Banking
Trade Group Urges FDIC to Reject NelNet Bank Application
August 3, 2018
On Wednesday, the Independent Community Bankers of America (ICBA) asked the Federal Deposit Insurance Corp. (FDIC) to deny Nelnet’s application to become an Industrial Loan Corporation (ILC) bank. ILC banks are special purpose banks that are not required to adhere to the same regulations as other banks, yet they can bear the same risk of failing.
“The ILC loophole allows commercial interests to own full-service banks while avoiding the legal restrictions and regulatory supervision that apply to other bank holding companies—threatening the financial system and creating an uneven regulatory playing field,” said ICBA President and CEO Rebeca Romero Rainey in a statement.
Furthermore, in a letter to the FDIC, the community bank trade group proposed a two year moratorium on future ILC bank applications. ILC bank charters are attractive to fintech companies because they offer reduced regulations (compared to traditional bank charters) and access to all 50 states.
“To support a safe and sound financial system and to maintain the separation of banking and commerce, the FDIC should impose a two-year application moratorium and Congress should close the ILC loophole for good,” Rainey said. “Our deposit-insurance system was created to protect depositors—not commercial firms.”
ICBA’s letter references the fairly recent ILC bank applications of two other fintech companies, SoFi and Square. Square withdrew its application last month, but said it had plans to refile. SoFi withdrew its application last October following sexual harassment allegations against its then CEO Mike Cagney. The company has not stated that it has plans to refile the application.
The ICBA’s request for a moratorium on applications for ILC bank charters comes right after the U.S. Office of the Comptroller of the Currency (OCC) opened its doors this week to fintechs interested in obtaining special purpose bank charters. So now fintechs have a few options if they aspire to become a bank.
The ICBA’s mission is to advocate for the community banking industry. It represents nearly 5,700 community banks in the U.S.
Can Fintech Startups Become Banks? OCC Opens The Gates
August 1, 2018
Yesterday, the U.S. Treasury Department released a report that prompted the Office of the Comptroller of the Currency (OCC) to say that it would start accepting applications from fintech for special purpose national bank charters.
This is boon for fintech companies that, until now, have mostly been prevented from applying for national bank charters because of protest from banks and others that they will not be subject to adequate regulations. But now the OCC, a significant regulator, is opening the door for non-depository fintech companies – like OnDeck and Kabbage – to become banks.
“Over the past 150 years banks and the federal banking system have been the source of tremendous innovation that has improved banking services and made them more accessible to millions,” said head of the OCC, Comptroller of the Currency, Joseph M. Otting, in a statement. “The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy…Companies that provide banking services in innovative ways deserve the opportunity to pursue that business on a national scale as a federally chartered, regulated bank.”
The main advantage for fintech companies of having the opportunity to get their own bank charter is that they would now be able to operate nationwide under a single licensing and regulatory system, instead of a myriad of state licenses. Currently, fintech companies must adhere to the regulations in each state where they do business, which can be expensive. And some states have regulations that are stricter than others. That is why this news is bad news for states that feel that this development will allow fintech companies to bypass and undermine their regulation designed to protect consumers.
The OCC’s decision is the latest development in a years long, sustained effort by fintechs to become banks. In fact, for the last several years, Fintech companies have tried attaining bank status by getting the Utah Department of Financial Institutions to allow them to become Industrial Loan Company (ILC) banks. So far, Square, SoFi and NelNet have tried, in some capacity, to become an ILC bank.
The New York Department of Financial Service and the Conference of State Bank Supervisors (CSBS) was angered by the OCC’s decision.
“An OCC fintech charter is a regulatory train wreck in the making,” said CSBS President John W. Ryan in a statement. “Such a move exceeds the current authority granted by Congress to the OCC. Fintech charter decisions would place the federal government in the business of picking winners and losers in the marketplace. And taxpayers would be exposed to a new risk: failed fintechs.”
He said that his organization is keeping all options open to stop what he says is regulatory overreach.
