United States: Decision By D.C. Judge Deepens Mystery Of OCC Fintech Charter's Legal Status

Last Updated: September 19 2019
Article by Dustin N. Nofziger

As it has been well-reported, including in this blog, the Office of the Comptroller of the Currency (OCC) announced an intention to allow FinTech companies to apply for special purpose national bank (SPNB) charters on July 31, 2018. This led to parallel legal challenges being filed by the New York State Department of Financial Services (DFS) in the U.S. District Court for the Southern District of New York and by the Conference of State Bank Supervisors (CSBS) in the U.S. District Court for the District of Columbia. Earlier this year, the OCC filed motions to dismiss in each case, arguing that the plaintiffs lacked standing to challenge the OCC's actions and that the cases were not yet ripe. In May and September 2019, the respective district courts reached differing conclusions on these motions to dismiss. The New York district court denied the OCC's motion to dismiss in May, thereby allowing DFS's lawsuit to proceed, while last week the D.C. district court granted the OCC's motion to dismiss.

By way of background, the merits issue in these cases is whether the OCC exceeded its authority under the National Bank Act (NBA) by promulgating a 2003 regulation, 12 C.F.R. § 5.20(e)(1)(i), that provides that the OCC may charter SPNBs that "conduct at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money." DFS and CSBS contend that the regulation exceeds the OCC's authority to the extent that it would allow the OCC to charter FinTech companies as SPNBs that do not receive deposits (e.g., to charter money transmitters as SPNBs). The OCC, meanwhile contends that the NBA's use of the term "business of banking" is ambiguous, and that the OCC's interpretation of that ambiguous term set forth in its regulation is entitled to Chevron deference from the courts.

Denial of OCC Motion to Dismiss DFS Lawsuit

In May 2019, the New York district court denied the OCC's motion to dismiss the action brought by DFS. On the issue of standing, the court held that DFS had adequately alleged that it was subject to an imminent invasion of a legally protected interest for two reasons. First, New York consumers would lose the protections that New York law and DFS oversight provide if FinTech businesses were able to obtain SPNB charters, thereby availing themselves of the federal preemption of New York law. Second, DFS would suffer direct economic harm due to lost revenues from assessments that DFS would otherwise levy on FinTech companies licensed by DFS if those companies were instead chartered by the OCC as SPNBs. On the issue of ripeness, the court held that DFS's claims were ripe, meaning that the court would not exercise its discretion to decline to exercise jurisdiction because the case would be better decided later. While no FinTech company has yet applied for a SPNB charter, in the court's view the OCC had taken sufficient steps towards the issuance of SPNB charters for FinTechs, for example by announcing its intention on July 31, 2018 to "accept[] applications for national bank charters from nondepository financial technology (fintech) companies," for the court to hear the case.

In the context of considering whether DFS had failed to state a claim upon which relief could be granted under Federal of Civil Procedure 12(b)(6), the New York court also considered the merits of DFS's lawsuit. In so doing, it found that Chevron deference to the OCC's interpretation of the term "business of banking" in the NBA was not warranted because the term "unambiguously requires receiving deposits as an aspect of the business." This conclusion was largely based on the New York court's reading of Civil War-era dictionary definitions of "banking" and "bank" that mentioned deposit-taking; a law review article regarding the purpose of the NBA that discussed deposit-taking; and two Congressional amendments to the NBA enacted more than 100 years after the original enactment of the NBA that the court felt suggested that subsequent Congresses understood the term "business of banking" in the NBA to require deposit-taking.  

Dismissal of CSBS Lawsuit

In contrast to the New York district court, the D.C. district court dismissed CSBS's lawsuit on the grounds that CSBS lacked standing and that its claims were unripe. According to the D.C. court, CSBS lacked associational standing because it had failed to plead an actual or imminent harm to any of its state regulator members (e.g., DFS). The D.C. court found it significant that not a single FinTech had applied for a SPNB charter in the 16 years since the OCC's promulgation of 12 C.F.R. § 5.20(e)(1)(i), and it held that CSBS had failed to allege in its complaint that any particular CSBS member would suffer any actual or imminent harm. In terms of ripeness, the D.C. court held that the dispute would be sharpened if the OCC chartered a particular FinTech – or decided to imminently charter a particular FinTech. (In a prior decision granting a prior OCC motion to dismiss a prior CSBS complaint, the D.C. court had noted that CSBS's prior complaint stated that the term "Fin[T]ech" can encompass an "almost unimaginably wide variety of services," and had opined that "[c]ourts are ill-equipped to prospectively draw lines as to which hypothetical Fin[T]echs, if any, may be chartered.") Unlike the New York court, the D.C. court did not reach the merits issues.

Where Do Things Go from Here?

CSBS may appeal the dismissal of its lawsuit by the D.C. district court or, alternatively, it may seek to refile its lawsuit once additional evidence has accumulated that its claims are "ripe" (e.g., once an application for a SPNB charter has been filed by a nondepository Fintech). The DFS lawsuit, on the other hand, has been cleared by the New York district court to move forward to summary judgment and, potentially, to trial. Given the New York court's substantial foray into the merits, however, the OCC and DFS currently are working together to craft a proposed final judgment, that, once accepted by the New York court, would be appealable to the Second Circuit. While this process is pending, the OCC has received multiple extensions from the district court of its deadline to answer DFS's complaint. The OCC's deadline to answer the complaint is currently set for September 30, 2019, although it may be again extended if the parties need additional time to confer on the proposed final judgment.  

Somewhat ironically – given the D.C. district court's holding that the CSBS case was not yet ripe in part due to the lack of an extant application by a FinTech for a SPNB charter – it seems unlikely that any FinTech company will apply for a SPNB charter until there is greater certainty about the charter's legality. In the absence of a Supreme Court or perhaps appellate court decision upholding the charter as legal, any non-depository FinTech that applies for a SPNB risks the charter being attacked by one or more state regulators and/or CSBS.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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