SoFi’s bid to become an industrial bank pulls FDIC into fintech fray
The Federal Deposit Insurance Corp. has so far managed to stay away from the growing battle over how America’s fintech industry should be regulated, but it looks likely to end when one of the nation’s largest online lenders has announced its intention to apply for a specialized banking charter. soon.
Social Finance Inc., the San Francisco-based consumer lender known as SoFi, is hoping to secure an industrial banking charter. This state-issued charter was once a popular way to organize a bank and was commonly used by companies not primarily in the financial services industry, but it fell out of political favor when Walmart tried unsuccessfully to ‘get a decade charter. since.
To get the charter, SoFi will need to get FDIC approval, which can be difficult, according to industry lawyers. No industrial loan company application has been filed since 2009, a period that includes a three-year moratorium imposed by the Dodd-Frank Act.
“The signals from the FDIC are still not favorable,” said Frank Pignanelli, partner at Foxley & Pignanelli in Utah, where many of the remaining industrial banks have charters. “We hope that over time the FDIC will change its perspective.”
In testimony before the House Oversight Committee last July, FDIC Chairman Martin Gruenberg said the agency welcomes deposit insurance claims. At the same time, he said industrial banks must meet the same standards as any other FDIC-insured bank, including minimum capital standards, insider trading disclosure and financial audit requirements.
The congressional hearing was called by Rep. Jason Chaffetz, R-Utah, who questioned whether the bureaucracy at the FDIC had discouraged nominations. At the time, concerns about the shortage of new industrial banks were largely confined to Utah, which was once home to a thriving industrial banking sector.
But SoFi’s plan to request a new charter raises the stakes considerably. If the company’s application is approved, other online lenders who are unhappy with their existing regulatory options may look to follow SoFi’s lead.
“It’s time for someone in the fintech space to put the ball in the right direction, speak to regulators and force the issuance of bank-style charters to fintech companies,” said Todd Baker, senior researcher at the John F. Kennedy School of Government at Harvard. , in an email.
Today, many American online lenders are partnering with banks that issue loans on their behalf to avoid state interest rate caps. But these arrangements were rejected by the courts.
Other online lenders get licensed in every state they lend, which can be an expensive, duplicative, and time-consuming endeavor.
In this context, the Office of the Comptroller of the Currency proposed to establish a special charter for financial technology companies. But the future of that effort hangs in the balance after the recent departure of Controller Thomas Curry, who has championed the new charter.
In addition, the desire of the OCC to establish a new fintech charter met with fierce resistance. States, who fear federal government encroachment. The States have filed two lawsuits against the OCC and launched their own effort harmonize registration and supervision between states. Consumer advocates also oppose the OCC’s plan on the grounds that the new federal charter would offer digital lenders a way to avoid state interest rate caps.
SoFi’s candidacy for an industrial banking charter is likely to plunge the FDIC into the midst of this controversy. Ultimately, the decision may lie with someone appointed by the Trump administration. The term of Gruenberg, former assistant to Democratic Senator Paul Sarbanes who has chaired the agency since 2012, expires in November.
FDIC spokesman David Barr declined to comment for this article.
Meanwhile, SoFi CEO Mike Cagney has acknowledged that his company’s candidacy has implications beyond his own company, raising the stakes for the FDIC.
“I think this will be the biggest challenge for the FDIC, and absolutely something the FDIC needs to consider,” Cagney told TechCrunch, who first reported SoFi’s plan to apply for a banking charter.
SoFi was founded in 2011 and has since funded $ 18 billion in student loans, personal loans, and mortgages. The company aims to become a full-service financial services provider for its young, well-heeled consumers. To this end, SoFi recently purchased Zenbanx, which offers mobile phone deposit accounts.
For SoFi, the decision to apply for an industrial banking charter is a decisive moment. Cagney once said he wanted to “kill banks”. But joining their ranks has become more attractive at a time when SoFi is looking to add deposit products and credit cards.
“He just can’t run his business without a long-term bank,” said Brendan Ross, CEO of Direct Lending Investments, which buys loans online.
If SoFi’s application for an industrial banking charter is approved, the private company will be able to collect the FDIC insured deposits. If rejected, SoFi can instead pursue a partnership that Zenbanx has established with WSFS Bank in Delaware.
For SoFi, obtaining an industrial banking charter has certain advantages over other types of banking charters, observers said. Basically, the company would not be subject to the Bank Holding Company Act, a law that would impose a series of new charges on companies with stakes in SoFi. The company would also avoid Federal Reserve oversight.
The OCC is not yet accepting applications for its fintech charter proposal. But even if it did, that option probably wouldn’t be right for SoFi, as the OCC charter wouldn’t come with deposit insurance.
SoFi declined to comment for this article.
The industrial bank charter has been a source of controversy in the past. In the mid-2000s, retail giant Walmart applied for the charter, but met a backlash from the banking industry.
Among the banking groups that opposed Walmart’s candidacy were the Independent Community Bankers of America. The ICBA has not yet decided whether it will oppose SoFi’s request, according to Christopher Cole, the group’s senior regulatory adviser.
Cole said there are some important differences between SoFi’s app and Walmart’s app, including the fact that SoFi is not a retailer. But he added: “We are still concerned about any extension of the ILC charter.”
Mary Wisniewski contributed to this report.