The OCC indicated in its announcement that fintech companies that become special purpose national banks will be subject to heightened supervision initially, similar to other banks. But these special purpose banks would not have to abide by the stricter regulations of deposit-taking banks and they would not have to be insured by the Federal Deposit Insurance Corporation (FDIC) either.
“It is hard to conceive that insured national banks will allow the OCC to allow a fintech entity a national bank charter without insisting that all national bank obligations apply—which is what fintech companies want to avoid,” said Joseph Lynyak, partner and regulatory reform specialist at the law firm Dorsey & Whitney.
nCino Partners With Santander
July 24, 2018
nCino partnered with Santander Bank last week, its latest in a string of partnerships with major banks.
“Innovative institutions such as Santander Bank understand the importance of ensuring the customer experience is as fast, easy and intuitive as possible,” said Pierre Naudé, CEO of nCino. “[Santander] also recognizes that a shiny front end means nothing if the middle and back office doesn’t embrace at least the same degree of automation and intelligence.”
nCino is a cloud-based lending platform that grew out of Wilmington, North Carolina-based Live Oak Bank in 2012. Its founder, James Mahan III, then CEO of Live Oak Bank, along with his team, recognized a need to make the commercial lending process less time-consuming. So they created the nCino Bank Operating System internally for Live Oak Bank. But it soon attracted the interest of other financial institutions, in the US and beyond.
Last year, nCino told deBanked in that in addition to working with Live Oak Bank, it was working with more than 150 other financial institutions in multiple countries, including nine of the top 30 US banks. Now, according to the nCino website, over 200 banks and credit unions of varying sizes use the company’s Bank Operating System. TD Bank and SunTrust are among their largest bank partners.
An nCino spokesperson told deBanked that its Bank Operating System is sold on a subscription-basis that is driven by individual annual user licenses. This allows employees, executives and other stakeholders of a financial institution to access the benefits and functionality of nCino’s solution. nCino spun off from Live Oak Bank and became its own entity in 2014. Separately, Live Oak Bank (NASDAQ: LOB) went public in 2015.
Santander will be using nCino’s platform for its business banking clients. Santander says that nCino’s cloud-based platform is accessible to customers from any device and will reduce the time it takes Santander to deliver loan decisions from start to finish by approximately 40 percent. In conjunction with a partnership with Accenture, Santander will be using nCino’s platform to help with customer relationship management, loan origination, account opening, workflow, enterprise content management, and instant reporting capabilities.
“Respecting our customers means giving them more insight into the loan process and getting them their money faster without any impediments so they can focus on running their businesses,” said Amir Madjlessi, Executive Vice President and Managing Director of Business Banking at Santander. “nCino’s platform automates the lending process from start to finish in a way that ensures a seamless, transparent experience for our customers that reduces delays and inefficiencies and securely connects our clients to our bankers whenever they need them with the touch of a button.”
nCino employs 500 people and is headquartered in Wilmington, North Carolina. The company recently opened an office in London and has plans to open additional offices in Australia and Canada later this year, according to a company spokesperson.
Texas Man Defrauds Banks with Cattle
July 18, 2018
A Texas man was arrested last week on allegations of using 8,000 heads of cattle he did not own as collateral for outstanding loans of more than $5.8 million, according to Dallas News.
The arrest was the culmination of a 16-month investigation carried out by the Texas and Southwestern Cattle Raisers Association. They were contacted by bank officials at the First United Bank in Sanger, Texas, who said that Howard Lee Hinkle had not made payments on loans with balances totaling more than $5.8 million. The bank obtained a court order to collect the 8,000 cows that Hinkle put up as collateral, but they were unable to find any of the cattle at the locations he had given the bank. Hinkle allegedly presented fake documentation.
Fintech lenders have also been victims of fraud whereby a merchant provides false documents, sometimes claiming to own property they do not own
Charged with first degree felony charges of theft, the 67-year-old Hinkle could serve a life sentence in jail. He was arrested last Thursday and brought to the Wichita County Jail, where he was released on bond pending trial.
