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CSBS files lawsuit over OCC’s fintech charter decision, arguing agency exceeds it authority under the National Bank Act
On October 25, the Conference of State Bank Supervisors (CSBS) filed a lawsuit against the OCC arguing that the agency exceeded its authority under the National Bank Act (NBA) and other federal banking laws when it allowed non-bank institutions, including fintech companies, to apply for a Special Purpose National Bank Charter (SPNB). As previously covered by InfoBytes, the U.S. District Court for the District of Columbia dismissed CSBS’s challenge last April on ripeness grounds because the OCC had not yet issued a fintech charter to any firm. But CSBS renewed its challenge in light of the OCC’s July announcement welcoming non-depository fintech companies engaging in one or more core-banking functions to apply for a SPNB (previously covered by Buckley Sandler Special Alert here), and statements indicating the OCC is currently vetting several companies and expects to make charter decisions mid-2019.
Among other things, the complaint argues that the SPNB program (i) exceeds the OCC’s statutory authority because the OCC may not “redefine the business of banking” to include non-depository institutions; (ii) is “arbitrary, capricious, and an abuse of discretion” because it inadequately addresses, without explanation, “the myriad policy implications and concerns raised by the public” and the “cost-benefit” tradeoffs; (iii) did not include the proper notice and comment period for preemption interpretations under the NBA; and (iv) is an improper invasion of “state sovereign interests.”
On September 14, New York Department of Financial Services (NYDFS) Superintendent, Maria T. Vullo, filed a lawsuit against the OCC arguing that the agency’s decision to allow fintech companies to apply for a Special Purpose National Bank Charter (SPNB) is a “lawless” and “ill-conceived” move that will destabilize financial markets more effectively regulated by the state. As previously covered in InfoBytes, last December the U.S. District Court for the Southern District of New York dismissed NYDFS’ previous challenge because the court lacked subject matter jurisdiction over NYDFS’ claims since the OCC had yet to finalize its plans to actually issue SPNBs. However, in light of the OCC’s July announcement welcoming nondepository fintech companies engaged in one or more core banking functions to apply for a SPNB (previously covered by Buckley Sandler Special Alert here), Superintendent Vullo once again issued a challenge to the OCC’s decision, arguing that it is unlawful and grants federal preemptive powers over state law. Among other things, NYDFS requests the court to (i) declare that the OCC’s decision to grant SPNBs exceeds its statutory authority under the National Bank Act, and specifically that the decision improperly defines the “‘business of banking’ to include non-depository institutions,” and (ii) enjoin the OCC “from taking further actions to implement its provisions.”
Buckley Sandler Special Alert: OCC announces it will accept fintech charter applications, following the release of Treasury report on nonbank financial institutions
On July 31, the OCC announced that nondepository financial technology firms engaged in one or more core banking functions may apply for a special purpose national bank (SPNB) charter. The announcement follows a report released the same day by the Treasury Department, which discusses a number of recommendations for creating a streamlined environment for regulating financial technology, and includes an endorsement of the OCC’s SPNB charter for fintech firms (fintech charter).
If you have questions about the report or other related issues, please visit our Fintech practice page, or contact a Buckley Sandler attorney with whom you have worked in the past.
On June 6, New York Department of Financial Services (NYDFS) Superintendent, Maria T. Vullo, spoke to the Exchequer Club in Washington, DC, emphasizing, among other things, her opposition to the OCC’s proposal for a fintech charter. Vullo noted that the OCC has not actually finalized plans for the new charter and Comptroller, Joseph Otting, is expected to announce his views on the pending proposal soon. As previously covered by InfoBytes, two legal challenges, one by NYDFS and one by the Conference of State Bank Supervisors, were recently dismissed in separate district courts for lack of subject matter jurisdiction and ripeness due to the fact that the OCC has not issued a fintech charter nor has it finalized its plans to issue one. In her speech, Vullo, acknowledged these lawsuits and her desire to continue the litigation “rather than accept the OCC’s lack of authority in the non-depository space and respect the states’ regulation of and consumer protections in this area.” Vullo noted that fintech, when done right, is a “very good thing” that can assist in bringing banking services to underserved customers. But she also stated that companies that use financial technology should not be granted “an exemption from the rules that banks and other financial institutions follow to manage risk and protect consumers.”
Vullo also touched on (i) her support for the CFPB’s final rule on payday loans, vehicle title loans, and certain other high-cost installment loans; (ii) her concerns over the dismantling of the Bureau’s Office for Students; (iii) her opposition to the Department of Education’s position that only the federal government may oversee student loan servicers (see InfoBytes coverage here); and (iv) the potential risks with the unregulated virtual currency market.
On April 30, a U.S. District Court judge dismissed the Conference of State Bank Supervisors’ (CSBS) challenge to the OCC’s proposed federal charter for fintech firms. (See previous InfoBytes coverage here.) According to the court, the suit is not “constitutionally or prudentially ripe for determination” and cannot proceed because the OCC has yet to issue a fintech charter to any firm. “This dispute would benefit from a more concrete setting and additional percolation. In particular, this dispute will be sharpened if the OCC charters a particular [f]intech—or decides to do so imminently,” the judge wrote.
