The Office of the Comptroller of the Currency’s (“OCC”) attention to modernizing regulation to better accommodate innovative products and industries is continuing full steam ahead since our recent post about a potential payments charter. In the weeks since we posted that article, Brian Brooks has become the acting Comptroller of the Currency, so it should come as no surprise that his goals are garnering some attention.

On Thursday, June 6, the OCC issued a notice of proposed rulemaking seeking public comment to update its rules for national bank and federal savings association activities and operations and an advance notice of proposed rulemaking seeking comment on rules on national banks’ and federal savings associations’ (banks) digital activities. These releases confirm that the agency is “reviewing its regulations on bank digital activities to ensure that its regulations continue to evolve with developments in the industry.”

As part of a substantial modification of the regulatory system, the OCC seeks comment on additional flexibility for banks with respect to permissible derivatives activities, tax equity finance transactions, corporate governance, anti-takeover provisions, capital stock issuances and repurchases, and participation in financial literacy programs.

In addition, the OCC seeks comment on a significant number of banking issues related to digital technology and innovation. The OCC asks whether current legal standards are sufficient flexible, whether they create undue hurdles, and whether there are other areas they should cover. Their requests for comments also touch on current questions, namely whether the pandemic has brought any concerns to light and what issues are unique to smaller institutions – which performed well with the rollout of the SBA’s Paycheck Protection Program, but may encounter hard times to come.

Brian Brooks, Chief Operating Officer of the Office of the Comptroller of the Currency (“OCC”) said on Monday that he believes the OCC should investigate the viability and utility of a non-depository payments charter: “One of the things I think we have to ask ourselves as an agency is, if it makes sense to have a non-depository lending charter, which was the original fintech concept, would it also make sense to have a non-depository payments charter?”

In his talk, given as part of the Consensus: Distributed virtual conference, Brooks focused on cross-border concerns that are particularly salient to crypto companies. He notes that we may have come to a point where the traditional state-federal divisions of licensing and oversight authority are less relevant, particularly in the crypto space. Brooks says there is an argument that “crypto looks a lot like banking for the twenty-first century,” in which case a single national license may provide modern update to the current patchwork of laws, which is burdensome and time-consuming for both payments companies and state regulators.

Brooks said “one of [his] missions at the OCC . . . is to investigate the extent to which over time it makes sense to think of crypto companies like banks and to think of charter types that might be appropriate for crypto companies.” While Brooks’ comments focused on crypto in mentioning a payments charter, he noted Stripe and PayPal as non-blockchain payments companies, which would presumably also be covered by such a payments charter.

Whenever discussing bank charter types, I’m reminded of a comparison made by Walt Moeling. Walt would always say that the bank charter choice is like choosing between a Ford and a Chevy truck. There are strong, die-hard advocates for the superiority of one over the other. But either one is functionally adequate, and will enable you to get from location a to b. Of course, neither is going to be confused for a Lamborghini or a Maserati either.

Looking at the breakdown of charters as of the beginning of 2019, while the majority of all U.S. banks are state, non-member banks (i.e. with primary federal supervision by the FDIC), each charter choice appears to continue to have its advocates.

The Office of the Comptroller of the Currency, the primary federal prudential regulator for national banks, has earned a reputation as the regulator of the largest banks, but the underlying data doesn’t necessarily support that viewpoint. While all of the four largest U.S. banks are national banks, in all asset classifications, there remains a variety of bank charter, showing that no one charter type is necessarily better based purely on asset size.

On July 31, 2018, the OCC announced that it had finalized parameters for its new limited-purpose financial technology national bank charter and is ready to begin taking applications.  This release follows several years of formal deliberation on the topic and coincided with the release of a 222-page U.S. Treasury report on innovation.  Industry reactions have been wide-ranging – will this level the playing field or usher in a FinTech “apocalypse“?

Highlights of the OCC notice include:

• Designation of the charter type as a national bank.  Like its other special-purpose charters, including the non-depository trust company or the credit card bank, the FinTech charter will be a “national association” in the National Bank Act sense of the term.  As the saying goes, membership will have its privileges (and burdens):  capital requirements, examinations, and federal preemption of certain state laws.
• Eligibility for qualified applicants that plan to conduct activities “within the business of banking.”  Pursuant to existing OCC regulations, a limited-purpose national bank not engaging in fiduciary activities “must conduct at least one of the following three core banking functions:  receiving deposits; paying checks; or lending money.”  In its FinTech charter announcement, the OCC notes that it “views the National Bank Act as sufficiently adaptable to permit national banks to engage in traditional activities like paying checks and lending money in new ways.  For example, facilitating payments electronically may be considered the modern equivalent of paying checks.”
• A requirement for a commitment to “financial inclusion.”  We will see how this element is administered.  In theory it provides a non-depository parallel to the Community Reinvestment Act (“CRA”).
• Publication and comment period.  Just as for other types of national banks, applications will feature newspaper publication requirements and will be generally subject to public review and comment.

The OCC stated that its decision to open the door for this new form of national bank “is consistent with bi-partisan government efforts at federal and state levels to promote economic opportunity and support innovation that can improve financial services to consumers, businesses, and communities.”  Comptroller Otting added:

Providing a path for fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation, and competition.  It also provides consumers greater choice, can promote financial inclusion, and creates a more level playing field for financial services competition.

Treasury’s report is consistent with these themes, noting, “A forward-looking approach to federal charters could be effective in reducing regulatory fragmentation and growing markets by supporting beneficial business models” and that the OCC should proceed with “thoughtful consideration” of FinTech charter applications.  Treasury also calls out specifically the need for updating regulations that relate to data aggregation, for addressing those which have become “outdated” in light of technological advances (e.g., in the mortgage lending and servicing space, according to Treasury), and for a regulatory approach that enables “responsible experimentation” in the financial sector.

On November 26, 2008, the FDIC issued a press release outlining a new plan to allow parties that do not have a bank charter to bid on failing institutions.  We will keep you up to date as additional details emerge on this new plan.  Below is the complete text of the FDIC’s press release.