On July 31, 2018, the U.S. Office of the Comptroller of the Currency (OCC) announced its decision (the Fintech Charter Decision) to begin accepting applications from financial technology (fintech) companies for special purpose national bank charters.1 The OCC has indicated it will not grant a charter to a fintech company that wishes to accept deposits or engage in fiduciary activities (for business plans that involve purely fiduciary activities, a limited purpose trust charter may provide an alternative vehicle). The Fintech Charter Decision is discussed in greater detail in a prior Sidley Banking and Financial Services Update.2
On September 14, the New York State Department of Financial Services (DFS) filed a federal court complaint seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision and related actions, arguing that such acts are lawless, ill-conceived and destabilizing of financial markets. DFS also argued that such acts are beyond the OCC’s statutory authority and in violation of the Tenth Amendment to the U.S. Constitution, alleging that the police power to regulate financial services and products delivered within a state’s own geographical jurisdiction is among a state’s fundamental sovereign powers.3
Prior OCC Publications
The Fintech Charter Decision was preceded by several related publications by the OCC, including a March 2016 white paper entitled “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective”4 and a December 2016 white paper entitled “Exploring Special Purpose National Bank Charters for Fintech Companies” (the Fintech White Paper).5
The Fintech White Paper discussed the possibility of granting a special purpose national bank charter, without deposit-taking authority, to fintech companies, saying that such an institution would possess “the same status and attributes under federal law as a full-service national bank.” The Fintech White Paper also stated that state law would apply “in the same way and to the same extent [for a special purpose national bank] as it applies to a full-service national bank,” noting that state law licensure requirements, for instance, may be preempted while certain other state laws are not.6
DFS’s Prior Complaint
In early 2017, a number of officials and institutions, including DFS, objected to the Fintech White Paper. The objectors argued, inter alia, that the proposal was beyond the OCC’s authority and posed a threat to the soundness of the financial services industry. On May 12, 2017, DFS filed a complaint seeking a declaratory judgment that the OCC’s granting of non-deposit-taking special purpose national bank charters to fintech companies would be illegal under the National Bank Act (NBA) and an injunction preventing the OCC from granting such special purpose charters.
On December 12, 2017, the district court judge granted the OCC’s motion to dismiss, finding that the action was not yet ripe.7 Notably, however, at oral argument, the court, as well as counsel for the OCC, agreed that such actions would become ripe when the OCC decided to accept applications for such charters. The Fintech Charter Decision released on July 31, 2018 announced that the OCC would “begin accepting applications for national bank charters from nondepository financial technology … companies,” potentially rendering the dispute ripe.
DFS’s September 14, 2018 Complaint
In its September 14, 2018 complaint, DFS now seeks to enjoin further actions by the OCC to implement the Fintech Charter Decision, as well as 12 C.F.R. § 5.20(e)(1), which defines “business of banking” for purposes of the NBA to include activities of certain non-depository institutions. The DFS complaint argues that the Fintech Charter Decision and 12 C.F.R. § 5.20(e)(1) exceed the OCC’s statutory authority and violate the Tenth Amendment by purporting to insulate certain entities from state regulation without a proper delegation of such power.
The complaint argues that the Fintech Charter Decision “grossly exceeds the agency’s statutory authority” by purporting to allow for special purpose national bank charters to institutions that will not accept deposits. DFS claims that this violates a “fundamental premise of federal banking law,” namely that financial services companies engaged in the “business of banking” (and thus covered under the NBA) must be deposit-taking institutions. Accordingly, DFS argues, “the Fintech Charter Decision does not concern the ‘business of banking’ and is therefore beyond the OCC’s jurisdiction to implement.”
DFS further argues that the Fintech Charter Decision creates “serious threats to the well-being of New York consumers and businesses,” including
- placing New York financial consumers at great risk of exploitation by federally chartered entities improperly insulated from New York law
- weakening state-law controls on payday loans and other predatory practices
- consolidating multiple non-depository business lines under a single federal charter, thereby increasing the incidence of too-big-to-fail institutions
- creating an unlevel playing field for large, well-capitalized fintech institutions and New York’s community banking system, allowing the former to overwhelm smaller market players and stunt innovation in financial services
In addition to these concerns, DFS claims that the effects of the Fintech Charter Decision could be far reaching given New York’s status as a global financial center, noting that nonbank financial services firms supervised by DFS have assets of approximately $1 trillion. Examples of such firms include certain lenders and mortgage servicers, premium finance companies, money transmitters and virtual currency businesses. DFS argues that the Fintech Charter Decision would allow such firms to obtain a special purpose national bank charter and thus render these entities immune to state-law requirements via federal preemption. DFS asserts that this would present “similar perils” to those at the root of the global financial crisis and would allow unscrupulous firms to avoid proper oversight by states in which they do business.
1 The OCC’s announcement is available at https://www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html.
3 Vullo v. Office of the Comptroller of the Currency, No. 18-cv-08377 (S.D.N.Y. Sept. 14, 2018).
6 The FinTech White Paper provides examples of state laws that would generally apply to national banks (and, by extension, special purpose national banks), including antidiscrimination, fair lending, debt collection, taxation, zoning, criminal and tort laws, as well as laws concerning unfair or deceptive treatment of customers and other state laws that only incidentally affect national banks’ exercise of federally authorized powers.
7 Vullo v. Office of the Comptroller of the Currency, 2017 U.S. Dist. LEXIS 205259 (S.D.N.Y. Dec. 12, 2017). A similar case was filed in the United States District Court for the District of Columbia by the Conference of State Bank Supervisors. This case was also dismissed as unripe. See Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, 313 F. Supp. 3d 285 (D.D.C. 2018).