On 2 May 2019 a federal district court judge denied a motion to dismiss filed by the US Office of the Comptroller of the Currency (OCC) in the lawsuit brought by the New York State Department of Financial Services (DFS), which challenged the OCC's decision to begin accepting applications from fintech companies for special purpose national bank (SPNB) charters (the Fintech Charter Decision) (for further details please see "OCC to issue fintech charters").(1)
Following the Fintech Charter Decision on 14 September 2018, the DFS filed a complaint seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision and the OCC's implementation of 12 CFR § 5.20(e)(1), which defines the 'business of banking' for purposes of the National Bank Act to include activities of certain non-depository institutions. Counts I and II in the DFS complaint argued that the Fintech Charter Decision and 12 CFR § 5.20(e)(1) exceed the OCC's statutory authority and Count III in the DFS complaint argued that the Fintech Charter Decision violates the Tenth Amendment by purporting to insulate certain entities from state regulation without a proper delegation of such power (for further details please see "New York State Department of Financial Services challenges OCC authority on fintech charters").(2)
The OCC moved to dismiss the DFS complaint for lack of subject matter jurisdiction and, alternatively, for failure to state a claim on which relief may have been granted.
The 2 May 2019 decision denied the OCC's motion to dismiss with respect to Counts I and II and granted the motion with respect to Count III for the DFS's failure to state a claim.
The court first rejected the OCC's lack of subject matter jurisdiction argument. It found that the DFS had standing to bring the claim and that the claim had been ripe. The DFS alleged that New York citizens would suffer by losing critical financial protections under state law – specifically, that the removal of state regulations would affect the DFS's regulation of non-depository institutions. The court stated that these threats to New York's sovereignty "are so clear that OCC does not even mention, let alone contest, the state's interests". In finding that the case had been ripe, the opinion discussed specific steps that the OCC had taken to demonstrate an expectation that it will proceed with issuing SPNB charters(3) and the ongoing risk the DFS faces that entities may leave their supervision at any moment if they believe that there will be a benefit from federal supervision resulting from the SPNB charters.
The court also rejected the first part of the OCC's failure to state a claim argument, which was based on the Administrative Procedures Act. Essentially, the OCC argued that under the Administrative Procedures Act it is entitled to deference in its interpretation of the National Bank Act. In disagreeing with the OCC, the court found that the term 'business of banking', as used in the National Bank Act, had unambiguously required receiving deposits as an aspect of business of banking and consequently need not reach the question of whether the OCC's interpretation of the National Bank Act had been entitled to deference. Thus, it concluded that the DFS had stated a valid Administrative Procedures Act claim under Counts I and II.
Finally, the court granted the OCC's motion to dismiss Count III, finding that the DFS had failed to state a valid Tenth Amendment claim. The court reasoned that to violate the Tenth Amendment, an action must exceed the federal government's enumerated powers. The power to regulate national banks is a power of the federal government under the Commerce Clause of the Constitution, and the National Bank Act represents the implementation of that power under the necessary and proper clause of the Constitution.
The case should now proceed on Counts I and II, with the OCC filing an answer and discovery, if any. These actions will likely be followed by cross-motions for summary judgment. Thus, it appears that the Fintech Charter Decision will be burdened with litigation for the near future (ie, through the ongoing DFS litigation and any related appeals, and a separate federal suit filed by the Conference of State Bank Supervisors). Fintech companies that were considering applying for an SPNB charter would benefit from evaluating their other options in the near term.
(2) The DFS originally filed a similar complaint in federal court against the OCC in early 2017 following two publications by the OCC in 2016, which discussed the possibility of granting a SPNB charter, without deposit-taking authority, to fintech companies. On 12 December 2017 the district court judge in the case granted the OCC's motion to dismiss, finding that the action was not yet ripe. Vullo v Office of the Comptroller of the Currency, 2017 US Dist LEXIS 205259 (SDNY 12 December 12 2017).
- the OCC having invited fintech companies to its offices to discuss SPNB charters;
- the numerous years the OCC spent developing the Fintech Charter Decision; and
- comments from the comptroller of the currency in the press indicating that the OCC is in informal discussions with numerous fintech companies for expected SPNB charters.
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