Financial technology companies that lend online are sounding a cautious note on a U.S. banking regulator’s plan to offer them special federal charters because of concerns over legal challenges and requirements that are more onerous than expected.
The Office of the Comptroller of the Currency said last month it would accept applications for banking licenses from the likes of LendingClub (LC.N) and OnDeck Capital Inc (ONDK.N), online lenders that do business outside the traditional banking system. They then could operate nationwide under one banking license rather than a patchwork of state-specific regulations.
Fintech executives lobbied for the license and applauded the OCC’s decision, but they are not immediately rushing in, they told Reuters.
“You’re going to have a bunch of lenders sitting around waiting. ‘I’m not going to go first, you go first,’” said Brock Blake, chief executive of Lendio, a small-business lending platform.
No companies have formally applied for a charter yet. An OCC spokesman said it is “just one option” for such companies, and any firms receiving a charter will be regulated in the same way as similar national banks.
“The decision was made to support innovation, promote economic opportunity, and provide greater choice to consumers and businesses,” said spokesman Bryan Hubbard.
Many fintech companies expect the charter to become embroiled in a legal battle between the federal government and states.
The New York Department of Financial Services (NYDFS) and the Conference of State Bank Supervisors (CSBS) challenged the OCC in a pair of 2017 lawsuits, when the OCC was considering fintech charters. Those suits were dismissed as premature but both parties could now reprise them and have told Reuters they are considering their options.
The OCC said it has the legal authority to issue such charters.
“I would expect that challenge to pick up where it left off,” said Keith Noreika, a partner at the law firm Simpson Thacher who led the OCC for part of the initial legal bout.
A legal battle would not prevent companies from applying but could discourage many from doing so until the matter is settled.
“It could percolate all the way to the Supreme Court,” said Noreika, who added the OCC is primed for a fight.
The banking industry has pushed hard for the OCC to ensure fintech companies are held to a comparable standard and the charter will force fintechs to grapple with new banking demands, including being subject to capital and liquidity requirements.
One key addition to the application process is the requirement that companies provide detail on how they would navigate financial stress, a process many banks have found extremely onerous.
LendingClub CEO Scott Sanborn told Reuters in an interview the company was “really pleased” by the OCC announcement but that it needed to consider all the implications.
“We are certainly open to exploring this, but … there are a lot of details still to come,” he added.
Many fintech companies specialize in lending small amounts, a market segment that has long-attracted criticism from lawmakers who accuse such firms of charging predatory interest rates.
Mary Jackson, CEO of the Online Lenders Alliance, a group of online small-dollar lenders, said her members were “skittish,” fearing the charter may spark renewed criticism. She said they would need reassurance there would be a level playing field for all types of fintechs.
“There’s a lot of caution. I’m not sure the OCC has thought about the variety of lenders and the challenges from state regulators and others.”