This article was published in American Banker on August 16, 2018. It is reprinted here with permission.
As reported in American Banker, consumer advocacy groups are concerned that financial inclusion expectations for fintechs chartered as special-purpose national banks may not perfectly mirror the requirements of the Community Reinvestment Act.
This possibility exists because the final version of the Office of the Comptroller of the Currency’s licensing manual supplement for fintechs lacks the same level of specificity as the draft manual that was published for comment last March. Consumer advocates have been steadfast in their insistence that the substance of the CRA, which by its terms only applies to depository institutions, be applied to non-depository fintech national banks. Yet imposing CRA-like requirements on these institutions would likely result in reduced credit opportunities for low-income communities.
Congress enacted the CRA in 1977 in response to public criticism that banks were willing to accept deposits from persons living in economically distressed areas, but were unwilling to lend to those persons. The CRA is designed to ensure that banks and thrift institutions “serve the convenience and needs of the communities in which they are chartered to do business,” particularly low- and moderate-income communities.
But as the Congressional Research Service noted in a 2015 report, “generally speaking, regulatory guidance that discourages banks from making higher-risk loans may result in customers migrating to nonbank financial service providers (including payday lenders), thus weakening the effectiveness of the CRA.”
The report adds that “during the 1980s and 1990s, LMI communities experienced an increase in the supply of (subprime) mortgage products by nonbanking institutions not covered by the CRA as well as an increase in the use of alternative financial service providers, such as check cashers and payday lenders.” For a variety of reasons, including supervisory expectations for safety and soundness, the report finds that as a general rule, federal banking regulators are reluctant to “award banks [CRA] credit for originating most higher-cost loans.”
In sum, the report makes a strong case for the position that nonbank lenders located in low-income communities owe their existence to the ineffectiveness of the CRA in fostering credit availability. The same could hold true if these same standards are applied to fintechs that have been approved as national banks.
Nonbank lenders that make high-cost loans in low-income communities are frequently maligned for their profit-driven practices. In adopting the small-dollar lending rule, the CFPB acknowledged and accepted that the rule would reduce the geographic availability of such lenders. Yet it is undeniable that nonbank high-cost lenders are willing to extend credit in low-income communities when CRA-regulated banks are either unwilling or unable to do so.
The story of Nashville businessman Robert Sherrill is a case in point. Sherrill grew up in housing projects and served time in federal prison for drug offenses before the age of 30. In 2016, he testified before Congress on behalf of the payday lending industry, recounting how no banks were willing to lend him the funds he was seeking to start a commercial cleaning business. Eventually, Sherrill borrowed $250 from a payday lender, which provided the seed money for his now successful business.
Notwithstanding the relative lack of detail regarding financial inclusion in the final OCC licensing manual supplement, there are no indications that the OCC is rethinking the general appropriateness of applying CRA-like financial inclusion requirements to fintech lenders that become special purpose national banks. Rather, the American Banker quoted Steve Lybarger, OCC’s deputy comptroller for licensing, as emphasizing that “in no way, between the original draft and the final supplement, is there any intent of the agency to lessen” its commitment to financial inclusion.
It would be ironic if a policy aimed in part at generating credit opportunities in low-income areas winds up having the opposite effect. But if the CRA has, indeed, dampened bank lending in LMI areas, as the 2015 CRS report found, imposing CRA-like requirements on fintechs that become national banks would necessarily result in reduced, versus increased, credit opportunities in such areas.
As noted above, the OCC has provided no indication that it is rethinking its basic financial inclusion plans for fintech national banks. Yet the historical performance of the CRA indicates that broad reconsideration is warranted, beginning with an evaluation of how high-cost loans in low-income areas would be viewed by OCC examiners.
The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.