The complaint  alleges that the OCC is over-reaching its authority in granting charter status to non-banks.  On  March 15,  2017, the OCC Issued a  Draft Licensing Manual Supplement for Evaluating Charter Applications From Financial Technology Companies pursuant to NR 2017-31.  This Manual set forth the application procedures, etc. to obtain this charter.    The OCC argues that the National Bank Act gives the OCC the legal authority to grant national bank charters to companies engaged in any aspect of banking and it is not prohibited from this action because a company delivers banking services in new ways with innovative technology.

The CSBS complaint  claims  that the OCC has gone far beyond the limited authority granted to it by Congress under the National Bank Act and other federal banking laws.  The OCC’s proposed action ignores Congress, seeks to preempt state consumer protection laws, harms markets and innovation, and puts taxpayers at risk of inevitable fintech failures.   The State regulators believe that there is already state licensing schemes in place to adequately protect consumers.  States also receive revenue from these technology companies by way of licensing fees and can expand banking departments with new hires to supervise these licensees.

The OCC Charter, which would potentially make it easier for these technology lenders to operate nationally,  has already been the subject of criticism, even in the industry.  In my informal conversations with industry leaders, the feeling is that the industry has already structured the business models based upon current state laws  and have expended considerable transaction costs to do so.  Of course, there is still the concerns regarding cost of funds that is not addressed by the state law licensing models.  Having been involved in structuring the business model for online commercial real estate lending and brokerage, there were concerns about doing business nationwide, and being able to offer our customers the same products and services, but we did create the state licensing business model that is still the model for compliance. 

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Rep. Emanuel Cleaver II,  raised certain concerns  in a recent letter to the CFPB (the “Cleaver Letter”) , which can help us answer this question.  As we know, fintech lending is based upon the use of algorithms to determine whether to provide commercial credit to a small business.  Since the algorithms are created by individuals  looking at various factors, an argument arises  that these practices could create higher interest rates thus,  discriminatory lending practices.  The Cleaver Letter raised issues regarding collection of data which would  better help us to understand the issues.

Dodd Frank Section  1071, amended the Equal Credit  Opportunity Act (“ECOA”) to require financial institutions to collect and maintain certain data in connections with credit applications made by women or minority owned and small businesses.  Such data includes the race, sex and ethnicity of the principal owners of the business.  At this time, the rule-making by the CFPB to implement Section 1071 has not taken place.

Another question asked is whether the CFPB has engaged in supervisory activities over fintech small business lenders?  The CFPB has stated that it has authority regarding small business lending and would like information about data and models for collection of information in this area.  The CFPB has been accepting consumer complaints related to  loans obtained from marketplace lenders.

What is the difference between institutional commercial business loans and the fintech lender?

The institutional lender has a relationship with its borrower, meets the borrower in person, analyzes the credit, etc.  There is already a statute which addresses discrimination called the Community Reinvestment Act   (“CRA”).     CRA authorizes  the federal financial supervisory agencies to encourage regulated financial institutions to help meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation. To enforce the statute, federal regulatory agencies examine banking institutions for CRA compliance, and take this information into consideration when approving applications for new bank branches or mergers and acquisitions.

There has been a discussion in the marketplace about access to commercial credit so the CFPB may very well create rules to enforce Section 1071.

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The Manual also outlines a set of  criteria specific to fintech companies that the OCC will use when evaluating applications, including the OCC’s requirement of a financial inclusion plan (“Financial Inclusion Plan”).   A financial inclusion plan should be set forth for each applicant whose business plan includes consumer or small business lending.   The financial inclusion plan will be an “enforceable condition” for any charter granted. Each financial inclusion plan must address the applicant’s proposed “goals, approach, activities and milestones” for meeting the needs of underserved individuals in its “relevant market or community.”

The OCC is seeking public comment on the Manual and the deadline for comment is April 14, 2017.

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Marketplace Lending is a term that has recently been applied to consumer and commercial lending using a technology platform to connect borrowers and lenders in a “smart” manner.  These new entities are generally not government regulated in the same way banks are, but do have state licensing requirements and if consumer or residential lending companies, for example, are subject to a wide range of federal law.  Borrowers are able to gain access to funds quickly and oftentimes at lower interest rates.  The funding sources vary from private investors to warehouse lines of credit.    Third party brokers, specialty lenders, lead generators and other players are penetrating the market.  We place marketplace platforms with traditional bank partners who wish to expand their fintech presence.

The conventional thinking is that marketplace lending platforms are user friendly and require less state and federal compliance which might not always be true and correct.   Structuring a collaboration, although creative from the legal viewpoint,  can give rise to a myriad of regulations and corporate cultural differences,  especially if we are working with consumer loan products.

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We offer a value-based consulting product to analyze goals, prepare a strategic plan and negotiate and document a transaction. I define marketplace lending as creating platforms to connect borrowers and lenders.

FinTech services are those using computer and other technology to enable banking and lending.  FinTech is used in the creation of the platforms.  The marketplace lender most often has an emphasis on new technology but when it enters the market, it has no expertise with state and federal lending law, including licensing issues.  Banks have regulatory expertise, but the systems are in constant need of modernization, updating loan products, etc.

I am working on an article “How to Successfully Strategic Alliances in Lending”  which gives an overview of the current state and federal law in this area and strategies to succeed.

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