In 2018, the Office of the Comptroller of the Currency unveiled a specialized bank charter that would not require deposit-taking. But the new charter, tailored for the fintech industry, quickly got mired in legal challenges and has never gotten off the ground.
Now, in the waning days of the Trump administration, one San Francisco-based fintech is attempting a workaround to that logjam. If it’s successful, Figure Technologies would get some of the key benefits of being a bank without paying certain costs that are traditionally borne in exchange.
Specifically, the firm would get the ability to preempt state interest rate laws, while it would avoid oversight by the Federal Reserve Board and the Federal Deposit Insurance Corp. It would also skirt the obligations normally imposed by the Community Reinvestment Act.
Figure’s unique application is being seen as a test case. Industry insiders believe that if the company gets approval from the OCC, and its strategy stands up to any subsequent legal challenges, its blueprint will likely be copied by other tech companies. That possibility is feeding longstanding concerns in the banking industry about the prospect of head-on competition from the likes of Google and Amazon.
“I think it would be precedent-setting if this was approved, and would provide a roadmap for larger, big tech companies to get charters from the OCC,” said Christopher Cole, executive vice president and senior regulatory counsel at the Independent Community Bankers of America.
Figure applied in early November for a national bank charter, but with a twist that seeks to emulate the value proposition offered by the fintech charter that the OCC introduced more than two years ago. The key to the company’s approach is that it would not take FDIC-insured deposits, but it would take uninsured deposits of over $250,000.
The aim is to navigate a tangle of laws that arguably require banks to take deposits, but not necessarily insured ones. Some of these laws predate the establishment of the FDIC in 1933, prior to which deposits existed, but deposit insurance did not.
The uninsured deposits, which would come from accredited investors, could function much like loans that carry a relatively high interest rate. Figure would not necessarily have to gather a lot of uninsured deposits, and those deposits do not appear to be a crucial part of the company’s business strategy. But the company’s unorthodox approach would bring regulatory benefits.
Because Figure Bank would not hold insured deposits, it would not be subject to the FDIC’s oversight. Similarly, the absence of insured deposits would prevent oversight by the Fed under the Bank Holding Company Act. That law imposes restrictions on nonbanking activities, and is widely thought to be a deal-breaker for tech companies where banking would be a sidelight.
One downside to Figure’s approach is that the company would not get the benefit of a stable, low-cost funding base that comes with offering insured deposits, though the company does plan to offer deposit accounts to consumers through a partner bank.
“This model, if it’s approved, wouldn’t be for everyone. A lot of would-be banks want to be banks specifically to have more resilient funding sources,” said Michele Alt, a co-founder of Klaros Group who worked on the Figure Bank application.
But she added, “I think if it’s successful, a lot of people will be interested.”
Figure, founded in 2018, currently offers home equity lines of credit and mortgage refinance loans. The firm says that its use of technologies, including blockchain, have significantly reduced the cost and the amount of time that it takes to originate home equity lines. Figure plans to add deposit accounts and point-of-sale credit through a mobile app, according to its application for a bank charter.
Figure CEO Mike Cagney said in an email that under a state regulatory structure, the company will need more than 200 state licenses in 2021. A national bank charter would consolidate supervision with the OCC.
“If in the future Figure Bank decides to engage in the full suite of banking services, including offering insured or demand deposits, then we would of course become subject to Federal Reserve supervision and regulation,” said Cagney, who co-founded Figure
Figure is one of several companies that have sought to secure nontraditional bank charters during the Trump administration. Those seeking industrial bank charters — a path that avoids oversight by the Fed, but not the FDIC — have included the payment processor Square, the investment firm Edward Jones and the student loan servicer Nelnet. General Motors, which has an auto-lending arm, is also
This wave of applications followed an informal freeze on nontraditional charters during the Obama administration. “There clearly has been a much greater openness on the part of the regulators,” said Brian Graham, a co-founder of Klaros.
Just as some industrial bank applications have met opposition from banking groups, Figure’s effort is expected to draw strong industry pushback. “In order to get a traditional bank charter,” said Cole of the ICBA, “they should be taking insured deposits.”
If the [OCC] grants this application, it effectively...opens the door for Big Tech and large retail companies to gain all the benefits of a national bank charter without being subject to consolidated supervision.
John Court, executive vice president and general counsel at the Bank Policy Institute, which represents many of the nation’s largest banks, expressed similar concerns about Figure’s application.
“The OCC has never before chartered a deposit-taking, uninsured national bank, and they have not clearly shared under what legal authority they are planning to do so now,” Court said in an email.
“If the agency grants this application, it effectively creates a new uninsured bank charter particularly susceptible to bank runs, and it opens the door for Big Tech and large retail companies to gain all the benefits of a national bank charter without being subject to consolidated supervision like other banks.”
The Bank Policy Institute and the Independent Community Bankers of America are among nine organizations, including both industry associations and consumer advocacy groups, that recently asked the OCC to provide a 90-day comment period on novel charter applications. An OCC spokesman said Wednesday that the agency plans to maintain a 30-day comment period, which is prescribed by regulation, for the Figure application. Comments are due by Dec. 7.
Cole expressed suspicion that acting Comptroller Brian Brooks, whose tenure could end shortly after President-elect Joe Biden takes office, is trying to expedite Figure’s application. “I’m concerned that the comptroller wants to approve this quickly before he leaves office,” Cole said.
The OCC spokesman declined to comment on what he called speculation about the agency’s motivation.
A spokeswoman for the Conference of State Bank Supervisors, which has been fighting the OCC over the fintech charter, said that the group is reviewing available information about Figure’s application. She declined further comment.
In 2018, the New York State Department of Financial Services sued the OCC over the fintech charter. The state agency won a key victory last year when U.S. District Judge Victor Marrero ruled that the business of banking requires receiving deposits. The case is currently before the U.S. Court of Appeals for the Second Circuit.
By proposing to offer only uninsured deposits, Figure may have found a loophole, but there is still some uncertainty about whether its strategy will hold up in court. Marrero wrote in his 2019 opinion that a provision of the Federal Reserve Act requires national banks to obtain deposit insurance.
Another lingering question about the Figure application involves the Fed’s decision-making under a scenario where the OCC grants the company a national bank charter. The central bank would then have to decide whether to grant Figure, as an uninsured depository, direct access to the payment system. Cagney said in his email that the company would welcome such access.
