Chartering “Fintechs” Puts Consumers at Risk

By Renato Rocha, Policy Analyst, Economic Policy Project, NCLR

Earlier this month, the Office of the Comptroller of the Currency (OCC) announced its plan to move forward with chartering financial technology (fintech) companies that offer bank products and services. This decision could drastically erode vital state oversight and consumer protection laws that protect working class Americans from predatory financial practices.

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Fintechs may be interested in a national charter so that they can comply with federal rules rather than seek licenses state-by-state, allowing fintechs to lend money, issue checks, and/or hold deposits at the national level. However, if chartered, fintech lending companies would also be able to avoid state interest rate caps due to the general absence of federal usury caps. For instance, in the context of payday lending, predatory fintech lenders would be able to offer small-dollar loans with limitless interest rates in states where payday lending is categorically prohibited. This would be harmful because consumers would be exposed to costly financial products and services, effectively stripping hard-earned money from American families still recovering from the recession.

Despite this development, it is doubtful that the OCC has the statutory authority to charter fintech companies. As Americans for Financial Reform points out, “The last time the OCC sought to charter nondepository institutions without specific statutory authority, it was blocked by the courts from doing so.”

Photo: Pictures of Money

Latinos are at the intersection of OCC’s decision: Hispanics have historically had limited options when seeking products and services to meet their financial needs. However, at the same time, Latinos are leading the way in adopting fintech products and services. Seventy-eight percent of Hispanics consumers use a mobile banking app, compared to 51% of non-Hispanic consumers. Fintech products can extend options to our community, but consumer protections would need to be put in place to ensure that these organizations are not engaging in predatory practices.

In an effort to address these concerns, NCLR was one of nearly 50 organizations that sent a letter to the Comptroller expressing “strong opposition to new federal nonbank lending charters that would enable chartered entities to avoid state interest rate caps, other state consumer protection laws, and state oversight.” This letter was not the only statement expressing concerns with OCC’s decision to charter fintech companies. The Conference of State Bank Supervisors (CSBS), the nationwide organization of banking regulators from all 50 states, also believes consumers will be at risk if OCC pursues a new federal charter. Specifically, the CSBS wrote, “State regulators believe … that a special purpose charter from the OCC for fintech firms is fatally flawed, and represents a direction that threatens to damage the U.S. financial system.”

Given the grave consumer protection concerns with nationally chartered fintechs, as well as our community’s limited access to mainstream financial services, and adoption rates of fintech products, NCLR will continue to work with consumer, civil rights, and other community organizations to see that consumer protections are not sidelined by fast-tracked innovation.

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