SoFi application for deposit insurance draws scrutiny

Rep. Maxine Waters, ranking minority member of the House Financial Services Committee, has written FDIC Chairman Martin Gruenberg, requesting his agency conduct a public hearing to consider SoFi’s application for deposit insurance on the industrial bank it is chartering in Utah.

SoFi is Social Finance, the six-year-old company that has made a name for itself in the online lending space focusing on student debt. More recently it has begun offering mortgages and personal loans. In June, SoFi submitted the application with the FDIC; Rep. Waters, a Democrat from California, sent her letter to Gruenberg on Aug. 25.

Further clouding the future of the application is the controversy around SoFi founder Mike Cagney, who recently left the company amid allegations of sexual harassment.

The SoFi application says it is seeking an industrial bank charter in order to offer FDIC-insured NOW accounts and a credit card product. It will offer the products via online means only; there will be no brick and mortar offices, nor will the bank have any deposit-taking ATMs. The bank’s address will be in Salt Lake City, Utah, and some operations will be conducted in Wilmington, Del.

SoFi will capitalize SoFi Bank with $166 million, in addition to investing $4 million in organizational expenses. Furthermore, it is contributing a core-banking computer system which it will count as a non-equity cash infusion. The application says it expects the capital to be sufficient to carry the bank through its first three years of operation.

The company says while it has customers who range in age from 19 to 90, the majority of its customers are part of the millennial generation. The bank expects to market primarily to its existing customer base. SoFi Bank plans to initially employ about 50 people, doubling its number of employees by its third anniversary.

The CEO and chairman of the bank will be Arkadi Kuhlmann; he was the chairman, president and CEO of ING Direct, the largest computer-only bank in the United States, with more than $84 billion in deposits and 7.8 million customers at its peak. SoFi director Tom Hutton has replace Cagney on an interim basis

The application’s CRA plan for the bank identifies an assessment area made up only of the metropolitan statistical areas surrounding Salt Lake City, an area populated by 2.4 million people. In her letter, Rep. Waters points out that the CRA assessment area does not match the market the bank notes, which consists of existing customers who reside mostly in the 10 largest metro areas across the country.

As part of its CRA effort, the bank says it will offer a “secured credit card utilizing its credit card and deposit infrastructure to the low and moderate income community.” The credit card will have no annual fee, an initial credit line of $200 to $500, charge interest of more than 20 percent, and include a “cash back” benefit.

The application says SoFi Bank’s CRA program will promote financial literacy, scholarship awards, include bank employee community service and will include partnership with local charities. The bank also promises to purchase Utah Housing Bonds.

Rep. Waters notes the controversial nature of deposit insurance for industrial banks, reminding Gruenberg the FDIC put a moratorium on approvals for deposit insurance on industrial loan companies in 2006 and 2007. Rep. Waters makes the case the companies that charter ILCs should be subject to the same supervision and regulation as any bank holding company. Rep. Waters quotes a comment about the application made by the Independent Community Bankers of America:

“The FDIC should deny SoFi’s application and impose a moratorium on future ILC deposit insurance applications. SoFi should be subject to the same restrictions and supervision that any other bank holding company of a community bank is subject to. Furthermore, Congress should close the ILC loophole because it not only threatens the financial system but creates an uneven playing field for community banks. Congress should address this issue and permanently close the ILC loophole before it is too late and we have huge commercial or technology firms like Amazon, Google or Wal-Mart owning FDIC-insured ILCs and operating them without adequate holding company supervision and without any restriction on the types of activities in which the holding company or ILC affiliates can engage.”

The SoFi application is available to subscribers.