States continue to fight the federal government for regulatory control of financial technology (fintech) companies, and the latest fintech lawsuit contends that feds don’t have the legal right to regulate them.
Fintech companies are technology startups specializing in a certain aspect of financial services. Lemonade, for example, offers renter’s insurance, SoFi refinances student loans and offers personal loans, and Kabbage provides small business loans.
According to an October lawsuit brought by the Conference of State Bank Supervisors (CSBS) against the Office of the Comptroller of the Currency (OCC), Congress has not authorized the OCC to regulate non-depository institutions, and so fintech companies that do not accept deposits — which is, most fintech companies — should be regulated by the states.
“For more than a century, states have regulated nonbank financial activities,” CSBS states in the court filing.
Thus, the CSBS argues, the OCC should not accept formal applications for federal banking charters from fintech companies. The OCC announced it would begin accepting formal applications last summer.
Earlier this week, the OCC moved to dismiss the lawsuit on the grounds that the OCC has not yet received any formal applications from fintech companies seeking a federal banking charter.
But the application process can take a year or longer, so it is impossible to say how many fintech companies are working on applications or are interested.
Catherine Pickels, communications director for the CSBS, told InsideSources that state bank regulators have “significant policy concerns” beyond the legal argument.
“One [concern] is consumer protection and preemption [of state laws] that the federal charter would bring,” Pickels said. “CSBS’ view is that preemption is unacceptable,” she added, referring to how the feds overrode state banking laws like Georgia’s 2002 Fair Lending Act, which many believe could have mitigated the 2008 mortgage crisis and subsequent recession.
Pickels pointed out that the fintech industry covers a very wide range of financial services that are usually and primarily regulated by the states, including, as listed by the CSBS lawsuit, “mortgage lending and servicing, consumer lending and servicing, money-services businesses and money transmission, debt collection, credit-service businesses, credit bureaus, payday lending, title lending, auto lending and auto loan servicing and student lending and student-loan servicing.”
If the OCC suddenly starts regulating all of these new companies providing services traditionally regulated by states, she said, “that has significant implications to competitiveness and the fairness of the market.”
But the lawsuit isn’t so much about consumer protection and competition as it is about states losing their licensing revenues, according to a source familiar with the matter who declined to be named for legal reasons.
If fintech companies charter with the OCC rather than individual states, then states lose charter and tax revenue.
Fintech companies may also gain a competitive edge by chartering with the OCC: instead of dealing with a patchwork of state laws, which can be very expensive for fintech startups, they would be regulated by one national standard.
Brian Knight, director of innovation and governance at George Mason University’s Mercatus Center, wrote in an op-ed for The Hill that the CSBS should drop its lawsuit because federal charters would streamline fintech growth and innovation.
“A more cynical read would be that the states are seeking to protect the lucrative licensing fees they would lose if state-licensed firms got a federal charter instead,” he wrote. “However, this doesn’t mean that the states are entirely wrong. They are right that the nationally chartered fintech banks would have a competitive advantage over their state-licensed non-bank rivals, just as banks now have an advantage over non-banks.”
Meanwhile, the CSBS continues to explore ways to regulate fintech companies via the states. The CSBS’ Vision 2020, for example, outlines ways for states to work together to regulate non-depository, fintech institutions.
Pickels said one component of Vision 2020, a fintech advisory panel providing industry input, “is nearing completion of a set of recommendations to state regulators that detail some of the primary pain points and inconveniences of multi-state licensing and supervision. That will be rolled out with state regulators response to the recommendations in just a few weeks.”