Fintechs shouldn’t be granted easy outs on CRA

Bank regulators, with assistance from Congress, have kept nonbank behemoths from entering the gates of the banking kingdom for decades. But that rapidly changed in 2020.

While a few state regulators and the Federal Deposit Insurance Corp. have gradually opened the banking doors to industrial loan companies, the Office of the Comptroller of the Currency has opened the floodgates by encouraging and lately, approving, fintechs to pursue national bank charters.

Varo Money was the first fintech to receive a full national banking charter from the OCC in July, a process that cost nearly $100 million in three years. That expense, plus $104 million of required capital, was no problem as Varo easily raised $419 million from investors, including Bono’s $2 billion Rise Fund promoting social causes. A few months later, the OCC gave Social Finance Inc. preliminary approval for a national bank charter.

And on Dec. 30, the OCC approved LendingClub’s purchase of Radius Bancorp, moving the online lender one (big) step closer to becoming a bank. Other regulators have also followed suit, albeit more slowly, like the FDIC’s deposit insurance approval in March for Square, a digital payments company, to form an ILC.

Such actions will only encourage many other fintechs in their attempts to crack into the banking system.

This competition is welcome so long as there is a level playing field. But the banking overlords have not always been fair. For example, credit unions with the help of congress continue to have competitive advantages in at least three areas: exemptions from similar taxes, the Community Reinvestment Act and reporting midyear branch deposits.

Challenger banks and fintechs might not mind paying similar taxes to that of banks, with their increased efficiency in serving customers with superior technology without costly branches.

Many fintechs initially pushed back on having to comply with CRA since they, like credit unions, argued they already focus on low- and moderate-income households and small businesses. In a 2017 comment letter when the OCC was first considering a special banking charter for fintechs, SoFi argued that applying CRA requirements “under the rubric of ‘financial inclusion’ ” was inappropriate for “institutions without operations based in specific geographic communities.”

Realizing compliance was a given, most fintechs opted for CRA “strategic plans.” But these plans don’t work as well for communities in need because it allows the bank to set their own goals for what’s considered a satisfactory and outstanding rating. This is a form of self-regulation, the first cousin of no regulation.

Regulators almost always approve strategic plans, only requiring community input which often comes from friendly community groups.

Rather than a tough in-class exam, the strategic plan is like a take-home test that can allow better ratings than banks that have to comply with the traditional CRA exam. Banks with strategic plans are three times more likely to receive an outstanding rating.

As regulators have begun reviewing fintech applications to form a bank, they’ve also made significant moves in revamping the 1977 CRA requirements this year.

The CRA reforms as finalized by the OCC and proposed by the Federal Reserve, retained the strategic plan option at the behest of some of the largest banks using them.

As the Biden administration moves in, it should consider a stronger CRA reform, sticking to its original intent of revitalizing communities. This can be accomplished either by improving the strategic option with specific rating guidelines and removing its fail-safe option, or better yet, eliminating this CRA loophole.