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Appeals court urged to uphold decision nixing special purpose charters

July 31, 2020. Print article

Fair lending groups asked a federal appeals court to uphold a ruling that struck down a U.S. banking regulator’s proposal to issue special purpose charters to fintech companies, asserting that the charters would open the door to predatory lenders.

The , National Consumer Law Center and National Community Reinvestment Coalition filed an amicus brief on Thursday urging the Second Circuit appeals court to uphold the lower court’s ruling against the  U.S. Office of the , as they fear that special purpose charters “will make usurious lending even more widespread.”

The OCC initially considered issuing special purpose charters to fintech companies in 2016, publishing draft standards the following year. The and the both challenged the proposal in court, though the lawsuits were dismissed.

After the federal government said it planned to start accepting applications for the special purpose charters in 2018, however, the New York Department of Financial Services and Conference of State Bank Supervisors sued again. This time, a New York federal district court ruled that the National Bank Act requires companies in the business of banking to receive deposits, which the special purpose charter would not allow fintech companies to do. The OCC is now appealing that decision.

Under the special purpose charter, the trade groups said, predatory lenders would have fewer constraints than other national banks and would not be subject to the Community Reinvestment Act, which only applies to national banks that take deposits.

Additionally, the special purpose charter would allow companies to circumvent state laws that set interest rate caps to protect consumers from predatory lending, the groups said.

“The OCC’s safety and soundness supervision and enforcement of federal law will not compensate for the elimination of state interest rate caps,” the amicus brief said. “Federal law does not generally limit interest rates, and interest rate caps are the simplest and most effective protection against predatory lending.”

The trade groups noted in the brief that the was created in 2010 “precisely because the OCC and other bank regulators had failed to adequately protect consumers.”

According to American Banker, Google, and “dozens of other technology and fintech companies” have met with the OCC about the special purpose charter, but many have backed off over concerns that they could harm existing relationships with state regulators and that the federal regulator will not prevail in its legal challenge.

Fintech companies have spent the last several years trying to find a way to directly compete with national banks, including through industrial loan companies and national bank charters.

Earlier this year, and were the first companies to receive industrial loan company charters since 2005, and on Friday, became the first fintech company to receive a national bank charter. Varo was not impacted by the special purpose charter lawsuits because it had applied for a full-service charter.