Introduction

On 31 July 2018 the Office of the Comptroller of the Currency (OCC) announced its decision (the Fintech Charter Decision) to begin accepting applications from fintech companies for special purpose national bank charters.(1) The OCC has indicated that 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) (for further details see "OCC to issue fintech charters").

On 14 September 2018 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 destabilising for financial markets. The DFS also argued that such acts are beyond the OCC's statutory authority and in violation of the Tenth Amendment to the 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.(2)

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"(3) and a December 2016 white paper entitled "Exploring Special Purpose National Bank Charters for Fintech Companies" (the Fintech White Paper).(4)

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 clarified 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 pre-empted while certain other state laws are not.(5)

DFS's prior complaint

In early 2017 a number of officials and institutions, including the DFS, objected to the Fintech White Paper. The objectors argued, among other things, that the proposal was beyond the OCC's authority and posed a threat to the soundness of the financial services industry. On 12 May 2017, the 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 and an injunction preventing the OCC from granting such special purpose charters.

On 12 December 2017 the district court judge granted the OCC's motion to dismiss, finding that the action was not yet ripe.(6) Notably, however, at oral argument, the court and the OCC's council agreed that such actions would become ripe when the OCC decided to accept applications for such charters. The Fintech Charter Decision released on 31 July 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 14 September complaint

In its 14 September 2018 complaint, the DFS is seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision, as well as 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. The DFS complaint argues that the Fintech Charter Decision and 12 CFR § 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.

In the complaint, the DFS has further argued 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. The DFS has claimed 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 National Bank Act) must be deposit-taking institutions. Accordingly, the DFS has argued that "the Fintech Charter Decision does not concern the 'business of banking' and is therefore beyond the OCC's jurisdiction to implement".

The DFS has also stated that the Fintech Charter Decision creates "serious threats to the well-being of New York consumers and businesses", including by:

  • placing New York financial consumers at 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; and
  • creating an unlevel playing field for large, well-capitalised fintech institutions and New York's community banking system, allowing the former to overwhelm smaller market players and stunt innovation in the financial services sector.

In addition to these concerns, the DFS has claimed that the effects of the Fintech Charter Decision could be far reaching given New York's status as a global financial centre, noting that non-bank financial services firms supervised by the 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. According to the DFS, 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 pre-emption. The DFS has further asserted 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.

For further information on this topic please contact Geoffrey F Aronow, Joel D Feinberg or David E Teitelbaum at Sidley Austin LLP's Washington DC office by telephone (+1 202 736 8000) or email (garonow@sidley.com, jfeinberg@sidley.com or dteitelbaum@sidley.com). Alternatively, contact Lilya Tessler at Sidley Austin's New York office by telephone (+1 212 839 5300) or email (ltessler@sidley.com). The Sidley Austin website can be accessed at www.sidley.com.

Endnotes

(1) The OCC's announcement is available at www.occ.gov/news-issuances/news-releases/2018/nr-occ-2018-74.html.

(2) Vullo v Office of the Comptroller of the Currency, 18-cv-08377 (SDNY 14 September 2018).

(3) Available at www.occ.gov/publications/publications-by-type/other-publications-reports/pub-responsible-innovation-banking-system-occ-perspective.pdf.

(4) Available at www.occ.gov/topics/responsible-innovation/comments/special-purpose-national-bank-charters-for-fintech.pdf.

(5) The Fintech White Paper provides examples of state laws that would generally apply to national banks (and, by extension, special purpose national banks), including:

  • anti-discrimination;
  • fair lending;
  • debt collection;
  • taxation;
  • zoning;
  • criminal and tort laws; and
  • laws concerning unfair or deceptive treatment of customers and other state laws that only incidentally affect national banks' exercise of federally authorised powers.

(6) Vullo v Office of the Comptroller of the Currency, 2017 US Dist LEXIS 205259 (SDNY 12 December 2017). A similar case was filed in the US 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 (DDC 2018).

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