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01.30.2019 | Legal Update

Some commenters have opined that the litigation risk surrounding the Office of the Comptroller of the Currency’s (“OCC”) proposed special purpose national bank charter for Fintechs (“Fintech Charter”) is deterring applicants from pursuing this charter option. Earlier this month, the OCC shed some light on the underlying procedural and substantive legal issues at stake. The OCC’s federal court filings give potential applicants an opportunity to weigh whether running the Fintech Charter gauntlet will be successful from a legal, regulatory, and strategic standpoint.

On January 7, 2019, the OCC filed a motion to dismiss in the U.S. District Court for the District of Columbia (“DC District Court”), asking the court to set aside claims by the Conference of State Bank Supervisors (“CSBS”), an association of state bank agencies, challenging the agency’s proposed Fintech Charter—at least until the agency has finally issued its first Fintech Charter. Importantly, the motion outlines the arguments the OCC plans to make to defend its Fintech Charter proposal against current and future challenges. The motion specifically highlights the OCC’s statutory authority to issue special purpose charters, as well as its historic flexibility to adapt to new developments in banking, from ATMs to remote check capture to online banking.

Fintechs considering a Fintech Charter should pay close attention to the arguments being made in this case and the concurrent challenge in the Southern District of New York (“SDNY”), as the outcomes are likely to provide important clarity in a new area of federal financial regulation.

Background

The CSBS is staunchly opposed to and has litigated the OCC’s proposed Fintech Charter, this being its second lawsuit before the OCC has even received its first application. The first lawsuit was dismissed by the same court last year, finding that the case did not demonstrate an actionable injury to any CSBS member and was not yet ripe to be heard, given that no charter had been issued (CSBS v. OCC, 313 F.Supp. 3d 285 (D.D.C. 2018)).

The CSBS is not alone in challenging the Fintech Charter. The New York State Department of Financial Services (“NYDFS”) has also challenged the charter in the SDNY for a second time. Similarly, the first NYDFS case was dismissed due to lack of standing and ripeness given the absence of any approved Fintech Charter (Vullo v. OCC, 2017 WL 6512245 (S.D.N.Y. 2017)). In the pending SDNY case, the OCC has not filed a motion to dismiss yet, but is expected to make largely the same arguments as it has in DC District Court.

Both the recent CSBS lawsuit (filed on October 25, 2018) and NYDFS lawsuit (filed on September 14, 2018) were initiated in response to the OCC’s July 2018 announcement that it will begin to accept applications for the Fintech Charter. The CSBS and NYDFS believe the relative imminence of a charter justifies an injury that would confer standing and ripens the issue to survive a motion to dismiss against the OCC.

Procedural Challenges

In its motion, the OCC cites the prior two federal district court decisions and continues to take the position that it is too early for courts to be hearing challenges to the Fintech Charter. Indeed, the OCC cites specific language that the SDNY observed would be required to properly analyze the authority of the Fintech Charter:

[s]everal contingent and speculative events must occur before the OCC charters a Fintech: (1) the OCC must decide to finalize a procedure for handling those applications; (2) a Fintech must choose to apply for a charter; (3) the particular Fintech must substantively satisfy regulatory requirements; and (4) the OCC must decide to grant a charter to the particular Fintech.

The OCC noted that while a procedure is in place to accept applications, no Fintech has submitted an application yet and, therefore, no Fintech Charters have been issued. Based on these facts, the OCC is asking the court to dismiss these claims until there is an approved Fintech Charter.

In addition to the ripeness claims, the OCC’s other procedural arguments included claims that the CSBS challenge (i) is not proper because the OCC’s July 2018 announcement was not a final agency action reviewable under the Administrative Procedures Act, (ii) is time-barred because the OCC regulation that it does concern has been in place through notice-and-comment rulemaking for 15 years, and (iii) does not identify an injury to any particular CSBS member because all of the alleged injuries require a Fintech Charter to be issued.

OCC Authority and National Bank Charter

The OCC’s recent motion is significant because it is the first time the agency has publicly outlined its underlying legal basis for issuing Fintech Charters. Should the court decide the motion on the merits, the OCC primarily relies on Chevron deference regarding its interpretation of the National Bank Act. Under the National Bank Act, the OCC is authorized to regulate nationally chartered banks that are in the “business of banking.” The OCC also relies on court precedent that has historically interpreted the agency’s authority to be flexible “to permit the use of new ways [to] conduct[t] the very old business of banking.”

The CSBS’s challenge argues, among other things, that (i) the OCC’s interpretation and application of 12 C.F.R. § 5.20(e)(1), which authorizes special purpose charters, does not include Fintechs, (ii) the Fintech Charter requires notice-and-comment rulemaking before implemented, and (iii) the Fintech Charter violates the Tenth Amendment, arguing the OCC does not have the constitutional authority to regulate “nonbanks.”

In response, the OCC notes that the National Bank Act, as well as subsequent regulations and case law, identify three core banking functions: receiving deposits, paying checks, and lending money. While the CSBS argues that receiving deposits is a necessary banking function that a Fintech must perform in order to be considered in the business of banking, the OCC argues that pursuant to its long-standing special purpose bank chartering authority, national banks may be engaged in only one of the three core banking functions. In addition to arguing that the OCC’s interpretation is entitled to deference, the OCC’s motion further argues that the Fintech Charter is not subject to notice-and-comment rulemaking because it relies on a regulation, 12 C.F.R. § 5.20(e)(1), that already has been implemented through notice-and-comment rulemaking. Finally, the OCC notes that the Constitution assigns the federal government with the authority to regulate national banks under which the National Bank Act was passed, and that the National Bank Act and its implementing federal regulations preempt state law.

Conclusion

These challenges create legal uncertainty and raise federalism questions that will ultimately be resolved by the pending litigation. It remains unclear how seriously courts will consider these challenges from the CSBS and NYDFS, but Fintechs considering a Fintech Charter must incorporate this legal, regulatory, and strategic risk when making the decision to apply for and obtain Fintech Charters from the OCC.