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States’ progress on fintech rules poses challenge for new federal regulators

Financial technology companies may find it more difficult to obtain national bank charters as President Joe Biden's incoming appointees consider whether federal regulation should supplant the frameworks some states have put in place.

New regulators at the Office of the Comptroller of the Currency might not seek to impede on the progress of fintech regulation made at the state level in recent years, and that could create an obstacle for fintech companies looking for a single charter that gives them access to lending or banking markets nationwide, industry observers said.

"I suspect that it's going to become more difficult and not less difficult to get a bank charter as we move forward," Scott Pearson, a partner at law firm Manatt Phelps & Phillips LLP, said in an interview. "As you see a transition at the federal level in who is running these agencies, you're likely to see it become more of an uphill battle to get a charter."

Many states have built out their financial regulation departments in recent years to protect consumers as fintechs have become staples in the financial services industry. In January 2020, for example, California Gov. Gavin Newsom unveiled plans to overhaul the state's financial regulator and model it after the Consumer Financial Protection Bureau. Advocates for state-by-state regulation believe it is better for consumer protection and are opposed to the impacts that federal charters have on state regulations, such as exemption from state laws and interest rate limits, Pearson said.

"There are a lot of big blue states like California and New York that really want to be able to regulate these companies, and they don't want those companies to be able to escape their usury limits and other laws through federal preemption," Pearson said.

A Democratic comptroller would likely be more conscious of impeding on states' regulations. "Under a Democratic administration, the appointees are going to be much more sensitive to the potential impact of federal preemption on what the states are doing to regulate fintechs," Pearson said. "Under the prior administration, things were really loosening up and it was becoming much easier to get chartered. And I think the pendulum is going to swing back the other way now. That doesn't mean it's impossible, but it's going to be more difficult."

Biden's pick for comptroller could be more cautious than former Acting Comptroller Brian Brooks, experts said. "I expect that whoever it is will be less likely to seek to preempt state laws than former Acting Comptroller Brooks," Arthur Long, a partner at law firm Gibson Dunn & Crutcher LLP who specializes in bank regulation, said in an interview.

Michael Barr, who was a top Treasury Department official in President Barack Obama's administration, is reportedly the pick to head the OCC. He has faced criticism for his ties to the fintech industry. But Barr has also been a long-time advocate for consumer protection, and he pushed for the creation of the CFPB during the Dodd-Frank Act negotiations.

Supporters of a federal approach say the variance in state regulation hinders fintech innovation and puts an unnecessary burden on companies.

"The laws of the states are not uniform, so something that may work well in North Carolina would be prohibited in Massachusetts," Sanford Brown, a partner at law firm Alston & Bird LLP, said in an interview. "That's a very inefficient way to do business on a nationwide basis. So having one agency, one set of laws that everybody agrees, 'those are the rules that apply to these organizations,' will make it much more efficient."

For that reason, the OCC and CFPB could ramp up their responsibilities and not defer to the states as much, according to Brown.

"The last four years, New York and California have taken the lead in aggressive consumer protection policies, while the federal government has been less focused on that. I think we'll see a shift at the OCC and the CFPB back to a more aggressive enforcement posture, which will make the states, even New York and California, less important," he said.

The issue of state versus federal regulation of financial service companies is a familiar conflict for the OCC. Over the past few months, a string of cryptocurrency-focused companies have applied for national bank charters with the OCC in order to more easily operate nationwide. Two companies that applied to convert their state charters to national charters have received conditional approval so far.

Acquisitions, such as LendingClub Corp.'s acquisition of Radius Bancorp Inc. and Jiko Group Inc.'s acquisition of Mid-Central National Bank, could be seen as a more viable route to secure a bank charter if it becomes harder to get a de novo charter, experts said.

"For those that decide they are all-in on banking ... an acquisition is a really good way to go," Brown said. An industrial loan company, or ILC, charter with the Federal Deposit Insurance Corp. could also be an attractive route for fintechs, Pearson said.