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The Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) have adopted several recent measures that attempt to confer benefits and privileges of banks on nonbank providers of financial services and commercial firms. The OCC’s and FDIC’s initiatives are unlawful and dangerous because they would allow nonbanks and commercial firms to subvert fundamental public policies embodied in federal laws governing banks and bank holding companies.

In 2018, the OCC announced that it would approve national bank charters for “fintech” firms that provide lending and payment services but do not accept deposits. The New York Department of Financial Services sued the OCC, and a federal district court ruled in 2019 that the OCC’s nondepository national bank charter was unlawful. In August 2020, Acting Comptroller of the Currency Brian Brooks ignored that ruling and invited payments companies to apply for nondepository national bank charters. Major technology firms responded with enthusiasm to Mr. Brooks’ invitation. A trade group representing Amazon, Apple, Google, Intuit, PayPal, and other technology companies issued a public statement praising the “leadership and vision” of Mr. Brooks.

In March 2020, the FDIC issued a proposed rule that would allow all types of commercial firms – including the largest technology firms – to acquire FDIC-insured industrial banks and industrial loan companies (hereinafter collectively referred to as “ILCs”). ILCs are FDIC- insured consumer banks chartered by Utah and several other states. On December 15, 2020, the FDIC adopted the ILC rule substantially as proposed. The FDIC’s ILC rule could potentially transform our financial system and economy. Unlike the OCC’s nondepository national bank charter, the FDIC’s ILC rule permits Big Tech giants and other commercial firms to own FDIC- insured, deposit-taking institutions.

The OCC and FDIC have approved additional measures that confer banking privileges on nonbank providers of financial services. In June 2020, the OCC adopted a rule authorizing national banks to transfer their federal preemptive immunity from state usury laws to nonbanks that are purchasers, assignees, or transferees of their loans. The OCC’s usury preemption transfer rule seeks to shield those nonbanks from the application of all state usury laws except usury laws of the state where the national bank that transferred the loans is “located.” Most national banks “locate” their lending operations in states that have few if any usury limits. Consequently, the OCC’s rule effectively grants blanket immunity from state usury laws to nonbanks that acquire loans from national banks. The FDIC subsequently issued a similar rule, which allows FDIC-insured state banks to transfer their federal preemptive immunity from state usury laws to purchasers, assignees and transferees of their loans.

In October 2020, the OCC adopted a rule that (1) allows national banks to form partnerships with nonbank lenders, (2) designates national banks as the “true lenders” for all loans produced by such partnerships if the banks are named as the lenders in the loan agreements or fund the loans, and (3) permits national banks to retain their status as “true lenders” even if they sell their entire interest in those loans to their nonbank partners one day after the loans are made. The OCC’s “true lender” rule enables national banks to establish “rent-a-charter” schemes with payday lenders and other high-cost nonbank lenders. Under “rent-a-charter” schemes, banks earn fees by selling their federal preemptive immunity from state laws to their nonbank partners, while the nonbanks assume all or most of the economic benefits and risks of the loans produced by such partnerships. The FDIC has not yet proposed a regulation similar to the OCC’s “true lender” rule.

This article criticizes the OCC’s and FDIC’s initiatives. Part 1 of the article contends that the OCC’s nondepository fintech national bank charter and the FDIC’s ILC rule are contrary to federal statutes and policies governing banks and bank holding companies. Part 2 of the article argues that the OCC’s and FDIC’s attempts to confer on nonbanks the preemptive immunities granted by Congress to banks violate federal laws and threaten to inflict serious injuries on states, consumers, and small businesses.

The OCC’s and FDIC’s actions would allow technology firms and other commercial enterprises to obtain banking privileges and benefits—including access to the federal “safety net” for banks—without complying with many important requirements governing FDIC-insured full- service banks. For example, commercial owners of nondepository national banks and ILCs would not have to comply with the Bank Holding Company Act (BHC Act), which prohibits affiliations between FDIC-insured full-service banks and commercial firms. That prohibition is a cornerstone of our nation’s longstanding policy of separating banking and commerce.

The BHC Act separates banking and commerce to prevent undue concentrations of financial and economic power and to stop commercial firms from gaining access to the subsidies provided by the federal “safety net” for banks. The OCC’s and FDIC’s efforts to undermine the separation of banking and commerce (i) create serious threats to competition and consumer welfare, (ii) produce severe risks of imposing large losses on the federal “safety net” during future systemic crises, and (iii) pose grave dangers to the stability of our financial system and the health of our economy

If the OCC’s and FDIC’s initiatives are allowed to stand, Congress will face intense pressure to repeal all of the statutory barriers separating banking from commerce. Big Tech firms will lobby for permission to acquire full-service banks, and big banks will push for authority to acquire technology firms. If Congress gives in, mergers between Big Tech companies and big banks are virtually certain to occur.

That outcome would permit giant banking-and-commercial conglomerates to spread across the nation. Commercial owners of banks would receive huge benefits from deposit insurance and other subsidies provided by the federal “safety net.” Large commercial firms that own sizable banks would be considered “too big to fail” and would enjoy enormous advantages over smaller competitors that could not afford to acquire banks. When the next crisis occurs, the federal government would almost certainly feel compelled to rescue the new class of banking- and-commercial conglomerates. Market discipline would be greatly weakened in large sectors of our economy.

Congress and the courts should reaffirm the separation of banking and commerce by overruling the OCC’s and FDIC’s attempts to allow commercial firms to acquire banks. Congress and the courts should also strike down the OCC’s and FDIC’s unlawful efforts to extend the preemptive immunities of banks to benefit nonbank providers of financial services.

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