The Office of the Comptroller of the Currency released a whitepaper in December outlining a proposal to extend specialpurpose national bank charters to fintechfirms that provide similar services to traditionalbanks.

OCC currently offers special purpose national charters tofinancial institutions that receive deposits, pay checks (thatincludes payments made through debit cards or other electronicformats, which OCC called the “modern equivalent of paying checks”in its proposal) or lend money. The proposal would extend theregulations and privileges of a national charter to fintech firmsthat do the same.

The OCC has only issued six special purpose charters since 2012,“a reflection of the economy and consolidation in the industry,”according to Brian Dolan, marketing director at law firm PepperHamilton.

Dolan moderated a webinar on Tuesday that explained whatapplying for such a charter would entail for a fintech firm, andwhat being approved for a charter would mean for itsoperations.

Some things to keep in mind regarding OCC’s proposal: Fintechfirms would not be required to seek a national charter to continueoperations. They could continue offering their products andservices in accordance with regulations in each state where they dobusiness.

Fintechs with a special purpose charter would be subject to thesame laws, regulations, and examination and reporting standards ofnational banks, as well as state laws that “only incidentallyaffect” national banks’ ability to fulfil their federallysanctioned duties.

However, if a state law has a discriminatory effect on thefintech, or would prevent it from conducting business, the lawwould be preempted, according to Greg Rubis, special counsel in thefinancial services practice group at Pepper Hamilton.

A special purpose charter could ease some of the burden offollowing multiple state regulations, but there are otheradvantages, Rubis explained.

Firms with a charter could export interest rates from their homestate, regardless of where they do business, Rubis said. Forexample, firms that establish Delaware or South Dakota as theirhome state could use those states’ higher interest rates on loansregardless of where the loan originated.

“We should keep in mind we’re talking about the home state.Unlike a corporation that can have its operations in New York butform under Delaware law, this statutory requirement is that youactually have your home base there,” Rubis explained.

Applying for a Special Purpose Charter

The application process for a special purpose charter beginswith a pre-filing meeting between the fintech firm and the OCC todescribe the firm’s three-year business plan, share informationabout the its leadership, identify any potential conflicts ofinterest, and discuss capital and subscription information. Thepre-filing meeting is private, and there are no time limits afterthe meeting for the firm to file (or not) for a charter.

The actual application is about 17 pages, Rubis said, althoughhe noted that banks that file for a charter find that once they’vecompiled all the information required, it’s “substantially longerthan that.”

Firms have to publish a public notice that they’re seeking aspecial purpose charter, Rubis said. “If there are a sufficientnumber of comments, or if the OCC decides this might be an area ofpublic interest, it could even decide to hold a publicmeeting.”

Firms have to file fingerprints of the leaders, IRS waiver formsand personal financial information along with the application. OCCis also looking for specific business plan and compensationinformation.

After the application is filed, OCC will conduct aninvestigation about the firm’s current operations, chances ofsuccess, and how it will ensure it operates safely and promotefinancial inclusion and fair access, Rubis said.

‘No Such Thing’ as Fintech Charter

“There really is no such thing as an OCC fintech charter perse,” according to Mark Dabertin, special counsel in the financialservices practice group at Pepper Hamilton. Rather, the OCC isextending special purpose charters to fintechs.

“Under certain circumstances, [the OCC is] willing to acceptcharter applications from fintech companies including thosecompanies that have limited activities,” he explained, meaning thefirm’s activities are limited to certain products or servicesofferings, not that they’re limited by law or regulation. The OCCis “imposing certain conditions on the approval of the charter,which makes those self-imposed conditions have the force oflaw.”

“Unlike certain special purpose banks that are common today,” hesaid, like trust or credit card banks, fintech firms approved for aspecial purpose charter “would not be recognized as having a BankHolding Company Act exemption.”

The Bank Holding Company Act applies to any entity that directlyor indirectly controls at least 25% of a bank’s voting securities,or can elect a majority of the board of directors. Banks thattake insured deposits would automatically be subject to the act, aswould those that make commercial loans, he said.

Credit card and trust banks are exempt thanks to the CompetitiveEquality Banking Act, which sets limits on activities thoseinstitutions can engage in. For example, special purpose creditcard banks can’t accept deposits under $100,000 and special purposetrust banks don't have access to the Federal Reserve discountwindow. Those exemptions wouldn’t apply to fintech firms unlessthey “chose to become, say, a credit card bank, in which case theywouldn’t need the OCC’s proposal to do that.”

Everything in a fintech firm’s business plan could become acondition of approval for a special purpose charter, Dabertin said.That means that “if you want to make any significant deviation fromthat business plan, you’re going to have to seek a no-objectionapproval from the OCC.”

A common condition for approval for any bank, not just fintechfirms, is the information security architecture, Dabertin said. TheOCC could require a third-party review a firm’s informationsecurity systems before approving its charter, he noted.

A contingency funding plan and diversification of risk will alsobe important factors in OCC’s decision to approve a charter for afintech firm.

Criticisms like those from Sens. Sherrod Brown, D-Ohio, andJeffrey Merkley, D-Ore., that OCC doesn’t have the authority togrant special purpose charters to fintechs are “baffling,” hesaid.

“The OCC knows they don’t have the authority to make new law.They can’t create a new charter; Congress would have do that,” hecontinued. “It really is just a regular national bank charter withimposed conditions, and there’s nothing new or unique aboutthat.”

Out of concern over uninsured banks, which wouldn’t be subjectto laws like the Community Reinvestment Act, OCC discussedfinancial inclusion in its proposal.

“I’ll be honest with you, we’re not sure exactly what thatmeans,” Dabertin said. It might mean fintechs will be required tomake their products and services available to all consumers withoutdiscrimination, or require them to invest in entities that reachfinancially disadvantaged consumers, he suggested.

“Our position would be that if the bank is not acceptingdeposits and not taking funds from a community, that it shouldn’thave CRA-like requirements,” Dabertin said.