FDIC Offers De Novo Guidance for Nontraditional Applicants

Financial Services Law

In an attempt to help non-banks and fintechs understand the de novo application process, the Federal Deposit Insurance Corporation (FDIC) released new materials, including a supplement to its Deposit Insurance Application Procedures Manual (the Supplement) that describes special considerations and procedures for unique or complex proposals, such as those submitted by nontraditional applicants.

Financial Institution Letter 8-2020 (FIL) referenced the Supplement and the Handbook for Organizers of De Novo Institutions (the Handbook), which it revised to summarize the changes. Together, the publications “comprehensively address the deposit insurance application process,” the FDIC said.

What happened

The FDIC issued the Supplement, the Handbook and related materials in an effort to clarify expectations and increase transparency for nontraditional applicants. The Supplement provides a definition of “non-bank” and “non-community bank.” The FDIC considers a non-bank to be one in which the organization is a bank under the Federal Deposit Insurance Act, but not under the Bank Holding Company Act. Examples include credit card banks and industrial loan companies. Non-community banks are contrasted from traditional banks by their products, services, delivery channels, geographic footprint, specialty business model or operational structure. Examples of non-community banks include a wide range of specialty or niche institutions in businesses as diverse as lending or funding and those that are delivered through nontraditional channels or to a narrow demographic group. In the Supplement, the FDIC encourages case managers to identify such applicants early in the process, as their de novo applications “may necessitate more in-depth application review and investigation processes” and require action at a higher level.

The case manager will also consider whether the application involves a de novo institution with no existing operations, or a new institution that would be created from the conversion of all or part of an existing operating noninsured entity, which then would dictate various factors to be evaluated by the FDIC.

Field investigations for de novo non-banks and non-community banks are to be tailored to the unique elements of the proposed de novo application.

The application process itself may require more detailed descriptive information, support and analysis than a traditional bank’s de novo application, the Supplement explained. For example, the FDIC case manager must develop an understanding of “any unusual complexities, the types and degree of risks presented and any mitigating information,” as well as ensure that sufficient information has been provided to evaluate each of the statutory factors the FDIC is required to consider.

The FDIC’s Statement of Policy on Applications for Deposit Insurance requires case managers to determine whether those statutory factors for deposit insurance are met.

This includes considering financial history and condition (covering at least three years unless the operating history is shorter); capital adequacy (providing at least initial capital commensurate with the risk inherent in the type of business to be conducted and the planned business growth); future earnings prospects; general character and fitness of management; risk to the Deposit Insurance Fund (which the FDIC interprets broadly); convenience and needs of the community to be served (since all banks must meet Community Reinvestment Act requirements); and consistency of corporate powers.

The FDIC noted in the Supplement that in addition to the conditions it imposes on all insured institutions, for proposed non-banks or non-community banks it “generally imposes non-standard conditions specific to the unique nature of these institutions.” These additional conditions may be required when the FDIC determines that they are necessary or appropriate to mitigate risks presented by the application. Such conditions would be contained in written agreements that address the specific risks or contain definitive commitments by the applicant.

Given the unique characteristics and likely longer review process, the overall processing time for an application from a proposed non-bank or non-community bank is expected to exceed the FDIC’s 120-day processing goal, according to the Supplement.

To read the Supplement, click here.

Why it matters

The Supplement and other materials do not contain any new guidance or policy. Instead, they provide clarification to non-banks and non-community banks considering a de novo application, the FDIC said. “The FDIC is committed to working with, and providing support to, any group with an interest in starting a de novo institution,” according to the Supplement. “New institutions with sound business plans, experienced leadership at the board and management levels, and appropriate capital support can play a vital role in serving the deposit and credit needs of their communities.”

The FIL and the Supplement were issued a few days after the FDIC’s approval of an application from a fintech company for insurance for an all-mobile bank. Whether these two events represent an indication that the FDIC finally will welcome non-banks and non-traditional players into the deposit fund remains to be seen, but they are positive signs. 



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