause disruptions in the day-to-day operations of a smaller institution.
Therefore, the OCC Release is a significant announcement and step in the direction of inclusion of many Fintech and other non-depository lenders on the same playing field of other, more traditional banking institutions which should be applauded. Whether it is the right step for a particular Fintech entity or non-depository lender, however, is a question that requires a serious analysis of an organization’s specific circumstances by its management and legal, accounting, and other business advisers, as unexpected, costly or otherwise unwelcome consequences could follow.
 It must be noted that if a Fintech lender with a special national bank charter becomes a member of the FDIC insurance program and/or operates as part of a bank holding company structure, the FDIC and/or the Federal Reserve may also have supervisory authority over certain of its activities.
Mr. Di Cioccio is a Partner in the New York Office of FisherBroyles, LLP and a member of the FinTech and Blockchain practice group. Prior to starting his legal career, he served as an Assistant National Bank Examiner in the New York Office of the Office of the Comptroller of the Currency.
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