A quick guide to what’s at stake in the SoFi charter controversy
July 25, 2017 12:14 PM
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A quick guide to what's at stake in the SoFi charter controversy
When a highflying technology startup with a bluntly elitist brand seeks access to FDIC-insured deposits through the kind of charter Walmart once sought, a backlash is almost certainly inevitable.
Social Finance’s application for an industrial loan charter has not onlydrawn opposition from a coalition of incumbent banks and community activists. It also serves as a microcosm of several perennial debates in financial services policy.
From complaints about an unlevel playing field to warnings about systemic risk, from giving back to the community to fostering innovation, here’s a rundown of the issues.
Social Finance’s application for an industrial loan charter has not only
From complaints about an unlevel playing field to warnings about systemic risk, from giving back to the community to fostering innovation, here’s a rundown of the issues.
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Separation of banking and commerce
The industrial loan charter was historically used by nonfinancial companies such as Target, General Electric and General Motors to reap the benefits of a banking license. Critics say industrial loan companies are insufficiently regulated and can extend the federal safety net to commercial firms. The 2008 bailout of GMAC, the auto lender that started as a subsidiary of GM, “remains widely viewed as a backdoor bailout of GM and Chrysler,” Americans for Financial Reform said in a comment letter opposing SoFi’s application.
Even though SoFi’s existing business – student loan refinancing, mortgages, and other loans – is solidly financial, opponents of the application say nothing could stop it from entering, say, e-commerce. “SoFi might even become ambitious enough to set up an online retail company that would compete with Amazon,” wrote Christopher Cole, executive vice president of the Independent Community Bankers of America, in that group’s comment letter. Because ILCs are exempt from the Bank Holding Company Act, “none of these affiliates would be subject to the supervision or examination of the Federal Reserve.”
Even though SoFi’s existing business – student loan refinancing, mortgages, and other loans – is solidly financial, opponents of the application say nothing could stop it from entering, say, e-commerce. “SoFi might even become ambitious enough to set up an online retail company that would compete with Amazon,” wrote Christopher Cole, executive vice president of the Independent Community Bankers of America, in that group’s comment letter. Because ILCs are exempt from the Bank Holding Company Act, “none of these affiliates would be subject to the supervision or examination of the Federal Reserve.”
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Regulatory arbitrage
While no new ILCs have been approved since Walmart withdrew its application more than a decade ago, some bankers still fume about unfair competition from lightly regulated entrants. The ICBA, in its comment letter to the FDIC, also took the opportunity to urge legislators to block any future attempts to open new ILCs.
“Congress should close the ILC loophole because it not only threatens the financial system but creates an uneven playing field for community banks,” Cole wrote. It must do so “before it is too late and we have huge commercial or technology firms like Amazon, Google or Wal-Mart owning FDIC-insured ILCs.”
“Congress should close the ILC loophole because it not only threatens the financial system but creates an uneven playing field for community banks,” Cole wrote. It must do so “before it is too late and we have huge commercial or technology firms like Amazon, Google or Wal-Mart owning FDIC-insured ILCs.”
Community obligations
Another bone of contention is SoFi’s plan for meeting its obligations under the Community Reinvestment Act should its bank application be approved. The company’s suggestion that it would issue secured credit cards for low- and moderate-income customers, with an annual percentage rate above 20%, prompted the California Reinvestment Coalition to quip that the figure was perhaps a typo.
The National Community Reinvestment Coalition savaged SoFi’s carefully cultivated air of exclusivity. “Originally, SoFi’s products were available only to Stanford graduates, the elite university of its founders. SoFi is fixated on finding the best and the brightest and discarding the rest,” wrote John Taylor, the group’s president and CEO, in a comment letter. A notorious Super Bowl ad, in which the voiceover narrator comments on the young adults on screen, calling some “great” and others “not so great,” only reinforced that perception, he wrote. Further, Taylor wrote, SoFi’s use of algorithms in lending decisions raises concerns about disparate impact.
The National Community Reinvestment Coalition savaged SoFi’s carefully cultivated air of exclusivity. “Originally, SoFi’s products were available only to Stanford graduates, the elite university of its founders. SoFi is fixated on finding the best and the brightest and discarding the rest,” wrote John Taylor, the group’s president and CEO, in a comment letter. A notorious Super Bowl ad, in which the voiceover narrator comments on the young adults on screen, calling some “great” and others “not so great,” only reinforced that perception, he wrote. Further, Taylor wrote, SoFi’s use of algorithms in lending decisions raises concerns about disparate impact.
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Barriers to entry
Kent Landvatter, a Utah community banker, found the industry lobbyists’ arguments against the SoFi application unconvincing. Having run an ILC in the past, he wrote in a BankThink op-ed , “I can assure you that that bank was examined by the same regulators and held to the same standards as my current community bank. Industrial banks are FDIC-insured banks, period.”
So what’s the real motivation of industry opponents? “To me, this is more about competition than safety and soundness or consumer protection,” wrote Landvatter, the CEO of FinWise Bank, also known as Utah Community Bank, based in Sandy, Utah.
A protectionist attitude would ill serve an industry facing rapid technological transformation. “Doesn’t it make more sense to focus on how to evolve with it rather than how to reduce competition?” Landvatter asked.
So what’s the real motivation of industry opponents? “To me, this is more about competition than safety and soundness or consumer protection,” wrote Landvatter, the CEO of FinWise Bank, also known as Utah Community Bank, based in Sandy, Utah.
A protectionist attitude would ill serve an industry facing rapid technological transformation. “Doesn’t it make more sense to focus on how to evolve with it rather than how to reduce competition?” Landvatter asked.
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Openness to change
There may be a case that decades-old, idiosyncratic rules are holding back financial innovation in the U.S. The acting comptroller of the currency, Keith Noreika, recently expressed openness to the hypothetical idea that a tech giant like Google or PayPal could obtain a bank charter.
“If you look at it across the international sphere, ours is the only country that has this strict separation of banking and commerce,” he said. “And it’s historic, I understand it. But also having gone to business school and concentrating in finance, I know it’s not the best thing to put all your eggs in one basket.”
“If you look at it across the international sphere, ours is the only country that has this strict separation of banking and commerce,” he said. “And it’s historic, I understand it. But also having gone to business school and concentrating in finance, I know it’s not the best thing to put all your eggs in one basket.”
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Washington's role in fintech regulation
The arguments over SoFi’s application fall against the backdrop of a broader debate about whether federal agencies should regulate innovative fintech providers, such as online lenders, payment processors and digital currency exchanges. Noreika, for example, has expressed support for the idea, championed by former Comptroller Thomas Curry, of establishing a new banking charter for fintech companies. (The Office of the Comptroller of the Currency will not have a say on SoFi’s application.)
State regulators such as Maria Vullo, superintendent of the New York State Department of Financial Services, oppose the potential preemption of their authority. “We happen to have really strong laws in New York, and we have all these institutions, with billions of dollars in assets,” she said recently. “The amount of fees that New York would lose if this thing happened! ”
State regulators such as Maria Vullo, superintendent of the New York State Department of Financial Services, oppose the potential preemption of their authority. “We happen to have really strong laws in New York, and we have all these institutions, with billions of dollars in assets,” she said recently. “
Access to stable funding
If SoFi’s application for an industrial bank charter gets approved, the privately held firm will be able to collect FDIC-insured deposits. This would be a coup in CEO and co-founder Mike Cagney’s quest to build a broad relationship with SoFi’s customers. It would also help address an issue that has recently dogged the entire online lending industry: the concern that their sources of funding will prove too volatile during times of economic distress.
