Aug. 1 — For some online marketplace lenders, the devil they know might look better than the devil they don't when it comes to proposals for federal bank regulators to issue national charters to financial technology companies.
The existing patchwork of state-by-state laws, though imperfect, has proven workable for many marketplace lenders and may be preferable to a national standard that features “a one-size-fits all” approach, according to some industry executives.
The issue surfaced in March, when Amy Friend, senior counsel for the Office of the Comptroller of the Currency (OCC), said at a conference in Washington that the agency had fielded inquiries from fintech companies about obtaining a national charter tailored to their needs. Since then, the concept has come up repeatedly at industry conferences and elsewhere. At an OCC-sponsored event in Washington June 23, for example, Maryann Kennedy, deputy controller for large bank supervision, said the agency was forming a committee to examine the question.
A charter for a non-bank fintech company that provides financial services would be modeled to some degree on the charters the OCC issues to banks. A key feature of the bank charters that a marketplace lender potentially would value is “pre-emption:” A national charter would establish a single set of nationwide standards that a company would have to meet, overriding the necessity of complying with an array of state standards.
“The current state-by-state patchwork creates a level of complexity for firms like CAN Capital that translates into higher operating costs that can impede our ability to provide the broadest access to capital to small businesses,” Parris Sanz, chief legal officer of CAN Capital, told Bloomberg BNA. “Harmonizing those state laws would provide some meaningful benefits.”
That doesn't mean, though, that a national charter necessarily is the answer for the marketplace lender, Sanz said: “It's about being able to identify the benefits relative to the burdens.”
In his July 12 testimony before a subcommittee of the House Financial Services Committee, Sanz said, “There are a tremendous number of details that would have to be explored and vetted thoroughly to understand exactly what the trade-offs are for a company like mine that’s strictly a small-business, balance-sheet model.”
The status quo, Sanz testified, is not so bad.
"Commercial finance companies can certainly operate in the face of the state patchwork,” Sanz told the subcommittee. "There are certain downsides to that, but whether or not a limited charter would be the answer, I think the devil is in the details.”
Joining Sanz on the witness panel, and echoing him, was Sachin Adarkar, general counsel of Prosper, a marketplace lender that specializes in consumer loans.
“The existing regulatory framework, I do feel like, has created a reasonable balance between consumer protection on the one hand and allowing these innovative companies to bring their innovations to market and to grow and to prosper at the same time,” Adarkar testified. “So I would be cautious about a new structure for that reason, just without knowing more about where the trade-offs would lie.”
The danger in a national charter is that it would effectively represent the law of the land, with little or no room for maneuvering by the lenders, according to Brayden McCarthy, vice president of strategy for Fundera, an online loan broker that works with several marketplace lenders and banks. McCarthy is a former economic policy advisor in the Obama White House and the Small Business Administration.
“If the OCC writes rules you don’t agree with, they are now applying them at a national level,” McCarthy told Bloomberg BNA.
Much of the testimony at the July 12 hearing involved a separate issue agitating marketplace lenders: whether federal regulators should continue to treat loans of $100,000 or less to small businesses — loans that make up the overwhelming majority of small-business borrowing — as business loans, or to treat them as consumer loans, which are subject to many more rules on disclosure and other factors.
The Department of the Treasury suggested applying consumer standards to those loans in its May report on marketplace lending, and Richard Cordray, the director of the Consumer Financial Protection Bureau, has outlined a similar approach. Sanz and other marketplace lenders are pushing back in Congress.
The courts, too, are wrestling with an issue that affects some marketplace-lending models: whether and when lenient rules on maximum interest-rate charges can be exported from states that have them to customers in other states with stricter usury caps; there is no national cap. The Supreme Court in June refused to hear one relevant case, Madden v. Midland Funding, and sent it back to a lower court for further consideration. Other related cases also are before the courts (124 BBD, 6/28/16).
The OCC has not disclosed what might be regulated by a national fintech charter, nor little else about its ongoing evaluation. The agency also has not said if it will decide to offer the charters, or when it might make that decision.
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