Banking regulators grapple with evolution of financial technology – Washington Examiner


A variety of banking and finance technologies have been introduced or popularized by upstarts since the 2008 financial crisis: digital currencies, new data points in determining creditworthiness, and automated anti-fraud processes. The Office of the Comptroller of the Currency, a bank regulator that operates as an independent agency within the Treasury Department, has been at the vanguard of grappling with how decades-old banking laws might apply to the changing world of banking.

In 2016, the comptroller’s office began developing a special purpose bank charter to effectively let nonbank financial technology firms that offer online lending, payments, or other financial services become banks for legal purposes without looking like a traditional bank or taking deposits.

Federal bank charters granted by the comptroller’s office allow banks to bypass state-by-state registration that startups find difficult and costly. The initiative allows startups to deal with one regulator in exchange for more direct oversight from the comptroller to ensure that they follow federal rules and laws relating to whatever services they offer. Firms such as LendingClub, a major online lender, have expressed interest in the charter in the past.

“The special purpose charter is another initiative to support responsible innovation that’s focused on entities that want to become banks,” Beth Knickerbocker, the federal agency’s first chief innovation officer, told reporters at a roundtable this month.

State bank regulators believe the federal agency overstepped its authority in the initiative, which allows firms to bypass state agencies that normally gatekeep financial operations in their states. Those state regulators have now filed multiple lawsuits. Initial court challenges from the New York Department of Financial Services and the Conference of State Bank Supervisors, an association representing state regulators, were deemed too early to continue — the comptroller’s office has yet to grant a special purpose charter to a financial technology company.

Both organizations refiled their suits after Trump appointee Joseph Otting, the comptroller of the currency, said he planned to continue the special purpose chartering program that was begun by his predecessor. On May 2, a federal judge in the Southern District of New York ruled that the New York regulator’s suit could go forward. In his ruling, Judge Victor Marrero rejected an argument from the federal regulator that banks do not have to take deposits.

“The Court finds that the term ‘business of banking’ … unambiguously requires receiving deposits as an aspect of the business,” wrote Marrero. “Indeed, the Court is not aware of OCC ever having chartered a non-depository entity as a national bank on the strength of the [National Bank Act]’s ‘business of banking’ clause.”

State regulators hailed as a victory Marrero’s ruling, which allows two of three grievances brought by New York’s financial regulator against the comptroller’s office to move forward.

“That gets to the core of our case,” Margaret Liu, senior vice president and deputy general counsel for the Conference of State Bank Supervisors, told the Washington Examiner. “We are hopeful that the judge in our case, here in D.C., will see things the same way.”

The legal uncertainty around the charter, as well as questions about how the Federal Reserve will treat recipients since national banks fall under the Fed’s jurisdiction as well as the comptroller’s, seem to have caused startups to hold off on applications so far.

“We currently have no applications,” said Knickerbocker, when asked about Otting’s desire to push forward on the project. “We are still continuing to have conversations with folks, and there continues to be interest in the charter. Hopefully we’ll see something soon.”

But that doesn’t mean the comptroller’s office is sitting on its hands as the case plays out. At the beginning of May, the banking agency announced a new financial technology pilot program for national banks to consult with the regulator about their use of new technologies, such as use of alternative data in underwriting or artificial intelligence programs aimed at monitoring for potential money laundering activity by customers.

The idea, put forward for public comment by the regulatory agency, is for banks to consult with them about the use of those new technologies, including partnerships with third-party firms that develop and offer them. The goal is to determine whether there is any risk to the bank, either from an operational or regulatory standpoint, in these new practices.

“If that’s the case, then we want to foster a discussion about that,” said Knickerbocker.



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