State regulators file legal challenge to OCC fintech charter

May 1, 2017 at 9:53 am Leave a comment

Good Morning,

Yours truly didn’t get around to doing many blogs last week and there is some stuff I need to get off my chest.

Of all the issues that I wanted to touch on, the one that most interests me and the one that could potentially have the largest impact on the industry has to do with the creation of fintech charters. In December, the OCC released a white paper laying out its legal authority for authorizing fintech companies. State regulators are so riled up by this idea that last week they filed a lawsuit seeking to block the OCC from chartering technology-based financial institutions.

Just how fired up are they? According to John W. Ryan, the President & CEO of the Conference of State Banks Supervisors, “The OCC’s action is an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks. If Congress had intended it to be used for another purpose, it would have explicitly authorized the OCC to do so.”

In their lawsuit, state regulators claim that the OCC is overstepping its authority to create so called special purpose banks. A special purpose national bank is a national bank chartered specifically to do at least one of the following: receive deposits, pay checks or lend money. The OCC argues that it is authorized to grant a special purpose national charter to a company whose technology platform permits it to engage in at least one of these core activities. This is an aggressive interpretation of its powers. If it is correct, then it could authorize the creation of platform-based lenders, even if they don’t accept deposits.

Behind the legal argument is an extremely important policy debate about how much authority state regulators should have to impose consumer protection laws on financial institutions. For example, under one scenario, payday lenders could avoid state regulation, such as New York usury laws, by adopting technology platforms and getting a national charter. There is also a safety and soundness concern. If a fintech didn’t accept deposits, it would not be subject to the oversight of the Federal Deposit Insurance Corporation.

Credit unions and community banks can’t stay on the side lines in this debate. The big guys already have the platforms in place to compete with an Apple Bank. In contrast, credit unions constrained by FOM requirements, could bear the brunt of the first wave of these federally chartered financial hybrids.

Think of it this way: Every technology vendor that wants to partner with you could instead decide to directly compete against your credit union.

 

Entry filed under: General.

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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