NYDFS fintech charter lawsuit survives challenge

Courts Fintech NYDFS OCC Fintech Charter National Bank Act State Issues Preemption

On May 2, the U.S. District Court for the Southern District of New York denied the OCC’s motion to dismiss a complaint filed by NYDFS arguing that the agency’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB) is a move that will destabilize financial markets more effectively regulated by the state. (See previous InfoBytes coverage here.) The court, however, stated that because the OCC failed to rebut NYDFS’s claims that the proposed national fintech charter posed a threat to the state’s ability to establish its own laws and regulations, the challenge “is ripe for adjudication.” Specifically, NYDFS alleged that granting a national charter to fintech firms would limit its ability to regulate non-depository institutions and could potentially lead to a loss in revenue derived from assessments levied against state licensed institutions. The court rejected the OCC’s preemption arguments, writing that the “threats to New York's sovereignty are so clear that the OCC does not even mention, let alone contest, the state's interests. Instead, OCC focuses exclusively on constitutional and prudential ripeness.” The court further dismissed the OCC’s ripeness argument that it has yet to receive, review, or approve a SPNB application, and referred to NYDFS’ allegations that the OCC has “invited fintech companies . . . to discuss SPNB charters,” which potentially demonstrates “at least some demand for, and interest in, such charters.” While the court concedes that the potential for fintech companies to “flout” New York's laws would only occur once a fintech company has applied and been granted a SPNB charter, “those steps do not stymie [NYDFS’s] standing.”

In addressing NYDFS’s Administrative Procedures Act claim, the court found, among other things, that engaging in the “business of banking” under the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.” Furthermore, the court concluded that “absent a statutory provision to the contrary, only depository institutions are eligible to receive [a SPNB] from [the] OCC.” However, the court dismissed NYDFS’s claims that a SPNB charter conflicts with state law in violation of the Tenth Amendment of the U.S. Constitution. According to the court, while NYDFS has standing to raise a Tenth Amendment claim, it has failed to state such a claim “because federal law preempts state law only when ‘Congress has clearly expressed its intent,’” and in this instance, “the operative question is not whether the federal government has the power to take the action challenged in this case, but whether Congress has, in fact exercised that power.”