The Office of the Comptroller of the Currency released a white paper in December outlining a proposal to extend special purpose national bank charters to fintech firms that provide similar services to traditional banks.
OCC currently offers special purpose national charters to financial institutions that receive deposits, pay checks (that includes payments made through debit cards or other electronic formats, which OCC called the “modern equivalent of paying checks” in its proposal) or lend money. The proposal would extend the regulations and privileges of a national charter to fintech firms that do the same.
The OCC has only issued six special purpose charters since 2012, “a reflection of the economy and consolidation in the industry,” according to Brian Dolan, marketing director at law firm Pepper Hamilton.
Dolan moderated a webinar on Tuesday that explained what applying for such a charter would entail for a fintech firm, and what being approved for a charter would mean for its operations.
Some things to keep in mind regarding OCC’s proposal: Fintech firms would not be required to seek a national charter to continue operations. They could continue offering their products and services in accordance with regulations in each state where they do business.
Fintechs with a special purpose charter would be subject to the same laws, regulations, and examination and reporting standards of national banks, as well as state laws that “only incidentally affect” national banks’ ability to fulfil their federally sanctioned duties.
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However, if a state law has a discriminatory effect on the fintech, or would prevent it from conducting business, the law would be preempted, according to Greg Rubis, special counsel in the financial services practice group at Pepper Hamilton.
A special purpose charter could ease some of the burden of following multiple state regulations, but there are other advantages, Rubis explained.
Firms with a charter could export interest rates from their home state, regardless of where they do business, Rubis said. For example, firms that establish Delaware or South Dakota as their home state could use those states’ higher interest rates on loans regardless of where the loan originated.
“We should keep in mind we’re talking about the home state. Unlike a corporation that can have its operations in New York but form under Delaware law, this statutory requirement is that you actually have your home base there,” Rubis explained.
Applying for a Special Purpose Charter
The application process for a special purpose charter begins with a pre-filing meeting between the fintech firm and the OCC to describe the firm’s three-year business plan, share information about the its leadership, identify any potential conflicts of interest, and discuss capital and subscription information. The pre-filing meeting is private, and there are no time limits after the meeting for the firm to file (or not) for a charter.
The actual application is about 17 pages, Rubis said, although he noted that banks that file for a charter find that once they’ve compiled all the information required, it’s “substantially longer than that.”
Firms have to publish a public notice that they’re seeking a special purpose charter, Rubis said. “If there are a sufficient number of comments, or if the OCC decides this might be an area of public interest, it could even decide to hold a public meeting.”
Firms have to file fingerprints of the leaders, IRS waiver forms and personal financial information along with the application. OCC is also looking for specific business plan and compensation information.