FCI Implements Factoring Solution That Is Islamic Law-Compliant
July 17, 2018The FCI, an international trade group focused on factoring, implemented changes to its General Rules of International Factoring so that they are now compliant with Islamic (Shari’a) law. The Amsterdam-based factoring group, which just celebrated its 50th anniversary, worked with Dubai-based Noor Bank and other constituents, to create amendments to its rules that would make it Shari’a law compliant, according to a recent FCI announcement.
While the details of the changes to FCI’s rules were not immediately available, deBanked spoke to Abed Awad, founding partner at New Jersey-based Awad & Khoury, who is an expert in Islamic law.
Awad said that Shari’a law’s fundamental problem with factoring is that it involves collecting interest, which is prohibited. While factoring might not seem to involve interest, Awad said that offering less cash upfront for a receivable that is worth more in the future, is essentially a reverse form of interest.
But Awad said that in recent years, people have developed a somewhat controversial concept, called Tawarruq (or monetization) that abides by the prohibition of interest rule while yielding the same result. This is how it works:
A merchant in need of cash goes to a bank. Rather than offering cash to the merchant, the bank instead arranges for a merchant to buy a commodity (like oil or sugar), on credit. The merchant doesn’t have to pay for the commodity until a future date. Meanwhile, the merchant quickly sells the commodity for cash to a third party. The merchant now has cash and will not be paying interest of any kind. The bank still makes money. It gets paid for structuring the arrangement between the merchant and the seller of the commodity, and for evaluating the creditworthiness of the merchant.
The end result is the same for the merchant. The merchant gets cash quickly, albeit a little less quickly because there are multiple parties involved. Noor Bank currently offers an Islamic law compliant factoring product. Tawreeq Holdings, which has offices in Luxembourg, United Arab Emirates and Morocco, specializes in the Tawarruq alternative to factoring.
“Islamic Factoring is an increasingly important element in the finance of international trade and our ability to support Shari’a compliant business is particularly important for our global member base, said Peter Mulroy, Secretary General of FCI. “This development is another real enhancement of the support we can provide for our members.”
Walmart Not New to Financing
July 17, 2018
Walmart is considering switching its branded credit card business partner from Synchrony Financial to Capital One Financial Group, according to a Bloomberg report. Accordingly, the change in banking partner is related to the retailer’s vision for Walmart Pay, Walmart’s current checkout payment system.
In light of this, it is worth noting that Walmart is no stranger to working creatively and ambitiously with banks. In fact, aside from currently having independent bank branches that operate from inside Walmart stores – including Fort Sill National Bank and City National Bank and Trust – Walmart once had aspirations to become a bank.
In 2006, using an old and now controversial statute, the behemoth retailer attempted to get a charter to become an Industrial Loan Company (ILC) Bank. Chris Cole, Senior Regulatory Counsel at Independent Community Bankers of America (ICBA), a trade group, told deBanked that banks and other anti-Walmart groups banded together to thwart the retailer’s plans.
Recently, two fintech companies, SoFi and NelNet, have submitted applications to become ILC banks.
Lendistry Becomes a Member of the Federal Home Loan Bank of San Francisco
July 11, 2018
Lendistry announced yesterday that it has been approved for membership by the Federal Home Loan Bank of San Francisco. This will allow the lender to expand its commercial real estate loan business, which Lendistry launched in January.
“It’s an honor to be a member of the Federal Home Loan Bank of San Francisco, an organization committed to community development by expanding availability of credit,” said Lendistry CEO Everett K. Sands. “We look forward to leveraging our unique business model of being a hybrid of a community bank and a fintech company to expand access to capital to all.”
Lendistry offers SBA loans (up to $250,000), traditional small business, or term, loans (up to $1 million), bridge and short-term loans (up to $500,000), and most recently, commercial real estate loans (up to $2 million). Sands told deBanked that about 65 percent of its business is derived from SBA loans, about 30 percent comes from term loans, and the remainder is a mix from the other loan types. Of the term loans, Sands said that the average is a four year loan with a 12 percent interest rate.
