FinTech, Marketplace Lending, and National Banks: the OCC White Paper
A week ago, March 31, 2016, the Office of the Comptroller of the Currency (OCC) began formally to address FinTech issues in the banking industry with the publication of a white paper, Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective. The Comptroller discussed the paper in remarks the same day at Harvard. He also reviewed the paper in remarks earlier today. Comments on the white paper are due by May 31, 2016. The OCC has scheduled a forum on FinTech on June 23, 2016, in Washington, D.C. For our clients and friends, FinTech and marketplace lending will be subjects of discussion at our annual financial services conference on May 18.
The white paper opens a two-month window in which banks, FinTech companies, and marketplace lenders can have their first semi-formal communications with a federal banking agency about the role of banks in working with new technology providers and alternative lenders to deliver banking services. This opportunity is the one chance for all institutions to get in on the ground floor of federal regulation of FinTech in the banking sector.
The paper warrants careful attention by three sets of stakeholders: banks, FinTech companies, and alternative lenders. Although the OCC has jurisdiction only over national banks and federal savings associations (collectively for the purpose of this alert, "national banks"), all banks should review the paper since it will strongly inform any work in this area by the other bank regulators, the Federal Reserve Board (the "Board") and the Federal Deposit Insurance Corporation (FDIC). Moreover, the white paper covers issues already under consideration at the Consumer Financial Protection Bureau (CFPB) and the Treasury Department. For FinTech providers, the white paper goes to the core of their work in the banking sector.
The white paper also holds considerable importance for marketplace lenders, even though they receive little mention in the paper, since regulation of FinTech will cover nearly every marketplace lender that does business with a national bank. Indeed, the OCC has statutory authority to examine nonbanks in their work with national banks. Even for those lenders that do not conduct operations with or for national banks, the OCC's decisions and activities may influence state regulation.
Before turning to the more practical aspects of the paper, a brief review of the OCC's purpose is in order. As the Comptroller explained in his remarks, the agency's "objective is to open the door for the banks we supervise to engage in the kind of innovation that can benefit businesses and consumers, including individuals who have not been well served or—in some cases served at all—by traditional banks." Responsible innovation, as defined by the Comptroller, is
one that is consistent with sound risk management practices. That means that the bank understands the product and the risks it carries, and has the capacity to manage those risks. It also means the product is compatible with safety and soundness and consistent with the bank’s strategic business plan. And finally, responsible means that it complies with laws and regulations, particularly those aimed at protecting consumers.
In order to create, in the words of the white paper, "a regulatory framework that is receptive to responsible innovation along with the supervision that supports it," the paper recites eight principles that will guide the OCC's approach to FinTech. Each of these principles suggests specific steps that banks should take and that will control their relationships with FinTech providers and alternative lenders. While these principles are limited to national banks, state banks and thrifts should expect that the Board and the FDIC will hold the same views in their supervision of FinTech and marketplace lending. The eight principles and their consequences are as follows:
- Support responsible innovation. This principle deals directly with the OCC's regulatory framework and contemplates several changes or developments at the agency. There will be a centralized unit to handle innovation issues; this unit may be new, or the OCC may designate an existing unit to take on this role. Additional guidance on new product development and third-party risk management seems likely, although the OCC will first review existing guidance, which is extensive. Licensing procedures may change for new activities. Finally, the OCC is open although not committed to pilot programs for new products and services.
- Foster an internal culture receptive to responsible innovation. The paper describes several ways in which the OCC already has sought to improve its receptivity to and internal communications about new technology. For outsiders, it is important to know that the agency has established a Payment Systems Policy Group to support examiners on payment issues. The agency also established an internal working group on marketplace lending. Additionally, in connection with the fifth principle below, the OCC is considering how best to use its National Risk Committee in its work on FinTech.
- Leverage agency experience and expertise. While the OCC has deep expertise in the full range of regulatory issues surrounding FinTech, this expertise is somewhat dispersed, and the agency seems likely to designate lead experts on innovation who follow closely industry trends and developments. These positions would be modeled on the designated experts the agency already has for more traditional banking issues including lending and operational risk.
