On October 21, 2019, the U.S. District Court for the Southern District of New York entered final judgment in Lacewell v. Office of the Comptroller of the Currency, the closely-watched case between the New York DFS and the OCC. While the entry of a final judgment might suggest a decisive end to the matter in favor of the NY DFS, the Court’s action this week principally enables the two bank regulatory agencies to continue their bout in the U.S. Court of Appeals. We expect all the key industry groups and policy experts on both sides of the issue to line up accordingly.

The case relates to the OCC’s initiative to enable a company—primarily a financial technology company—to work within the OCC’s existing rules and licensing standards to obtain a charter for a special-purpose national bank. The NY DFS does not like the idea of the special-purpose fintech charter, arguing that the OCC has sought to usurp the state agency’s role. The NY DFS filed the high-profile lawsuit against the OCC in the Southern District of New York, challenging the OCC’s authority to adopt and implement a fintech charter, particularly through the OCC’s interpretations of the framework that the OCC established years ago for a de novo national bank. The OCC held its ground and filed a motion to dismiss the lawsuit. In May 2019, we wrote an alert about the Court’s decision, in which it denied the OCC’s motion to dismiss. As we reported then, the Court allowed the lawsuit to proceed, and the Court’s decision was, at least in our view, a victory for federalism and the dual banking system.

However, for now, we remain at the fork in the road as to the future of the bank regulatory environment for fintech companies: will there be a centralized licensing framework controlled by the OCC or will the dual banking system effectively be left intact. This alert summarizes the latest developments in the lawsuit, and we offer our analysis on how this case might affect the OCC’s efforts going forward to promote innovation for fintech companies.

The Dispute

According to the OCC, its regulations on the special-purpose national bank charters (“SPNB charters”)—which is at the center of the dispute—is based on OCC’s authority to charter special purpose banks with limited activities pursuant to the National Bank Act of 1864 (the “NBA”). That program, if implemented, would allow fintech companies to apply to the OCC for approval to operate nationwide without facing state-by-state regulations.

The NY DFS, however, opposed the program. Maria Vullo, then Superintendent of the DFS, brought the lawsuit in July 2018.  (The Acting Superintendent Linda A. Lacewell substituted for Ms. Vullo as the Plaintiff when Ms. Vullo stepped down in February 2019.)  In the lawsuit, the NY DFS primarily alleged that the OCC exceeded its authority under the NBA by inviting applications for a limited-purpose national bank. Moreover, the NY DFS alleged that the SPNB charters would undermine the state’s ability to regulate and protect its consumers and markets, essentially exempting fintech applicants from federal standards such as safety and soundness.

In its May 2019 decision, the court found that the NY DFS had established standing for its constitutional and statutory claims because the agency had demonstrated a substantial risk that harm would occur should the current balance of the dual banking system be upset by the OCC’s SPNB charters. Moreover, having considered the plain language of the NBA, history, and legislative context, the court found that the business of banking “unambiguously requires receiving deposits,” limiting the eligibility of applicants for OCC national bank charters only to depository institutions.

The Final Judgment

On October 21, 2019, U.S. District Judge Marrero entered final judgment in this case. The final judgment sets aside OCC’s existing regulation, at 5 C.F.R. § 5.20(e)(1)(i) “with respect to all fintech applicants seeking a national bank charter that do not accept deposits.” Notably, the OCC and NY DFS negotiated the terms of the final judgment—and the parties’ objective clearly is to enable the OCC to take the court’s May 2, 2019 decision up to the Court of Appeals.

After the Court’s May 2, 2019 ruling, the OCC and NY DFS conferred and agreed that it resolved all of the substantive legal issues. In its letter submitted to the Court on May 29, 2019, for example, the OCC stated that though it disagreed with the Court’s decision and reserved its rights to appeal, it believed that the decision rendered entry of a final judgment appropriate. The NY DFS agreed.

Scope of Relief

The parties’ negotiations towards the final judgment were not smooth sailing. The parties asked for several extensions while they apparently hashed out the proposed language for the final judgment. And there was one sticking point that they brought to Judge Marrero’s attention: the provision in the final judgment “concerning the geographical scope of the court’s relief.”

The NY DFS argued in its October 7, 2019 letter that the normal remedy for an agency action subject to judicial review under the Administrative Procedure Act (the “APA”) is to vacate the agency action “wholesale,” and that imposing geographic limitation would give rise to substantial administrability and enforceability difficulties for fintech companies that do not currently have but may later develop a nexus with New York.

The OCC countered that the NY DFS had couched its concerns of the SPNB charters on the distinction and interplay between the federal and state bank regulatory systems, where the alleged injuries only stemmed from the SPNB charters’ potential impact on New York citizens and the NY DFS itself.

Judge Marrero sided with NY DFS’s interpretation on the APA and the final judgment adopted the broad language proposed by the NY DFS, voiding the OCC regulations with respect to all fintech applicants.

Implications

Regardless of the scope of the relief, this final judgment indicates that the OCC and the NY DFS share a desire to make rapid headway to the Second Circuit.  For the OCC’s special purpose national bank charter, the fight between the NY DFS and the OCC has created considerable legal uncertainty for the future scope of the SPNB charter—and possibly even its emergence under the OCC’s current regulations and its Licensing Manual, including the Supplement issued in July 2018 to facilitate the application process for fintech companies.  During the pendency of OCC’s near-certain appeal to the Second Circuit, and before the Second Circuit has taken action, a fintech company that seeks to become a national bank and yet “[does] not accept deposits” will not be able to proceed with the OCC to obtain a SPNB charter; rather, to the extent applicable, that type of fintech company must comply with licensure and other requirements under state laws.