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OCC Issues Draft Licensing Manual for Evaluating Charter Applications from Fintech Companies

On Wednesday, the Office of the Comptroller of the Currency (“OCC”) issued a highly-anticipated draft supplement to its Licensing Manual (the “Supplement”) for evaluating applications from fintech companies for a special purpose national bank (“SPNB”) charter. The Supplement explains how the OCC will apply its existing licensing standards and requirements to these companies. The OCC is accepting comments on the Supplement until April 14, 2017.

This publication follows comments by Comptroller Thomas J. Curry at the LendIt conference indicating that supplemental licensing guidance for fintech companies would be released soon.  Shortly after these comments, Republicans on the House Financial Services Committee sent a letter to Comptroller Curry noting that his term expires in April and directing the OCC to subject any such guidance to public comment and to refrain from finalizing the guidance before the appointment of a new Comptroller.  The OCC does not typically offer the public an opportunity to comment on procedural manuals and supplements, a fact noted in the OCC press release, so the OCC may have been influenced by the House Republicans’ letter.

The Supplement reflects principles broadly consistent with a white paper released by the OCC in December 2016. The OCC received a number of comments on its white paper. These comments are cataloged and analyzed in a separate document, the Summary of Comments and Explanatory Statement, also released by the OCC yesterday.

Some highlights from the Supplement are discussed below.

The Supplement describes the process that a fintech company would follow in order to apply for and obtain a SPNB charter, commencing with the company’s initial contact with the OCC and ending with the OCC’s final approval.

Initial Contact with the OCC

  • A fintech company seeking to apply for an SPNB charter should begin the process with an initial inquiry to the OCC’s Office of Innovation. The fintech company and the OCC may schedule an exploratory meeting to discuss the company’s business model, the Supplement, and the OCC’s expectations.

Pre-filing Communications with the OCC

  • Following initial contact, the fintech company may engage in one or more pre-filing meetings with appropriate OCC staff, including staff from the Licensing Division.

  • Before the initial pre-filing meeting, the company should provide OCC staff with an overview of the fintech charter proposal, which discusses both the business plan and any novel policy or legal issues implicated by the application.

  • The OCC will also request informational submissions, such as a draft business plan that includes a Financial Inclusion Plan (“FIP”), discussed below, before the company files the SPNB charter application.

Activities of the Proposed SPNB

  • Fintech charter applicants will only be permitted to conduct activities that are permissible for national banks under a statute, regulation, federal judicial precedent, or that the OCC has determined to be permissible. These activities include core banking activities such as lending money and facilitating electronic payments.  They also include nontraditional activities for which the company may need to seek approval from the OCC to conduct.

Filing Procedures

  • After completing the pre-filing phases, the applicant may file the charter application, which should include the business plan and an Interagency Biographical Report on all identified organizers.

  • Notice of the application is required to be published in a newspaper of general circulation in the community in which the prospective bank will be located, and the public will have the opportunity to comment for 30 days. Portions of the business plan, including the FIP, will be included on the OCC’s public website.

Chartering Standards

  • In addition to other standards, the Supplement emphasizes that the OCC will not approve charters for proposals that “inappropriately comingle banking and commerce.” Several comments on the December white paper raised potential commingling as a concern, and the OCC agreed that the commingling of banking and commerce could cause issues, including the fostering of anti-competitive effects and the concentration of market power.

Evaluation Criteria

  • The OCC identified four, non-exclusive criteria it will evaluate when deciding whether a fintech company applicant for an SPNB charter satisfies the standards and policy considerations for such charters. The agency will consider whether the proposed bank has:

    • managers and organizers with appropriate skills and experience;

    • adequate capital;

    • a business plan with a clear path and timeline to profitability; and

    • an adequate financial inclusion plan (“FIP”), described below, if applicable.

Coordination with Other Regulators

  • In considering fintech charter applications, the OCC will coordinate as appropriate with other regulators that have jurisdiction over the proposed SPNB.