- Encourage responsible innovation that provides fair access to financial services and fair treatment of consumers. This principle covers Community Reinvestment Act (CRA) and related matters. The agency makes four critical points here.
- The issue of branch location and the definition of communities in which a bank has responsibilities to low- and moderate-income populations will not change: "[b]rick-and-mortar branches are a stabilizing force in low-income neighborhoods, and innovative technology should not be seen as a substitute for a physical presence in those communities."
- The agency appears open to a surprisingly large number of products that could be offered to unbanked and underbanked consumers – including payday loans ("small dollar, unsecured consumer loans") and small business loans. The agency presumably contemplates that national banks will offer credit products that compete with or contain terms similar to marketplace loans now provided by nonbanks.
- Recognizing that, notwithstanding the importance of physical branches, innovative technology will improve access to banking products and services among low- to moderate-income populations, the OCC will issue guidance on how banks can receive CRA credit for various innovations.
- The OCC will support innovation "to increase access to unbanked and underbanked populations; to increase the speed, efficiency, effectiveness, and transparency of financial transactions; and to lend and invest in ways designed to address the credit needs of low- and moderate-income individuals and communities."
- Further safe and sound operations through effective risk management. This principle deals with the application of traditional corporate governance and risk management principles to FinTech. Banks must ensure that they have policies and procedures, reporting relationships, board involvement, and audit and monitoring practices that are comparable to those for other business lines. The paper underscores the importance of applying existing guidance to innovative activity, including guidance on strategic planning, evaluation of new products and services, the use of models, operational risk, cybersecurity, and the management of third-party relationships. The guidance on new products and services probably warrants special attention since it dates back to 2004.
- FinTech companies and marketplace lenders should be aware that the banking regulators' reach extends to any company that works with a bank or savings association to provide banking products or services. The regulators have statutory authority to examine such third parties with respect to such work. Moreover, banks and thrifts are required to monitor and even audit the work of these third parties and to include a variety of provisions that enable a bank or thrift to control much of the relationship.
- Encourage banks of all sizes to integrate responsible innovation into their strategic planning. The agency's focus on strategic planning has two components. First, every bank should address emerging technology in its strategic planning, even if the bank does not have specific plans in this area and views technology innovation only as a competitive issue. Second, if a bank intends to use new technology, the strategic plan must show how it will align with customer needs and the overall plan, as well as the sufficiency of the bank's risk management practices. The paper identifies several planning criteria that apply to the use of new technology, including reasonable financial projections, adequate staffing, consideration of all risks – and exit strategies.
- Promote ongoing dialogue through formal outreach. In order to continue its dialogue with all stakeholders – and not just banks – the OCC has scheduled a forum on June 23 in Washington, DC. The agency also will be planning workshops, other meetings, and "innovator fairs." The fairs should be of special significance; it is at these events that the OCC says it plans to discuss regulatory requirements and its supervisory expectations with both banks and nonbanks.
- Collaborate with other regulators. This principle is standard in any banking agency initiative. In this case, banks and FinTech providers can expect that the white paper will be the starting point for the approaches of the Board and the FDIC.
The paper concludes by inviting comment on nine questions, but, taken together, comments on any aspect of the relationship between banks and FinTech providers will be responsive. Nonetheless, three are of special importance.
- Two questions are specifically for community banks: the challenges they face regarding FinTech and what tools may be necessary to incorporate innovative products and services into strategic planning.
- The third question is for the FinTech companies and marketplace lenders and is central to their relationships with banks: how can the OCC provide guidance to nonbanks on the agency's expectations about arrangements with banks.
In sum, the OCC's paper marks a critical moment for both banks and FinTech companies to consider how banking regulation may change and affect new technology in the banking industry. The OCC, the Fed, and the FDIC are all just beginning to reflect seriously on their supervisory roles. All stakeholders should in turn begin communications with the agencies if they have not already done so.
 The white paper is available at http://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-39.html.
 The Comptroller's remarks are available at http://www.occ.gov/news-issuances/index-news-issuances.html.
 Today's remarks are available at http://www.occ.gov/news-issuances/news-releases/2016/nr-occ-2016-42.html
 In February 2016, the CFPB released a policy on review of innovative products. In July 2015, Treasury issued a request for information on marketplace lending.
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