About 70 percent of Lendistry’s business comes from a combination of bank referrals and commercial loan brokers, or ISOs. Otherwise, Lendistry obtains customers from affiliate partners, like Lending Tree, and from its own direct efforts. Out of a 22 person team, Lendistry employs eight salespeople. And Sands said that about 70 percent of the team has a banking background.
Lendistry customers come from a variety of industries including healthcare, restaurants and home improvement. Sands said that the bulk of its business comes from merchants in the medical and manufacturing industries because these are the types of companies that their bank partners have been sending them lately. The lender also makes a fair amount of loans to restaurants, Sands said.
Lendistry has a partnership with The Center, a nonprofit that provides small business owners with educational resources, such as workshops, training videos, coaching sessions, and networking opportunities. Founded in 2015, Lendistry is based in Brea, California, outside of Los Angeles.
The Past, Present and Future of the ILC Bank
July 9, 2018
Last Thursday, Square confirmed that it withdrew its application to the FDIC for depository insurance, which would allow it to take deposits from customers in all 50 states. The company said it plans to refile.
This is not the first time that a fintech company has withdrawn a bank application from the FDIC. Last October, SoFi withdrew its application in the wake of sexual harassment allegations against its then CEO Mike Cagney. SoFi has not explicitly stated that it plans to refile.
Regardless of the reason for withdrawing the application, this news revives the debate over whether fintech companies should be allowed to become banks in the first place – at least in the manner that Square and SoFi have sought to attain bank status. Both companies have submitted applications to the Utah Department of Financial Institutions to become Industrial Loan Company (ILC) banks.
This is controversial because ILC banks are not subject to the same regulations that other banks are. For instance, an ILC bank can engage in commercial activity outside of banking which could jeopardize the bank, critics contend. Under the 2010 Dodd-Frank Act, which came in response to the Great Recession, there was a moratorium on establishing ILC banks because they were deemed to be a risk to the U.S. banking system. The moratorium was lifted in 2013.
Chris Cole, Senior Regulatory Counsel at Independent Community Bankers of America (ICBA), a trade group, is a big opponent of ILC banks. He maintains that companies seeking to become ILC banks are simply taking advantage of an old policy that is no longer relevant. He explained that ILCs were created as banks for industrial workers in the early 1900s.
“They were meant to serve a certain type of industrial worker that had trouble finding a commercial bank they could bank with,” Cole said. “Now we don’t have that problem anymore. Industrial [or other lower paid] workers have plenty of opportunities to bank. This charter is completely outdated [and is] a loophole that should be closed so that the owners of these bank-like institutions are restricted in the same way that commercial banks are restricted.”
Last year, deBanked spoke to Richard Hunt, president and CEO of the Consumer Bankers Association, who echoed Cole with the regard to the initial purpose of ILC banks.
“No one envisioned when they wrote the ILC charter that we would have fintech companies that finance mortgages and student loans from private equity capital and not deposits. It’s a new world. Like with all rules and regulations, federal regulators should periodically review longstanding policy,” Hunt said.
Cole said that in addition to Square and SoFi, another fintech company recently applied to become an ILC bank. That company is NelNet, which services students loans, and it submitted an application to the FDIC less than two weeks ago.
So far, the FDIC has not approved of any ILC banks since Dodd-Frank. (There are only about 30 of them right now.) But that may soon change under the leadership of the agency’s new Chairman, Jelena McWilliams.
“I am hopeful that Jelena McWilliams will follow the same course as her predecessors have [and not issue ILC charters],” Cole said. “Issuing a moratorium is what I’d like to see.”
But McWilliams, who assumed the new role on June 5, may be more open to approving these applications than her predecessors. She said during a recent conference:
“The agency has a duty to the public to actually proceed [with the applications.] Now, that doesn’t mean that we will approve every application. That doesn’t mean that we will deny every application.”
