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2nd Circuit says challenge to OCC’s fintech charter is unripe
On June 3, the U.S. Court of Appeals for the Second Circuit reversed a 2019 district court ruling, holding that NYDFS lacked Article III standing to pursue claims that the OCC’s policy to issue Special Purpose National Bank charters (SPNB charters) to non-depository fintech companies exceeded its statutory authority. As previously covered by InfoBytes, the district court entered final judgment in favor of NYDFS after concluding that the OCC’s SPNB policy should be set aside “with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State. Among other things, the district court, in denying the OCC’s motion to dismiss, determined that the OCC exceeded its authority under the National Bank Act because the Act “unambiguously requires receiving deposits as an aspect of the business,” and that “absent a statutory provision to the contrary, only depository institutions are eligible to receive [a SPNB] from [the] OCC.” The OCC appealed, and both parties filed briefs addressing issues related to ripeness and standing (covered by InfoBytes here).
On appeal, the 2nd Circuit concluded that NYDFS lacked Article III standing to pursue its claims because it failed to show that it had suffered an actual or imminent injury from the OCC’s decision to issue SPNB charters. The appellate court also found NYDFS’s claims to be “constitutionally unripe,” holding that NYDFS’s challenge is too speculative since no non-depository fintech companies have applied for or have been granted an SPNB charter. “It is unclear at this juncture whether New York law will ever be preempted in the ways [NYDFS] fears,” the appellate court wrote. However, the 2nd Circuit determined it lacked jurisdiction to decide the remaining issues on appeal and did not address the district court’s finding that “the ‘business of banking’ under the NBA unambiguously requires the receipt of deposits.” The appellate court remanded the case to the district court with instructions to enter a judgment of dismissal without prejudice.
NYDFS Superintendent Linda Lacewell issued a statement following the 2nd Circuit’s decision, in which she reiterated the importance of “guarding against any encroachment on the state regulatory system” and urged the OCC to reconsider its policy.
OCC counters CSBS’s arguments in fintech charter challenge
On April 29, the OCC responded to the Conference of State Bank Supervisors’ (CSBS) most recent challenge to the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). As previously covered by InfoBytes, CSBS filed a complaint last December opposing the OCC’s alleged impending approval of an SPNB for a financial services provider, arguing that the OCC is exceeding its chartering authority.
The OCC countered, however, that the same fatal flaws that pervaded CSBS’s prior challenges (covered by InfoBytes here), i.e., that its challenge is unripe and CSBS lacks standing, still remain. According to the OCC, the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB—the proposed bank would conduct a full range of services, including deposit taking. Further, the OCC stated, even it if was an application for a SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe. As to standing, the OCC asserted that any alleged injury to CSBS or its members is purely speculative. Finally, the OCC contended that CSBS’s challenge fails on the merits because the challenge relies on the premise that the company’s application must be for a SPNB, not a national bank, because the company is not going to apply for deposit insurance but there is no requirement in the National Bank Act, the Federal Deposit Insurance Act, or the Federal Reserve Act that requires all national banks to acquire FDIC insurance.
New York law prohibiting paper billing statement fees is an unconstitutional restriction of commercial speech
On March 16, the U.S. District Court for the Northern District of New York dismissed a putative class action with prejudice over whether a national bank violated state law by charging a fee for paper billing statements in certain circumstances. The consumer’s suit alleged violations of N.Y. Gen. Bus. Law § 399-zzz as well as N.Y. Gen. Bus. Law § 349, which prohibits deceptive acts and practices. The bank argued, among other things, that (i) the consumer’s § 399-zzz claim was preempted by the National Bank Act (NBA); (ii) the consumer’s interpretation of § 399-zzz “would prevent [the bank] from exercising its federally authorized power to charge non-interest fees”; (iii) § 399-zzz is unconstitutional under the First Amendment because it limits the bank’s communication of fees and pricing to consumers; (iv) the statute does not apply to national banking institutions like the defendant; and (v) the statute does not prohibit the conduct at issue. The court disagreed, ruling that § 399-zzz is not preempted by the NBA because paper statement fees are not limited to only banking institutions. Moreover the court determined that the state statute is a rule of general application and “does not prevent or significantly interfere with [the bank’s] exercise of its powers.” However, the court ultimately dismissed the consumer’s action, agreeing that § 399-zzz constitutes an unconstitutional restriction on the bank’s First Amendment right of commercial speech under intermediate scrutiny. According to the court, § 399-zzz regulates “how businesses can communicate their fees” by “prohibit[ing] businesses from charging consumers for receiving a paper statement” but permits businesses “to offer consumers a credit for receiving an electronic statement instead of a paper statement.” The court also ruled that the consumer failed to state a claim for a deceptive act or practice because §399-zzz unconstitutionally infringes on the bank’s First Amendment rights.
OCC addresses permissible activities for chartered national banks
On January 11, the OCC published an interpretive letter #1176 addressing the OCC’s authority to charter national banks within the scope of 12 U.S.C. § 27(a) of the National Bank Act. As described by the OCC, the statute “recognizes the authority of the OCC to charter a bank that limits its operations to those of a trust company and activities related thereto.” Trust company activities include those “permissible for a state trust bank or company even if those state authorized activities are not necessarily considered fiduciary in nature under 12 U.S.C. § 92a and 12 CFR Part 9.” Accordingly, the letter explains that a national bank chartered under 12 U.S.C. § 27(a) is not limited to fiduciary activities as defined for purposes of 12 C.F.R. Part 9 and may engage in any permissible activities of a trust company. The letter also discusses (i) standards the OCC considers when assessing whether an activity is conducted in a fiduciary capacity; (ii) implications for chartering de novo institutions that limit activities to those of a trust company; (iii) permissible activities of converting state-chartered institutions and the handling of nonconforming assets; and (iv) permissible activities for national banks that do not have fiduciary powers.
