Weekly Industry Update: Acting OCC Head Noreika Comments on FinTech Charter and Online Lending

Leading regulators and lenders convened this past week at the Online Lending Policy Institute in Washington. Keith Noreika, the acting head of the OCC, delivered a keynote expressing support for online lenders. Noreika enlivened the audience when he made the case that marketplace lenders represent the evolution of banking

Also, in a major shift from prior OCC Head Tom Curry, Noreika affirmed that the proposed FinTech charter could be granted to commercial firms. Former Chair of the FDIC, William Isaac, was also constructive on the concept of enabling commercial firms to engage in banking to drive greater competition, customer choice, and expand access to credit to the 60% of Americans that cannot access a loan from a US bank. Historically, the separation of banking and commerce under the Bank Holding Company Act has prevented commercial firms (outside the ILC charter) from offering banking services. Our interpretation of the above is that, under the FinTech charter, commercial firms such as Walmart, Amazon, Google, and Facebook would have a path to offering banking services.

Cross River Bank CRO Adam Goller moderated a panel including PeerIQ (Ram Ahluwalia), Affirm (Alex Karram), Marlette Funding (Jeff Meiler), and former Massachusetts Commissioner of Banks, David Cotney. PeerIQ cited data and research from Columbia and Harvard Law concluding that the lack of regulatory clarity stemming from Madden-Midland has reduced the availability of credit in District 2.

This week, we cite key excerpts from Acting OCC Keith Noreika’s comments at the OLPI Summit and provide context to situate the remarks.

On Non-Bank FinTechs joining the banking system:
“Some companies that set out to be ‘bank killers’ a few years ago are discovering the advantages of being part of the banking system.”

PeerIQ Context: “Some companies” likely refers to SoFi and Square’s recent applications for charter.

On FinTech Innovation:
“I am very optimistic about the power of innovation to improve banking, expand access, and deliver better products and services in more affordable and sustainable ways. While much of the innovation comes from within the banking system itself, other innovations come from outside the system—from companies like yours.”

PeerIQ Context: Noreika sees FinTech firms as a source of innovation that benefits rather than disrupts the banking system. The OCC seeks to balance the safety and soundness of the banking system with the goal of driving innovation. One of the key challenges will be identifying non-bank lenders that meet the standards – including capital & profitability – typically applied to banks. The OCC signaled their focus on innovation last year by introducing the “Chief Innovation” office to serve as a clearinghouse for innovation matters.

On Timing for Issuing Charters:
“Interest also remains in the possibility of the OCC offering special purpose national bank charters to nondepository fintech companies engaged in the business of banking. … We have not, however, decided whether we will exercise that specific authority to issue special purpose national bank charters to nondepository fintech companies. We will keep you posted.”

PeerIQ Context: The Conference of State Bank Supervisors and NYS Dept of Financial Services have challenged the OCC’s authority to issue charters. Also, the OCC may be waiting for the nominee of Head of OCC Joseph Otting to be confirmed by the US Senate before introducing the FinTech Charter. Otting was approved by the Senate Banking Committee in early September.

On Support for a Congressional “Fix” to Madden-Midland:
“One example of action that Congress could take involves clarifying the long-held ‘valid when made’ doctrine at the heart of the Madden v. Midland Funding, LLC.15 The Congressional ‘fix’ supported by the OCC would provide that the rate of interest on a loan made by a bank, savings association, or credit union that is valid when the loan is made remains valid after transfer of the loan. … The proposal supports economic opportunity by helping banks, savings associations, and credit unions to sell their loans, thereby promoting liquid markets.”

PeerIQ Context: In the post-keynote Q&A, Keith Noreika indicated that the OCC may provide interpretive guidance, presumably supporting the valid-when-made doctrine, should Congress choose not to clarify the matter.

On the Importance of Risk Management to the Maturing Online Lending Industry:
While the consensus expects the economy to expand through 2018,7 we may be seeing cracks in performance with consumer unsecured charge-offs for marketplace lenders having increased since the fourth quarter of 2015. It remains to be seen how online lending companies and loans originated using new models will perform under stress. That’s part of a maturing business, and risk is part of economic opportunity. Success requires adapting to new market conditions and effectively managing evolving risks.

PeerIQ Context: We agree! Our business is built on credit risk and liquidity risk management. We believe standards and  transparency are cornerstone to ultimately unlocking liquidity for the sector. Reach out to PeerIQ to learn more about our enterprise-SAAS risk analytics software.

Stay tuned this week as release our quarterly securitization tracker.

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