On October 23, the District Court for the Southern District of New York (SDNY) issued a final judgment setting aside in relevant part the regulation1 on which the Office of the Comptroller of the Currency (OCC) based its special-purpose national bank (SPNB) charter program for non-depository fintech firms. The judgment followed the court’s May 2 denial of the OCC’s motion to dismiss the New York State Department of Financial Services’ (NYSDFS) claim that the charter program exceeded the OCC’s authority and so violated the Administrative Procedure Act.2
The court’s May 2 decision made clear that it would ultimately rule in favor of the NYSDFS. The parties requested that the court enter final judgment so as to expedite appeal to the Second Circuit, and the court did so without further analysis of the merits.
The core legal issue is whether the National Bank Act (NBA) authorizes the OCC to charter national banks that do not accept deposits. The OCC first asserted this authority in 2003 when it issued the regulation the SDNY vacated on October 23. That regulation interpreted the NBA as allowing issuance of a special-purpose charter to a bank that did not accept deposits, provided that the bank was engaged in either fiduciary activities, lending, or “paying checks.” The regulation languished until the OCC used it as a basis for its proposal to charter non-depository fintech firms. These would include payments-based firms involved in what the OCC called, without further explanation, “the electronic equivalent of ‘paying checks’” as well as alternative lending platforms currently gaining traction.3
In response, the NYSDFS and the Conference of State Bank Supervisors (CSBS) filed separate, though similar, suits against the OCC in 2018, both of which were dismissed as unripe. When the OCC announced last year that it was ready to begin accepting applications, both the NYSDFS and CSBS duly refiled. The US District Court for the District of Columbia dismissed the CSBS suit on ripeness grounds for the second time on September 3. However, the NYSDFS’s lawsuit was allowed to proceed.
The NYSDFS’s position is that the OCC’s 2003 regulation exceeded the chartering authority conferred on it by the NBA because a non-depository entity is not engaged in “the business of banking” within the meaning of that statute. The OCC moved to dismiss on the basis that the statutory phrase “the business of banking” is ambiguous, that the OCC was entitled to interpret it, and that its interpretation was entitled to Chevron deference.4
In its May 2 decision, the District Court of the Southern District of New York denied the OCC’s motion to dismiss, finding that “the term ‘business of banking,’ as used in the NBA, unambiguously requires receiving deposits as an aspect of the business.” In other words, Congress did not intend for the OCC to interpret the phrase “business of banking” at all.
This conclusion was not dictated by either statutory language or the contextual clues on which the SDNY relied. The court twice acknowledges in its opinion that the statutory text, standing alone, is ambiguous. This would have been difficult to deny. The statute does not define “the business of banking,” nor does it expressly require deposit-taking. The court nonetheless reached the conclusion that Congress’s meaning was unambiguous by examining several “interpretive clues” that it found to “speak almost unanimously.”
Significant among these clues was the court’s observation that Congress has twice amended the NBA to authorize the OCC to charter limited-purpose, non-depository national banks—once in 1978 for trust banks and once in 1982 for bankers’ banks—from which the court inferred that Congress did not think this authority already belonged to the OCC. The court acknowledged that “benign statutory redundancies” are not unusual, but nonetheless found the amendments “illuminating.” A review of the case law suggests an alternative explanation for the amendments that the SDNY opinion did not mention.
Both the 1978 and 1982 amendments to the NBA occurred after the 1977 case of National State Bank of Elizabeth, N.J. v. Smith, in which a New Jersey district court held that the OCC lacked authority to charter a bank that would engage solely in trust activities and would not take deposits. After that decision, but before the Third Circuit could rule on the OCC’s appeal, Congress passed the Financial Institutions Regulatory and Interest Rate Control Act of 1978, which amended the NBA to provide that trust banks were “not illegally constituted” solely because they did not engage in deposit-taking. The second amendment to the NBA, to provide for bankers’ banks, was passed four years later. When both of these amendments were passed, Congress was on notice that the OCC’s authority to issue “special purpose” charters was likely to be challenged. Congress might have passed specific amendments simply to avoid challenge rather than to confer an authority the agency previously lacked.
Also informing the court’s decision was the 140-year delay between enactment of the NBA and the OCC’s 2003 regulation claiming authority to charter non-depository national banks, which the court found was cause for skepticism as to whether the NBA actually conferred this power. This is based on the general principle that an agency’s claim to have discovered a previously unknown and far-reaching power is inherently suspect. However, it is hardly surprising that the OCC did not adopt a regulation intended to address the supervision of non-depository fintech firms until those entities became widespread and influential in the market. During most of the NBA’s 140-year history, banks were the dominant form of financial institution, deposit-taking was their primary function, and the role of technology in the delivery of financial services was limited or non-existent.
Even before the SDNY’s judgment was issued, the OCC fintech charter faced a long road to practical relevance. The OCC has not provided sufficient detail on its plans to supervise SPNBs to allow them to determine whether OCC oversight will unacceptably limit their ability to generate an acceptable return on equity, change business plans, or expand activities. Uncertainty also remains as to whether SPNBs will have the same access to the Federal Reserve discount window as other banks.
To date, fintechs have been unwilling to serve as test cases for the SPNB charter in light of the uncertainty surrounding the OCC’s authority to issue. That uncertainty will continue, pending a favorable Second Circuit decision on appeal or Congressional action to more clearly permit these charters.