As previously covered in InfoBytes, last December the U.S. District Court for the Southern District of New York dismissed a lawsuit filed by the New York Department of Financial Services against the OCC, citing to lack of subject matter jurisdiction over the claims because the OOC had yet to finalize its plans to actually issue fintech charters.
A U.S. District Court Judge dismissed the New York Department of Financial Services’ (NYDFS) challenge to the OCC’s proposed federal charter for fintech firms. (See previous InfoBytes coverage here.) In the December 12 order, the judge agreed with the OCC that the court lacked subject matter jurisdiction over NYDFS’ claims because the OCC has yet to finalized its plans to actually issue fintech charters. The case was dismissed without prejudice.
As previously covered by InfoBytes, the Conference of State Bank Supervisors (CSBS) has also filed a lawsuit, which challenges the same statutory authority allowing the OCC to create charters for fintech companies. The CSBS lawsuit is still active.
On September 13, the Conference of State Bank Supervisors (CSBS) filed its response to the OCC’s motion to dismiss a lawsuit brought against the agency, which challenged its statutory authority to create a special purpose national bank (SPNB) charter for fintech companies. As previously discussed in InfoBytes, the OCC argued in its motion to dismiss that the CSBS lawsuit was premature because the agency has not reached a decision on whether it will make SPNB charters available to fintech companies or other nonbank firms. The OCC further asserted that under the National Bank Act (NBA), its interpretation of “the business of banking” deserves Chevron deference. In its response, CSBS disagreed and argued that in December 2016 the OCC “formally announced” its decision to begin chartering nonbanks, and that with the publication of a supplement to its Licensing Manual—which both stated its authority to issue SPNP charters to “institutions that neither take deposits nor are insured by the [FDIC]” and “invited interested parties to initiate the application process”—the OCC “crystalized its position.”
In addressing other issues raised by the OCC in support of dismissal of the lawsuit, CSBS argued that:
- CSBS has sufficient injury for standing because the OCC’s decision to grant charters interferes with states’ sovereignty and the ability to oversee and enforce state licensing and consumer protection laws;
- the court must test the underlying legal premise, which is that the “OCC lacks the requisite statutory authority under the [NBA] to encroach upon the regulation of nonbanks by issuing national bank charters to institutions that do not take deposits, and therefore do not engage in the ‘business of banking’” because “there is no point in either [the] OCC or its charter applicants devoting resources to ultra vires charters that will be invalidated”;
- the OCC’s position that CSBS has “failed to state a claim” concerning the interpretation of the “business of banking” is unsupported, and the court “must consider the statutory context of the term, including a regulatory regime that encompasses not only the NBA, but also other federal banking statutes” to conclude that the “business of banking” necessarily includes the taking of deposits; and
- if the OCC seeks to expand its authority “into areas traditionally occupied by states, courts require a clear showing that Congress, acting through the agency, has approved such a result”—which the OCC has not shown.
On August 18, the OCC filed a motion in the U.S. District Court for the Southern District of New York to dismiss a lawsuit brought by the New York Department of Financial Services (NYDFS) challenging the OCC’s fintech charter, which would allow the OCC to consider applications from fintech firms for Special Purpose National Bank Charters (SPNB). See Vullo v. Office of the Comptroller of the Currency, Case 17-cv-03574 (S.D.N.Y., Aug. 18, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that the case is not ready for judicial review because NYDFS’ claims that the charter is unlawful and would grant preemptive powers over state law are “contingent on future actions that [the] OCC might or might not take.” Therefore, because NYDFS “cannot point to any injury-in-fact that it has suffered as a result of [the] OCC’s purported actions . . . all of the potential injuries . . . are future-oriented and speculative, and therefore insufficient to confer standing.” Citing Lujan v. Defenders of Wildlife, the OCC asserted that injury must be “likely”—not just “speculative” in nature.
The OCC additionally contended that NYDFS’ challenge lacks standing because:
- The matter fails to meet the fitness and hardship prongs for ripeness and lacks evidence of concrete hardship: (i) the fitness prong is not met because the OCC’s inquiry regarding whether to offer SPNB Charters is ongoing and it has not decided whether it will accept applications for the charters; and (ii) the hardship prong is not met because the OCC averred NYDFS “will not suffer any immediate or significant hardship” if the court were to delay review of this matter.
- Any challenge to the OCC’s 2003 amendment to Section 5.20(e)(1) is “time-barred by the statute of limitations applicable to civil actions against federal agencies.” Furthermore, “[i]nsofar as the adoption of the amendment . . . constitutes a final agency action that [NYDFS] seeks to challenge here, any cause of action would have accrued on January 16, 2004, when the Final Rule became effective. 68 Fed. Reg. 70122 (Dec. 17, 2003). Accordingly, the time for filing a facial challenge to the regulation expired on January 16, 2010.”