OCC conditionally approves conversion of digital bank
On January 13, the OCC announced it has conditionally approved a South Dakota non-depository public trust company’s application to convert to a national trust bank. The digital bank—which offers digital asset and cryptocurrency custody services in certain states—has entered into an operating agreement as an enforceable condition of approval, which specifies capital and liquidity requirements and risk management expectations. By receiving a national trust bank charter, the digital bank will be allowed to expand its digital asset custody services nationally and may perform the functions and “activities of a fiduciary, agency, or custodial nature, in the manner authorized by federal and state law” with oversight being conducted by the OCC. According to the OCC, this approval “demonstrates that the national bank charters provided under the National Bank Act are broad and flexible enough to accommodate evolving approaches to financial services in the 21st century.”
CSBS challenges OCC’s pending fintech charter
On December 22, the Conference of State Bank Supervisors (CSBS) filed a complaint in the U.S. District Court for the District of Columbia opposing the OCC’s impending approval of a national bank charter for a financial services provider (company), arguing that the OCC is exceeding its chartering authority. According to the complaint, the company’s charter is close to being formally approved by the OCC after being “solicited, vetted and in November 2020 accepted as complete” by the agency. The complaint asserts the company will continue its lending and payment activities (which are currently state-regulated) without obtaining deposit insurance from the FDIC. The complaint alleges that the company is applying for the OCC’s nonbank charter, which was invalidated by the U.S. District Court for the Southern District of New York in October 2019 (which concluded that the OCC’s Special Purpose National Bank Charter (SPNB) should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” covered by InfoBytes here). CSBS argues that “by accepting and imminently approving” the company’s application, the “OCC has gone far beyond the limited chartering authority granted to it by Congress under the National Bank Act (the “NBA”) and other federal banking laws,” as the company is not engaged in the “business of banking.” CSBS seeks to, among other things, have the court declare the agency’s nonbank charter program unlawful and prohibit the approval of the company’s charter under the NBA without obtaining FDIC insurance.
New York district court grants interlocutory appeal request in escrow interest action
On September 29, the U.S. District Court for the Eastern District of New York granted a national bank’s request for interlocutory appeal of the court’s September 2019 decision denying the dismissal of a pair of actions, which alleged that the bank violated New York law by not paying interest on escrow amounts for residential mortgages. As previously covered by InfoBytes, last September, the district court concluded that the National Bank Act (NBA) does not preempt a New York law requiring interest on mortgage escrow accounts, because there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The bank moved to amend the prior order and certify the preemption question for interlocutory appeal to the U.S. Court of Appeals for the Second Circuit. The court granted the motion stating that the case “presents one of the rare instances in which there would be system-wide benefits to granting an interlocutory appeal.” The court noted that certifying the question for appeal would foster an “effective and efficient judiciary” by saving the defendants and jurists “considerable time and effort” by not having to re-litigate the issue. Moreover, certifying for appeal would “materially advance the ultimate disposition of [the] litigation.”
District court dismisses credit card usury claims
On September 28, the U.S. District Court for the Eastern District of New York dismissed a putative class action alleging a national bank’s subsidiaries and trustee (collectively, “defendants”) violated New York usury and banking laws by charging and receiving payments at interest rates above the state’s 16 percent limits. The defendants moved to dismiss the action, arguing that the claims are preempted by the National Bank Act (NBA) because the national bank parent company, which is located in a state that does not impose interest rate limits so long as the rate is disclosed to the borrower, owned the credit card accounts underlying the securitization, and would therefore not be subject to New York’s limitations. The court agreed with the defendants, concluding that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported the premise that the NBA preempts the usury claims. Specifically, the court noted that the case is distinguishable from Madden in that the national bank retained ownership of the credit card accounts throughout securitization and thus, “maintains a continuous relationship with the customer accounts that goes beyond its designation as originator of those accounts.” The court also rejected the plaintiffs’ unjust enrichment claim, because it was duplicative of the usury claim and therefore was also preempted. Thus, the court dismissed the action in its entirety with prejudice, noting that “any pleading amendment would be futile.”
District court: Usury claims preempted by National Bank Act
On September 21, the U.S. District Court for the Western District of New York dismissed allegations against two entities affiliated with a national bank, and a trust acting as trustee of one of the entities, ruling that a plaintiff’s “state-law usury claims are expressly preempted by the [National Banking Act].” The court noted that, “[e]ven before the OCC issued its rule clarifying that interest permissible before a transfer remains permissible after the transfer, [the plaintiff’s] claims would have been preempted” because the national bank “continues to possess an ‘interest in the account.’” The plaintiff contended he was charged usurious interest rates that exceeded New York’s interest rate cap on unsecured credit card loans originated by the national bank. According to the opinion, one of the entities contracted with the bank to service the credit card loans, with the bank retaining ownership of the accounts. The plaintiff argued that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported his claims against the affiliated entities, but the court disagreed, ruling that the national bank retained interest in the loans, which included the right to “change various terms and conditions” as well as interest rates.
OCC defends fintech charter authority in NYDFS challenge
On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”
The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.