Mike Cagney and US Banking System Tests

Mike Cagney, the founder known for his innovative approach, continues to attract investor confidence. Shortly after stepping down from SoFi, the personal finance company he helped establish in 2011 following allegations of sexual harassment, he secured $50 million in funding for a new lending venture named Figure. This startup has subsequently garnered at least $225 million in investment and reached a valuation of $1.2 billion just last year.

Currently, Cagney is pursuing an unprecedented strategy with Figure, which utilizes blockchain technology to expedite the approval processes for home equity loans, mortgage refinancing, and both student and personal loans. The company has submitted an application for a national bank charter within the United States. This charter would allow Figure to accept uninsured deposits exceeding $250,000 from accredited investors, while not holding FDIC-insured deposits.

The significance of this lies in the potential regulatory advantages, as detailed by American Banker (AB). As reported this week, “Because Figure Bank would not hold insured deposits, it would not be subject to the FDIC’s oversight. Similarly, the absence of insured deposits would prevent oversight by the Fed under the Bank Holding Company Act. That law imposes restrictions on non-banking activities and is widely thought to be a deal-breaker for tech companies where banking would be a sidelight.”

Approval of this charter could establish a precedent, enabling numerous fintech companies – and other retailers interested in offering financial products – to obtain non-traditional bank charters without the scrutiny of the Federal Reserve Board or the FDIC.

Michelle Alt, of a financial advisory firm that assisted Figure with its application, explained to AB: “This model, if it’s approved, wouldn’t be for everyone. A lot of would-be banks want to be banks specifically to have more resilient funding sources.” However, she added that its success would undoubtedly generate considerable interest.

The potential consequences of this approach remain uncertain, although the possibility of Amazon establishing its own bank would not be unexpected for those familiar with the company’s activities.

For a smaller organization like Figure, this strategy represents a potentially lucrative but risky undertaking. It would allow the company greater operational freedom than traditional banks, but without the safety nets available to them or their customers. A significant risk would be a bank run, where accredited investors who currently provide funding at high interest rates simultaneously demand the return of their capital. (This scenario is known to occur.)

Cagney may find a favorable reception from Brian Brooks, a veteran of Fannie Mae who served as Coinbase’s chief legal officer for two years before joining the Office of the Comptroller of the Currency (OCC) this spring. The OCC is responsible for ensuring the safe and sound operation of national banks and federal savings associations.

Brooks was appointed acting head of the agency in May and approved one of the first national charters for a fintech company, Varo Money, earlier this summer. In late October, the OCC also granted SoFi preliminary, conditional approval for its own national bank charter application.

While Brooks has not commented on the specifics of Figure’s application, he reportedly addressed concerns from trade groups regarding his efforts to grant charters to fintech and payments companies during a July event at the Brookings Institution, stating: “I think the misunderstanding that some of these trade groups are operating under is that somehow this is going to trigger a lighter-touch charter with fewer obligations, and it’s going to make the playing field un-level . . . I think it’s just the opposite.”

Christopher Cole, executive vice president at the Independent Community Bankers of America, remains unconvinced. He expressed his concerns about Figure’s charter application to AB earlier this week, suggesting that Brooks “wants to approve this quickly before he leaves office.”

This is a possibility, as Brooks was nominated by President Trump last month for a full five-year term leading the federal bank regulator and is currently awaiting Senate confirmation. However, this move, intended to impede the incoming Biden administration, could be reversed by President-elect Joe Biden, who has the authority to dismiss the comptroller of the currency and appoint an interim replacement until a Senate-confirmed nominee is in place.

Despite this uncertainty, Cole believes Brooks still has sufficient time to facilitate a path forward for Figure and, if its innovative charter application is approved and withstands legal challenges, for many other companies as well.