Fintech charters, CRA and data sharing: McWilliams, Otting weigh in

April 24, 2019 6:07 PM

WASHINGTON — Federal regulators gathered Wednesday to discuss the fintech chartering process and some of the biggest challenges deterring the emerging industry from entering the banking space.

Federal Deposit Insurance Corp. Chairman Jelena McWilliams and Comptroller of the Currency Joseph Otting agreed, separately, at a fintech event hosted by the FDIC, that fintechs are having a harder time than expected proving capital and profitability in their business plans when seeking a charter.

They also agreed that the agencies are moving forward jointly on reforming the Community Reinvestment Act, but hedged on when a proposal could be released.

During the event, which covered a lot of ground beyond fintech, Treasury Secretary Steven Mnuchin and McWilliams agreed that they need to address data aggregation at banks and how consumers control their own data, as the FDIC is beginning to study the issue.

Following are highlights from the event.

Bank charter stumbling blocks

The Robinhood application is displayed in the App Store on an iPhone.

The OCC is beginning to see more fintechs apply for a full-service national bank charter — the online brokerage Robinhood became the second fintech to apply on Friday. The money servicer Varo Money also has an application with the OCC that has conditional approval pending FDIC approval for deposit insurance (a requirement for the charter).

Otting and McWilliams were careful Wednesday not to address any particular applicant, despite being asked about Robinhood specifically. However, both regulators noted that fintechs have generally struggled in proving they can meet the requirements for capital and profitability in their three-year trajectory plans in the applications for any bank charter.

“For fintechs, the issues become the capital because a lot of them have equity but not really capital. And a lot of them are profitable on paper but not really profitable,” McWilliams said. “And the question is: how do you address profitability and capital ... those are the issues that we’re working through as well when we look at the ILC [industrial loan company] applicants.”

Otting added that the OCC does take into consideration any enforcement action or consumer protection issue tied to the applicant. He was addressing a question about how certain issues — such as Robinhood's misstep late last year with the rollout of a new product erroneously marketed as if it would be backed by federal deposit insurance — play into the regulatory thinking for a national bank application.

“We always look at all that activity and try to understand: What was the premise of it and what was the assumption?” Otting said. “It’s not unusual for a bank to run amiss of ... certain laws. But often: did they self-report it, what was the remediation, and how quick did they remediate? Those kind of activities are really important to us.”

Hazy timeline for CRA

Jelena McWilliams, nominee for FDIC chair

Jelena McWilliams, member of the board of directors with the Federal Deposit Insurance Corporation (FDIC) nominee for U.S. President Donald Trump, speaks during a Senate Banking Committee confirmation hearing in Washington, D.C., U.S., on Tuesday, Jan. 23, 2018. If confirmed by the Senate, McWilliams would join other Trump appointees who are crucial to his goal of rolling back rules for the financial industry. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Otting and McWilliams separately agreed that agency heads, including at the Federal Reserve, were working toward significant reforms to the Community Reinvestment Act to modernize the 1977 law. However, both regulators hedged when asked about the timing for a notice of proposed rulemaking. This was a notable change of pace for Otting, who suggested earlier this month that a notice could be released by December.

The three agency principals on CRA “had one personal gathering and we’ve had one phone call and we have a succession of phone calls established to try to move this towards a notice of proposed rulemaking,” Otting told reporters after his speech at the FDIC event. “It may take eight weeks, it may take 20 weeks, but it just depends how we start to move this into a notice of proposed rulemaking.”

Otting said separately that the agency heads have “80-plus percent” alignment. McWilliams separately agreed that there was agency consensus on modernizing the law, revisiting CRA assessment areas and determining how lending data is being collected, for example.

“We all agree that the digital banking channels have changed the framework for the CRA and the framework itself has not changed,” she said. “But until you actually put the pen to the paper, you won’t see where some of the idiosyncrasy are” and “once you start drafting, that’s where a ton of issues come up.”

When asked the same question on timing, McWilliams said, “I can’t tell you the exact dates.”

More to come on data sharing

McWilliams said the FDIC has begun studying data aggregation and how data is shared between banks and third parties, including with fintech vendors.

“We need to take a look at this,” she said, clarifying it would be a “truly preliminary” study, not a rulemaking. “There are privacy concerns and cyber concerns. And from the FDIC’s perspective, the third-party vendor management is crucial."

Specifically, McWilliams said the FDIC is looking at who owns the data between parties as well as how much consumers have a right to their own data and whether more data should be shared.

Earlier in the day, McWilliams interviewed the Treasury's Mnuchin, who said that data aggregation was a critical matter but one that ought to be addressed through the private sector.

“This is a complicated issue and I would say my view from a consumer standpoint is, it should be very clear and very simple if your data is being shared, who it’s being shared with,” Mnuchin said. “In general, I like where there are private solutions as opposed to a government solutions.”

Full steam ahead for fintech charter

Comptroller of the Currency Joseph Otting

Former OCC chief Joseph Otting's CRA proposal was finalized in 2020. However, acting Comptroller Michael Hsu rescinded that in favor of the joint proposal.

Andrew Harrer/Bloomberg

Otting remained adamant that the agency expects an application for the OCC’s new special-purpose bank charter built for fintechs, unveiled last year. No firm has formally applied to date, partially due to concerns about being named or engaged in two pending lawsuits over the charter filed by the Conference of State Bank Supervisors and New York’s financial regulator.

But the concerns are a nonissue, the comptroller said.

“I don’t worry about those guys. ... It’s kind of a nuisance lawsuit as far as I’m concerned,” he said. “We’re hopeful we’ll get resolution to this shortly.”

He said the OCC expects to have an applicant in the second quarter this year.

Otting added that the agency is beginning to see interest in the charter from fintechs that offer small-dollar consumer loans and a “fair amount” of entities that offer custody banking services through blockchain technology.

“Think about in the technology wave where some of the ledger entities [could have] the ability to demonstrate to their potential customers that they have the seal of capital and liquidity by a national bank status” if approved for a charter, he said. “So they want to become a custody national bank.”