In the ongoing question of how to regulate marketplace lending in the US, Comptroller of the Currency Thomas Curry (pictured right) says that he will consider special purpose national charters for fintech firms. Firms offering online loans, smartphone payments and other fintech products will be able to apply for the licence.
Speaking at an event at the Georgetown University Law Center, Curry said that a charter would be in the public interest.
“It is clear that fintech companies hold great potential to expand financial inclusion, empower consumers, and help families and businesses take more control of their financial matters,” he said.
Mr. Curry also said that the charter route offers an element of choice, allowing fintech firms to seek a charter without requiring them to do so. Lenders that do opt for the charter route will be evaluated in order to ensure that they have appropriate risk management, effective consumer protection, and strong capital and liquidity.
The existing regulatory framework for marketplace lending in the US is not bespoke to the industry; rather the platforms have been awkwardly crowbarred into an old regulatory regime. The largest players like Lending Club and Prosper rely on banks (such as WebBank and Cross River Bank) to originate the loans that are later sold to investors through an online marketplace.
This is commonly referred to as the exportation model, and it allows marketplace lenders to charge interest rates that exceed state caps, under the National Bank Act. Or at least it has done so far. The shadow of the Madden vs. Midland case continues to hang over the sector. The U.S. Supreme Court rejected calls to review a Second Circuit decision on the Madden vs. Midland case in June, in what was described as a serious blow to the marketplace lending industry.
With charter applications opening up the possibility of operating independently of the banks, Brian Korn, a partner at law firm Manatt, Phelps & Phillips, has raised a number of the questions about the process. He asks whether successful applicants will be able to pick a base state and use the usury limits of that state, as the banks do, and whether firms can continue to use a partner bank for origination purposes should they choose to.
More generally, Korn notes that the time it will take to obtain a charter, the review requirements and the capital requirements are all yet to be determined. If they are too high, he believes that take up for the new scheme will underwhelm.
“Fintech will always opt for the regulatory path of least resistance, all other things including enforcement risk being equal,” he said.
The OCC’s full paper – “Exploring Special Purpose National Bank Charters for Fintech Companies” – may be downloaded by clicking here. Comments must be submitted by 15 January 2017.