The CSBS’ request for an injunction may prompt the OCC to slow down or abandon its willingness to consider issuing national bank charters to fintech companies.

On April 26, the Conference of State Bank Supervisors (CSBS) filed suit in the U.S. District Court for the District of Columbia seeking to enjoin the U.S. Office of the Comptroller of the Currency (OCC) from issuing special-purpose national bank charters to fintech companies that would agree to forgo accepting deposits as a condition of charter approval.

In CSBS’ complaint, it asserts that:

Congressional authorization exists to charter only three categories of special-purpose national banks: trust banks, banker’s banks, and credit card banks . . . [and] [t]his specific legislative authorization would not have been necessary if the OCC already possessed the broad authority to charter institutions not engaged in the “business of banking” under existing law.

Specifically, CSBS challenges the legality of an OCC interpretative rule, 12 C.F.R. § 5.20(e)(1), which states that the OCC may charter a special-purpose bank that is engaged in limited banking activities so long as those activities include “at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money.” According to CSBS, “[in] promulgating 12 C.F.R. § 5.20(e)(1), the OCC endeavored to unilaterally extend its authority to charter entities that do not carry on the ‘business of banking,’ such as non-depository entities, without the requisite Congressional authorization.”

The term "business of banking" is not defined in the National Bank Act (NBA). Rather, CSBS cites case law in support of the position that the term is “defined by law and custom.” Moreover, as its primary legal support for the position that “a financial company or other firm that does not receive deposits is not engaged in the ‘business of banking’ within the meaning of the NBA,” CSBS cites Independent Banker Ass’n of America (IBAA) v. Conover, 1985 U.S. Dist. LEXIS 22529 (M.D. Fla. 1985). In Conover, which is further discussed below, the U.S. District Court for the Middle District of Florida granted the IBAA’s request for a preliminary injunction barring the OCC from issuing national charters to “nonbank bank” institutions that neither accepted commercial deposits nor made commercial loans.

As a preliminary matter, the Conover court determined that the parties’ dispute centered on “the issue of whether the Comptroller ha[d] the authority to charter nonbanks, and not [on] the role of . . . nonbank banks as subsidiaries of bank holding companies.” This distinction was essential for the case to proceed because certain types of financial institutions are excluded from the Bank Holding Company Act (BHCA) definition of “bank,” and U.S. Supreme Court case law “bars [pursuing] an action against the Comptroller . . . when the relationship of the bank to a holding company is the real issue to be determined.”

In finding that the IBAA and other plaintiffs had met their burden of demonstrating a likelihood of success on the merits, the Conover court first noted that “Courts have long recognized that the power to accept demand deposits and make commercial loans is at the core of the ‘business of banking.’” The court then opined that the OCC “has presented no authority to rebut plaintiffs’ argument that the [very] essence of the ‘business of banking,’ as defined by law and custom, includes taking deposits and making commercial loans.”

Furthermore, according to the court, the fact that the BHCA definition of “bank” was silent regarding nonbank banks weighed against the OCC’s position. The court stated, “Since [all] national banks were engaged in the ‘business of banking’ which meant accepting demand deposits and making commercial loans, it was assumed that the definition covered them and that including [particular types of] national banks in the definition by name would be redundant.”

The Conover court additionally cited the decision by the U.S. District Court for the District of New Jersey in National State Bank of Elizabeth v. Smith, No. 76-1479 (D.N.J. September 16, 1977), for the proposition that “when Congress has wanted to expand the authority of the Comptroller to charter national associations that are not to be engaged in the business of banking, it has done so through specific amendments [to the NBA].” In Elizabeth, the court enjoined the OCC from chartering limited-purpose trust national banks. Congress subsequently amended section 27 of the NBA to expressly authorize these national banks.

In addition to its legal arguments, CSBS asserts a number of public policy arguments, including the potential for an improper intermingling of banking and commerce, and concerns regarding the possible misuse of federal preemption to override state consumer protection laws. The OCC has acknowledged the existence of those risks in its written proposals and public statements regarding the possibility of chartering fintechs as special-purpose national banks.

Pepper Points

  • In 1987, two years after Conover, the BHCA definition of “bank” was amended by the Competitive Equality Banking Act to exclude credit card banks that neither accept demand deposits nor make commercial loans. Counter to the court’s assumptions in Conover, Congress did not amend the NBA for the purpose of authorizing the OCC to charter these institutions. Today, many of the nation’s largest credit card issuers are chartered as special-purpose credit card national banks. CSBS skirts these inconvenient facts and instead highlights Congress’ failure to adopt NBA amendments that the OCC proposed in 2011 and 2012 with respect to special-purpose institutions that serve “underbanked” consumers. It is undeniable, however, that no revisions to the NBA were needed for the OCC to charter institutions that neither accept demand deposits nor make commercial loans. Hence, the CSBS’ heavy reliance on Conover appears misplaced.

  • The OCC has a long and successful history of advancing the law with respect to permissible activities of national banks. See, e.g., NationsBank of N. C., N. A. v. Variable Annuity Life Ins. Co., 513 U.S. 251 (1995). The OCC has consistently demonstrated a willingness to look past “custom” in interpreting what is the “business of banking.”

  • The CSBS’ request for an injunction may prompt the OCC to slow down or abandon its willingness to consider issuing national bank charters to fintech companies. Either outcome would be unfortunate. The OCC has made it very clear in its written proposals and public statements that it is not looking to establish a new type of national bank charter. Rather, a nationally chartered fintech would be subject to self-imposed limits on its banking activities, which would be enforced as charter approval conditions, and would be supervised in a similar manner to any other national bank.
  • Although the legal arguments asserted in CSBS’ complaint are unpersuasive, the complaint also includes legitimate public policy concerns. The OCC has acknowledged those concerns. Hopefully, these issues will continue to be vetted and addressed through opportunities for public comment and in-person discussions with the OCC and this litigation will not stop robust discussions from occurring.