Can financial technology unite Republicans and Democrats?
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Last year, the Office of the Comptroller of the Currency (OCC) set a course for the future of financial services. Now it appears that the agency is adrift without a captain, and a storm is upon it.

Like any 150-year-old institution, the OCC — an independent bureau within the U.S. Treasury Department that charters and regulates national banks — has been trying to adapt to rapid changes in how financial services are delivered in the information age, as well as maintain its relevance among a crowded field of federal and state financial regulators.

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In 2016, the OCC announced that it was moving forward with a proposal to create a special-purpose national bank (SPNB) charter for so-called financial technology, or “fintech,” companies. The SPNB charter would be available to fintechs, among other nonbank companies, that engage in the “core banking activities” of paying checks or lending money.

 

The OCC’s move was controversial, garnering praise from fintech companies seeking to avoid the burdensome state licensing process and criticism from state banking regulators and consumer advocacy groups concerned about federal overreach and preemption of state consumer protection laws.

The proposal even prompted a rare moment of bipartisanship. In January, Democratic Sens. Jeff MerkleyJeffrey (Jeff) Alan MerkleyDems mull big changes after Brazile bombshell Dems push clearer GMO labeling Dems cheer Flake after scathing Trump speech MORE (D-Wash.) and Sherrod BrownSherrod Campbell BrownTrump tells Senate Dems that 'rich people get hurt' in GOP tax plan Senate panel approves North Korea banking sanctions Trump names Powell as chairman of Federal Reserve MORE (D-Ohio) sent a letter to the OCC sharply criticizing the proposal. The senators questioned the OCC’s authority under the National Bank Act to issue charters to SPNBs that do not take deposits.

The senators noted that a non-depository company “does not encourage the fundamental banking act of building wealth by encouraging savings” and therefore “should not be able to refer to itself as a ‘bank.’” The letter also questioned why the SPNB charter would be available to all non-bank firms and not just fintech companies.

Republican members of Congress also joined the chorus. On March 10, 34 members of the House Financial Services Committee wrote to the OCC, warning the agency not to “rush this decision” without providing a “full and fair opportunity for all stakeholders to see the details of the special charter.” The members were particularly concerned about the timing of the OCC’s proposal — coming within a month of the expiration of Obama appointee Thomas Curry’s term as comptroller of the currency.

Undeterred, on March 15, the OCC issued a draft licensing manual for fintech charter applications along with an explanatory statement addressing some of the public concerns that had been raised.

Those opposed to the proposal wasted little time. On April 26, State banking regulators sued the OCC in federal court to stop implementation of the SPNB charters. They argue that the OCC lacks authority under the National Bank Act to regulate associations that do not engage in the “business of banking,” which they say is limited to receiving deposits. Among other things, the state regulators also claim that the agency failed to follow required procedures for issuing regulations.

The fintech charter proposal may not survive legal challenge. The OCC has said that it has authority to issue fintech charters to non-depository companies if they engage in other “core banking activities,” such as paying checks or lending money. But that position is based only on the OCC’s own 2003 regulation, which the state regulators are also challenging. And, as Sens. Merkley and Brown noted, other SPNBs that do not accept deposits (bankers’ banks, credit card banks, and trust banks) are specifically authorized by Congress under the National Bank Act.

In addition to the legal challenge, last week Comptroller Curry stepped down after completing his five-year term. Keith Noreika, a longtime banking partner at several major law firms and Trump transition team member, has been named acting comptroller until a replacement is nominated and confirmed by the Senate. The frontrunner for the permanent job is Joseph Otting, former CEO of OneWest Bank and close ally of Treasury Secretary Steven Mnuchin (his former boss at OneWest).

While Comptroller Curry expended significant agency resources and political capital on the fintech proposal — including creating a new Office of Innovation in the OCC and weathering Congressional criticism and a lawsuit — it is not clear that his replacement shares his commitment. With such uncertainty surrounding the OCC’s fintech proposal, now is the time for Congress to act. The OCC has staked its position: fintech companies should be brought within the federal banking system.

But supporters and critics of the proposal are asking the right questions: will a federal fintech charter ensure the United States can compete with countries around the world, which currently are experimenting with creative regulatory schemes — sometimes known as “sandboxes” — designed to facilitate responsible growth and innovation? Is the state-by-state licensing regime crushing innovation? What are the implications of a federal fintech charter for the United States’ dual federal-state system for banking regulation?

Congressional Republicans and Democrats have both recognized the importance of the issue, and Congress is the right institution to explore the implications for the burgeoning fintech industry and the federal-state banking system. And unlike the highly partisan warfare over the Dodd-Frank Act, the SPNB charter provides a rare opportunity for members of both parties to work together to fully examine the risks and benefits of providing a national bank charter to fintech companies.

The OCC has pointed the ship in the right direction. Now is the time for Congress to chart the course.

Rachel Rodman is counsel with Williams & Connolly LLP, where she specializes in representing consumer financial services companies in litigation and government investigations. She previously served as senior litigation counsel and enforcement attorney for the U.S. Consumer Financial Protection Bureau.

Charles Jones is an associate with Williams & Connolly LLP.


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