An organization of state banking regulators hit the Office of the Comptroller of the Currency with a lawsuit, claiming the federal agency’s plan to issue fintech charters exceeds its authority.
While brewing for some time, the dispute can officially be traced back to December, when the OCC announced that it will consider applications from fintech companies seeking special purpose national bank (SPNB or fintech) charters, enabling the company to originate loans and access the payment system directly without relying on third-party banks. An OCC charter would further allow fintech companies to operate across the country without the need for a separate license in each state where customers are located.
After accepting comments on the proposal—ranging from staunch opposition to possible acceptance with some caveats and recommendations for the regulator—the OCC published draft licensing standards in March.
To be sure, much remains unclear about the OCC’s proposal, including capital requirements, access to the Federal Reserve discount borrowing window and other compliance requirements. It also remains unclear how the Trump administration plans to handle the fintech charter proposal, which was proposed under the leadership of the now-departed comptroller, Thomas Curry, an appointee of President Obama.
The draft supplement to the regulator’s licensing manual that explains how financial technology companies may seek SPNB charters was the final straw for one opponent. The Conference of State Bank Supervisors responded by filing a complaint in D.C. federal court accusing the OCC of going “far beyond” the authority granted to it by Congress.
Federal lawmakers imbued the OCC with the power to issue charters to firms that engage in deposit taking and other traditional banking activities—not for charters outside these boundaries, the CSBS argued. “[T]he OCC has, through its latest effort, created, without express statutory authorization, a new charter for nonbank companies that would not be engaged in deposit-taking and, thus, would not carry on either the business of banking or any expressly authorized special purpose,” the group alleged. On the other hand, the OCC proposal adopted the view that deposit taking was not an essential prerequisite to being a bank, provided the company undertook another fundamental function of banking, such as lending money.
“The OCC’s Nonbank Charter Decision exceeds the OCC’s authority under the [National Bank Act],” CSBS told the court. “Congress has never conferred upon the OCC the broad power to redefine the business of banking to exclude deposit taking, so as to enable the OCC to create new categories of charters for companies that do not engage in the business of banking. In fact, each time the OCC has attempted to issue such charters, the federal courts have struck down its efforts.”
State authorities have been successfully overseeing and regulating nonbank companies—including those viewed as fintechs—for many years, the complaint added, where in addition to various prudential requirements, those companies must meet state safety and soundness requirements and conform to both state and federal consumer protection and anti-money laundering laws.
By acting outside its statutory authority, the OCC has acted contrary to the National Bank Act (NBA) and the Administrative Procedure Act by failing to follow the required notice and comment procedures for agency rulemaking or conducting a cost-benefit analysis, CSBS alleged. The OCC also stated that approval criteria, supervisory requirements, acceptable activities of the charter holder and applicable federal banking laws will be determined on a case-by-case basis, eschewing comprehensive regulations, CSBS said.
“It is improper and unlawful for the OCC to handle this matter of fundamental importance to the U.S. banking and financial systems outside the agency rulemaking process established by the APA,” the group said. “The OCC has opted instead to approve nonbank charters pursuant to broadly worded policy statements that are subject to change at the whim of the agency and modification based on the type of business seeking a charter. The OCC likewise will incorporate otherwise inapplicable federal banking laws and protections on a confidential, non-transparent, case-by-case basis.”
An attempt at unauthorized pre-emption, the fintech charters also create conflict with state law and threaten to pre-empt state sovereign interests, CSBS told the court.
“Specifically, the OCC’s actions impede the states’ ability to continue their existing regulation of financial services companies within their borders and to enforce state laws designed to protect the consuming public and ensure the safety and soundness of nondepository companies,” the group alleged. “This also creates difficulties for the states in detecting unlicensed activity within their borders. Similarly, companies facing or at risk of state enforcement actions could escape state enforcement authority by obtaining a national charter.”
The complaint requests declaratory and injunctive relief setting aside the OCC’s charter decision as unlawful. It is unclear which argument will win out, although courts have typically sided with the OCC (and other agencies) when its actions do not clearly violate the statutory mandate. If that trend holds, it could be a long battle for the CSBS and state regulators, who are loath to cede control or see erosion of their current bank and financial oversight roles.
To read the complaint in CSBS v. OCC, click here.
Why it matters
Since the OCC announced its plan last year, the agency has received pushback and criticism, particularly from state regulators arguing that the federal agency’s charters would allow companies to potentially harm consumers by sidestepping state regulations. Now that the CSBS has thrown down the gauntlet with its federal court complaint, the industry should keep a close eye on developments.