The Office of the Comptroller of the Currency’s recently released guidance on preemption is a reminder of the fierce debate among U.S. bank regulators concerning the extent to which OCC-regulated firms are subject to state laws.
The guidance comes in response—as observed by the OCC—to state and local attempts to apply various Covid-19 response measures to all financial institutions in their jurisdictions, including those that address foreclosure and repossession moratoriums, loan forbearance, interest and fees limitations, and reporting requirements.
Although specific to the pandemic, the guidance reiterates the OCC’s longstanding, broad view of preemption of state laws under the National Bank Act.
The states, through the Conference of State Bank Supervisors (CSBS), shot back that the guidance was dead on arrival: constitutionally (states protect citizens’ health, safety and welfare), procedurally (the OCC must follow certain Dodd-Frank Act procedures), and substantively (the guidance is subject to a more exacting review under Skidmore deference).
Neither side has advanced new arguments. Nor do we expect this debate to subside. The OCC will likely continue to adapt the bounds of the “business of banking” as the industry evolves, and the states will likely challenge such efforts.
Recent related developments include:
- Continued FinTech charter support. The OCC’s special purpose national bank charter for FinTechs is meant to appeal to non-depository FinTech companies looking to conduct banking activities nationally without the burden of varying state licensing, lending and other restrictions or requirements. Despite litigation spearheaded by the CSBS and the New York Department of Financial Services, and one pending appeal, the OCC continues to support the FinTech charter initiative.
- Possibility of a new payments charter. According to the new acting Comptroller of the Currency, Brian Brooks, the OCC may consider developing a national payments charter. This new charter would preempt all state money transmission licensing requirements, and let firms obtain one charter, rather than many licenses. Initially, the proposed charter would not provide access to the Federal Reserve’s payments system. But for certain firms, including cryptocurrency exchanges, this should not be fatal. Nevertheless, litigation by the states will likely follow.
- New rules codifying views on preemption. The OCC and the Federal Deposit Insurance Corporation (FDIC) recently issued rules codifying their long-held interpretation of federal law that non-usurious loans originated by a bank and then transferred to a non-bank entity are not subsequently usurious under state law. The rules attempt to clarify the uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding LLC, which called into question longstanding “valid-when-made” principles relied upon by loan originators, securitizers and investors. Until courts defer to the rules, their effect remains unclear.
- New proposed rule clarifying when a national bank is a “true lender.” Under a new proposed rule, a national bank in a partnership with a third-party would be considered a “true lender” if, as of the date of origination, the bank is named as the lender in the agreement or funds the loan. The proposed rule anticipates receiving Chevron deference and seeks to simplify and clarify divergent court approaches.
Options for Financial Services Providers
Practically, these developments point to a persistent competitive U.S. landscape for charters, licenses, and other arrangements for financial services providers of all stripes.
While the FinTech charter remains clouded in uncertainty, no company has made substantial progress towards obtaining one. Instead, firms have turned to traditional options, including:
- Varo Bank, a mobile only neo-bank, obtained FDIC approval to receive insured deposits in February 2020 and, just last week, final approval from the OCC for a de novo national bank charter. This is the first instance where a non-bank FinTech has received a full national bank charter. It will be able to lend (among other activities) across the U.S. without multiple state licenses.
- LendingClub, an online peer-to-peer lending company, announced that it will acquire Radius Bancorp and its subsidiary, Radius Bank, a federal savings bank that is announced to become a national bank. As a result, LendingClub will become a bank holding company subject to regulation and supervision by the Federal Reserve. This move may signal renewed interest in another path to insured deposits: becoming a bank holding company by buying a neo-bank or tech-forward bank. The Federal Reserve’s recent final rule clarifying its controlling influence framework may provide more certainty to FinTechs, bank holding companies, non-US banks, and other investors exploring this option.
After years of uncertainty, the FDIC approved deposit insurance applications for two new industrial loan companies (ILCs):
- Nelnet Bank will originate and service private student loans and other consumer loans, as an internet-only bank.
- Square Financial Services will originate commercial loans to merchants that process card transactions through Square’s payments system.
Unlike LendingClub, the parents of these ILCs will not become bank holding companies subject to Federal Reserve regulation and supervision. Similar FDIC restrictions, however, will apply by written agreement. The FDIC recently issued a proposed rule to codify aspects of these agreements, in a move akin to the Federal Reserve’s rule on controlling influence.
In addition, the FDIC continues to consider other ILC applications, including a revised application by Japanese e-commerce company, Rakuten.
Each option involves different requirements, regulators, and considerations, including preemption and enforcement issues, and assessments/fees.
With inter-agency competition for charters, licenses, and other models, firms have many options to consider with respect to their U.S. market expansion in the financial services space.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Pratin Vallabhaneni is a partner in White & Case’s global Banking and Financial Institutions Advisory practices. He represents both US and non-US fintech, banking, broker-dealer, exchange, insurance, asset management and specialty finance companies, as well as their directors, senior officers and investors, on transactional, enforcement and regulatory matters.
Glen Cuccinello is a counsel in White & Case’s global Banking and Financial Institutions Advisory practices. He has extensive experience advising U.S. and non-U.S. banks and other financial institutions on a wide range of commercial regulatory matters.
Max Bonici is an associate in White & Case’s global Banking and Financial Institutions Advisory practices. He counsels U.S. and non-U.S. financial institutions on regulatory, transactional, and enforcement matters.
Any views expressed in this article are strictly those of the authors and should not be attributed in any way to White & Case LLP.