Weekly Industry Update: December 4, 2016
By Vy Phan
December 4, 2016
On the regulatory front, the OCC introduced a framework for granting national bank charters to FinTech lenders. In the ABS market, the first rated securitization of loans (Lending Club’s LCIT-NP2) consisting of Madden & Midland loans priced successfully. A strategic partnership between PeerIQ and TransUnion was unveiled to drive standardization, transparency, and liquidity for our industry.
Special Purpose National Bank Charter for FinTech
Thomas Curry, head of the Office of the Comptroller of the Currency (OCC), announced Fridaythat the agency would grant national bank charters to qualifying FinTech firms. Curry cited “public interest”, a “patchwork of supervision”, and the “great potential to expand financial inclusion” as motivations for the charter.
Special-purpose charters will be granted to firms that engage in one of three banking functions: lending, receiving deposits, or paying checks (e.g. issuing debit cards or enabling payments).
The proposed charter offers federal pre-emption of conflicting state laws. Under the charter, non-banks must comply with laws applicable to other national banks (BSA, AML, OFAC, etc.), and continue to adhere to relevant consumer protection laws (e.g., FCRA, ECOA, TILA, etc.). Many of the largest FinTechs, particularly those that are service providers to banks, already comply with the foregoing today.
However, under the charter, FinTechs will also be subject to qualitative and quantitative capital and liquidity requirements to ensure safety and soundness. The quantitative requirements are unspecified, although they will be at a level lower than banks accepting insured deposits.
Access to liquidity and financing remains the most pressing challenge for non-banks more generally. The charter will not solve this, on the contrary, access to reliable liquidity and funding is a pre-condition for the charter. (FinTechs will not have access to government-insured deposits under the charter; instead they must apply to the FDIC for the privilege and, if granted, would be paired with capital requirements and incremental supervisory standards associated with traditional banks.)
Charter requirements will require significant investment in governance, personnel, systems, and creating a top-down culture of compliance. The criteria that most FinTech firms will struggle with are the to-be-defined capital and liquidity rules. In determining the rules, the OCC is trading-off the goal of public confidence in national banks and the banking system generally, with the goal of expanding access to credit and encouraging innovation.
Our speculation based on the qualitative criteria in the proposal and the “safety and soundness” standard is that FinTechs that have liquidity, funding, or going concern risks will struggle to obtain charters.
The likely beneficiaries of the charter will be technology firms that can satisfy their liquidity needs from operations or sale of marketable securities (under various market conditions), and have credible access to the capital markets. Payments firms like Google, Apple, Paypal, and Amazon would fit the profile, as well as large non-bank lenders that have de-risked their business models.
We note that the OCC is receiving comment letters through January 15th, 2017 we may change our view once explicit quantitative criteria on capital and liquidity requirements are disclosed in the final rules.
Technology firms may also choose to avoid the charter to maintain a culture of growth and innovation. Partner funding banks such as Web Bank and Cross River will continue to play an important role for all but the largest non-bank lenders.
PeerIQ summarizes below the baseline supervisory standards from the OCC’s “Exploring Special Purpose National Bank Charters for FinTech Companies”:
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- Opal Group’s, “Marketplace Lending and Alternative Financing Summit” December 4-6 in Dana Point, CA. Ram will join a discussion on “Getting Prepared as a First Time Securitization Issuer”.
- New Partnership Promises Better Data for Marketplace Loan Buyers (American Banker, 12/1/16)
- BRIEF-Peeriq and TransUnion Enters into a Strategic Partnership (Reuters, 12/1/16)
- Data and Analytics Firm Pair Up (SCI, 12/4/16)
- PeerIQ and TransUnion Partner to Provide More Transparency to Marketplace Lending(LendAcademy, 12/1/16)
- PeerIQ & TransUnion Join Forces to Bring Data Transparency Solutions to Marketplace Lending (CrowdFundInsider, 12/1/16)
- New $100m Lending Club Securitization (AltFi, 12/1/2016)
- PeerIQ and TransUnion Forge Strategic Partnership to Bring Suite of Data Transparency Solutions to Marketplace Lending (Yahoo, 12/1/16)
- PeerIQ and TransUnion Partner with Transparency in Mind (Bankless Times, 12/2/16)
- Regulator Will Start Issuing Bank Charters for Fintech Firms (WSJ, 12/2/16) New proposal by the OCC ill allow fintech firms to become ‘special purpose national banks’.
- Fed’s Brainard: Fintech Has Potential to Expand Access to Credit (WSJ, 12/2/16) Regulators at the Fed, OCC, Treasury, and SEC share the view that FinTech expands access to credit.
- SFIG Issues First Marketplace Lending Best Practices Report (SFIG, 12/1/16) SFIG releases “Green Paper” for best practices on data standards for marketplace lending.
- U.S. to Forgive at Least $108 Billion in Student Debt in Coming Years (WSJ, 11/30/16) Report shows that the government will forgive $108 Bn in student debt, costlier than expected.
- Citigroup Returns to Bond Market It Sat Out for Two Years (Bloomberg, 12/2/16) Citigroup is returning to credit-card ABS as deposit-financing grows more expensive.
- SoFi Adds DBRS to Mortgage Deal (AB Alert, 12/2/16) DBRS will rate SoFi’s debut mortgage bond offering, expected to total $250-$300 MM and price in mid-December.
- OneMain Dusts Off Springleaf Trust (AB Alert, 12/2/16) OneMain is resuming issuance of bonds under its Springleaf brand with a $460 million deal expect to price next week.
- The State of Small Business Lending: Innovation and Technology and the Implications for Regulation (Harvard Business School, 12/16)
- Kroll Bond Rating Agency Assigns Preliminary Ratings to LendingClub Issuance Trust, Series 2016-NP2 (BusinessWire, 11/29/16)
- Mosaic Announces New Financing Facilities for Over $550 Million in Home Solar Loans(Reuters, 11/21/16)
- In the Upside-Down World of Zimbabwe, $100 Trades for $102 (WSJ, 11/29/16) Zimbabwe is experiencing unusual dollar-to-dollar exchange rates.