Requirements for Organizers, Management, and Directors

  • As part of the application process, the OCC will evaluate whether the fintech company’s organizers, managers and directors are well-qualified and whether they have sufficiently diverse experience in banking and other relevant areas.

Business Plan: Overview

  • A comprehensive proposed business plan will be critical in the OCC’s assessment of fintech charter applications.

  • Fintech applicants should in general abide by the Interagency Business Plan Guidelines, but the Supplement also offers additional specific guidance applicable to fintech companies.

Business Plan: Risk Assessment

  • The application should include a risk assessment that identifies and discusses the particular risks the proposed bank will face given its business model. Examples include concentration risk, compliance risk, reputation risk, strategic risk, and operational risk.

Business Plan: Records, Systems, and Controls

  • The business plan should describe the proposed bank’s system for customer record keeping, transaction processing, and internal controls to protect customer data and process transactions.

Business Plan: Financial Management

  • The business plan should include a section on financial management that addresses capital levels and the liquidity profile for the proposed bank.

  • The business plan should include the company’s proposal for an initial minimum capital requirement that will be negotiated with the OCC; the final minimum capital requirement will be a condition to the OCC’s approval of the application

  • The business plan should also address liquidity and funds management. The OCC may include conditions in its final approval order relating to liquidity, such as the company entering into a liquidity maintenance agreement.

Business Plan: Monitoring and Revising the Plan

  • The business plan should discuss how the board of directors will monitor adherence to the plan and adjust or amend the plan as appropriate.

Business Plan: Alternative Business Strategy; Contingency Plans

  • For some applicants, the OCC will require an alternative business strategy that explains how the applicant proposes to manage scenarios where expectations differ significantly from the original plan.

  • All applicants should include realistic contingency plans, recovery plans, and exit plans to unwind the proposed bank in an organized manner if necessary.

Business Plan: Financial Inclusion Plan

  • Any fintech SPNB charter applicant with a business plan that includes lending or providing financial services to consumers or small businesses must submit a FIP as part of the business plan.

  • This FIP should describe how the proposed bank intends to engage with its market and community, including underserved populations, and how it intends to address the community’s financial needs.

  • The FIP should include proposed goals, approaches, activities, and milestones for financial inclusion. It should also include terms and conditions under which the proposed bank will provide financial services to consumers or small businesses.

  • The OCC will evaluate the FIP based on how it would support fair access to financial services and fair treatment to consumers, including, for example, policies and procedures that ensure offers will be made on a non-discriminatory basis and with full and fair disclosure of terms and conditions.

Preliminary Conditional Approval

  • The OCC will review a fintech charter application and decide whether to grant preliminary conditional approval or deny the application.

  • The preliminary conditional approval gives the bank permission to proceed with the organizational phase but not to open for business.

  • As part of this approval, the OCC will impose both standard and special requirements and conditions that the bank must follow, including potentially an operating agreement. Where applicable, the special conditions will include adherence to the proposed FIP.

Final Approval

  • Once final approval has been issued, the bank may begin to conduct business, subject to ongoing conditions and supervision by the OCC.

© 2017 Covington & Burling LLP

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About this Author

Michael Nonaka, Covington Burling, compliance enforcement attorney, transactional matters lawyer
Partner

Michael Nonaka advises banks, financial services providers, and non-bank companies on a broad range of compliance, enforcement, transactional, and legislative matters. He has worked extensively with federal and state banking agencies and with other federal agencies authorized to regulate financial services. 

Mr. Nonaka has significant experience advising clients on issues arising under financial services legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act. He has advised clients on, among other areas in Dodd-Frank,...

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Sam Adriance focuses on issues related to financial regulation, data privacy, and cybersecurity. He advises clients on a range of regulatory issues, including compliance with the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and other federal and state consumer protection laws.

Mr. Adriance is a member of the Maryland bar. He is currently not admitted in the District of Columbia, but is supervised by principals of the firm.

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