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Consistency in charters could improve fintech regulation

By Sasha Padbidri
17 Jan 2017

A letter published by The Conference of State Banking Supervisors (CSBS) on Friday is the latest in a round of opposition to the Office of the Comptroller of the Currency’s (OCC) fintech charter proposal. But the charter could help to streamline regulation of the fragmented industry.

The OCC’s proposal in December to issue national banking charters to financial technology companies, including marketplace lenders, has since been met with opposition from consumer advocacy groups as well as community banks. 

The CSBS is the latest group to oppose the OCC’s move, arguing in a January 13 letter that the new charter could potentially “expose taxpayers to the risk of fintech failures”, and “pre-empt existing, effective state laws”.

Under the existing loan origination model, marketplace lenders rely on a “partner bank” model, in which a nationally chartered bank originates the initial loan and sells it to the lender. 

However, the controversial Madden versus Midland case cast doubt as to whether lenders were legally bypassing state usury limits, and bottlenecked loan liquidity for some marketplace lenders. With the new fintech charter however, lenders would be able to avoid state-by-state licensing requirements.

While it is true that the charter will allow lenders to get around state regulation, the fintech industry could be made safer thanks to the greater regulatory certainty that comes with dealing with a single authority, rather than a patchwork of state regulators.

Something that has been reiterated by both lenders and government officials is the need for regulation that is consistent. This would be made possible if the OCC, when issuing charters, holds marketplace lenders to the same strict standard of regulations as it does for national banks and federal savings associations, which could potentially include capital and liquidity requirements.

However, streamlining regulations has its complexities. One of the things that the OCC needs to consider is the difference in business models between fintech firms, which the comptroller failed to address in his December announcement. With the formal comment period set to end on January 17, the hope is that that the OCC takes time to understand the nuances of different fintech business models, rather than throwing out vague guidelines and allowing companies to fall through the cracks.

By Sasha Padbidri
17 Jan 2017