- NYDFS’ complaint fails to state a claim on which relief may be granted because the OCC would have had to have issued Section 5.20(e)(1) charters—non-finalized policy statements and requests for public input alone are insufficient to satisfy the “final agency action” requirement needed to give rise to a claim under the Administrative Procedure Act. The OCC asserted it has not completed its decision-making process and that its actions have not affected rights or obligations or resulted in legal consequences.
- Under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.
- The OCC has statutory and constitutional authority to issue a Section 5.20(e)(1) charter because: (i) the limited judicial authority cited by the DFS is not entitled to weight; (ii) the historical understanding of “bank” is consistent with the OCC’s interpretation; and (iii) any SPNB charters issued to fintechs pursuant to Section 5.20(e)(1) would not violate the Tenth Amendment.
On July 28, the OCC filed a motion in the U.S. District Court for the District of Columbia to dismiss a lawsuit brought by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s fintech charter. See Conf. of State Bank Supervisors v. Office of the Comptroller of the Currency, Case 1:17-cv-00763-JEB (D.D.C. Jul. 28, 2017). In a memorandum supporting its motion to dismiss, the OCC argued that CSBS does not have standing to bring the case because the OCC has not yet come to a decision on whether it will make special purpose national bank charters available to fintech companies and other nonbank firms, and therefore, “[n]o tangible effect on CSBS or CSBS's members could even arguably occur until a 5.20(e)(1) Charter has been issued to a specific applicant.” For similar reasons, the OCC argued that the case was not ripe for judicial review.
Addressing the merits, the OCC cited Independent Community Bankers Ass’n of South Dakota, Inc. v. Board of Governors of the Federal Reserve System, 820 F.2d 428 (D.C. Cir. 1987), cert. denied, 484 U.S. 1004 (1988), arguing that the ruling confirms its authority to issue special purpose bank charters and “illustrates that the legal concept of a special purpose national bank power is not novel or unprecedented, but rather follows a decades-old OCC practice.” The OCC further argued that under the National Bank Act, the OCC’s interpretation of “the business of banking”—in which a special purpose bank “must conduct at least one of the following three core banking functions: receiving deposits; paying checks; or lending money”—deserves Chevron deference.
As previously discussed in a Special Alert, CSBS claimed the fintech charter violates the National Bank Act, Administrative Procedure Act, and the U.S. Constitution, and that the OCC has acted beyond the legal limits of its authority. Furthermore, CSBS asserts that providing special purpose national bank charters to fintech companies “exposes taxpayers to the risk of inevitable [fintech] failures.”
However, shortly after the OCC’s motion was filed, a federal judge ordered that the OCC’s motion to dismiss be stricken based on excessive footnoting. The judge, in a minute order on the docket, cited that the excessive number of footnotes “appear to be an effort to circumvent page limitations.” On August 2, the OCC filed a renewed motion to dismiss.
On July 25, acting U.S. Attorney for the Southern District of New York, Joon H. Kim, filed a letter with the federal court in that district on behalf of the OCC, requesting a pre-motion conference to discuss its anticipated motion to dismiss the New York Department of Financial Service’s (NYDFS) suit against the OCC’s special purpose fintech charter. See Vullo v. Office of the Comptroller of the Currency, Case 17-cv-03574 (S.D.N.Y., Jul. 25, 2017). As previously covered in InfoBytes, NYDFS filed the lawsuit May 12 on the grounds that the charter is unlawful and would grant preemptive powers over state law. Kim cites the following three reasons for dismissal of NYDFS’s complaint:
- NYDFS lacks standing to bring the suit because, although the OCC has “publically contemplated the possibility of issuing fintech charters…those public statements do not amount to a ‘final agency action’ subject to challenge under the [Administrative Procedure Act].” Indeed, since any harm NYDFS can identify is “conjectural or hypothetical,” and it has not suffered any “actual or imminent” injury, the Court lacks subject matter jurisdiction.
- OCC’s interpretation of its statutory authority under the National Bank Act (NBA) refers to Section 5.20(e)(1), which “reasonably limits the issuance of charters to institutions that carry on at least one of three ‘core banking activities’ [such as] the receipt of deposits, the payment of checks, or the lending of money.” Thus, regulations that allow chartering approvals—even if the chartered companies don't take deposits—is reasonable because they carry on at least one core banking function.
- The Supremacy Clause of the U.S. Constitution would protect fintech banks chartered under the relevant OCC rules and entitle them to NBA protections against state interference. Kim noted that it “is well established that the Supremacy Clause operates in concert with the NBA to displace state laws or state causes of action that conflict with federal law or that prevent or significantly interfere with national bank powers.”
The OCC faces a separate fintech lawsuit in the District Court for the District of Columbia brought by the Conference of State Bank Supervisors. (See previous Special Alert.)
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