The 2020 presidential race is in full swing, and speculation about whether President Trump will energize enough of his base to stave off former Vice President Joe Biden has dominated headlines for months. With the Nov. 3 election less than three months away, Bank Innovation spoke with lawyers, academics and think tanks to learn how the two campaigns view important policies surrounding banking and fintech. In the first part of this ongoing series, we examine what is at stake for bank charters as the election approaches.
This has been a busy year for bank charters. March saw the student loan servicer Nelnet receive approval for an industrial bank charter, while the payments giant Square received conditional approval. In July, Varo Money went from neobank to bank by gaining a national charter.
For fintechs, owning a bank charter means ditching the reliance on a partner bank and gaining the ability to launch new products. As nonbanks continue to explore the path to a charter, they must account for a potential administration change after the election. Although industry thinkers believe there would be some continuity between the Trump presidency and a potential Biden one, there are differences worth noting.
“I think it’s fair to say Democrats are universally skeptical of the industrial bank model where you have a big nonbank entity that then owns a bank,” said Julie Hill, a professor of law at the University of Alabama and a financial institution regulation expert. “It’s harder to say exactly where Republicans are on the spectrum of industrial banks. I think they are slightly more friendly to nonbank entities owning depository institutions.”
Hill noted, however, that a continued Republican administration doesn’t mean every bank charter will receive approval. For instance, Rakuten withdrew its application for an industrial charter this summer, marking the second time the online shopping platform has submitted and withdrawn a charter application.
Industrial bank charters, which are regulated by the FDIC but not the Federal Reserve, have faced controversy. Many banks believe large nonbanks gaining FDIC approval would create an unfair advantage that would squeeze smaller community banks. For example, Walmart had to abandon plans to gain an industrial charter in 2007, after both lawmakers and bankers criticized the plan. Senator John Kennedy (R-La.) introduced the “Eliminating Corporate Shadow Banking Act of 2019” last year to create stricter regulations around industrial bank charters. The proposed legislation has received support from the Independent Community Bankers of America.
“A loophole in the Bank Holding Company Act allows commercial and fintech companies to own or acquire [industrial loan companies] chartered in only a handful of states without being subject to federal consolidated supervision, leaving a dangerous gap in safety and soundness oversight,” the ICBA wrote in a statement. “The issue has become increasingly relevant as nonbank technology companies, such as Rakuten, Square, SoFi and Nelnet, have sought ILC charters under Utah law, and filed deposit insurance applications.”
According to Robert Savoie, an attorney at McGlinchey specializing in financial services and fintech regulation and policy, the chartering landscape won’t shift dramatically if Biden unseats Trump. “You are going to see continued interest in chartering if there’s a presidential administrative change,” Savoie said. “I don’t think you’ll see a material or more obvious change, but I do think the more roadblocks that are placed up in the chartering process — which is what happened after ‘08 and ‘09 with Dodd-Frank and you saw a dramatic chilling of the de novo bank charters — the more you’re going to see the fintech pivot away from non-depository authorities.”
Regardless of the presidential race, the future is already murky for the special purpose national bank charter for fintechs, which the Office of the Comptroller of the Currency (OCC) introduced in 2018., In October, the federal district court in New York ruled against the special national charter, forcing fintechs to explore traditional and industrial charters or to rely on a partner bank. The OCC is appealing this decision.
Thomas Brown is a partner with the Paul Hastings law firm who focuses on antitrust and competition and the global banking and payment systems practices. He said the OCC priorities under current Acting Comptroller Brian Brooks are similar to those under Thomas Curry, the former acting comptroller who was sworn in under Obama in 2012 and left office in 2017.
“I think the areas of sensitivity are likely to be similar,” Brown said. He added that both parties are interested in providing credit to disadvantaged communities at more attractive rates than existing predatory loans. “It becomes an easy issue, frankly, on either side to demagogue, but I do think at least some of the objectives are consistent.”
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