On Thursday, December 19, 2019, the OCC filed an appeal of a ruling that will have significant ramifications for nonbank participants in financial markets and the scope of the OCC's authority to regulate them. In Lacewell v. Office of the Comptroller of the Currency, Case 1:18-cv-08377-VM (S.D.N.Y.) (ECF No. 45), the court concluded in a stipulated judgment that the OCC lacks the power to grant National Bank Act ("NBA") charters to nondepository institutions, thereby thwarting the OCC's "Fintech Charter" program, which would have allowed charter recipients to preempt state usury laws. The appeal will give the Second Circuit an opportunity to address one of the collateral effects of its controversial decision in Madden v. Midland Funding LLC,786 F.3d 246 (2d Cir. 2015).
The Madden decision limited the ability of nonbank debt purchasers to benefit from the NBA's preemption of state usury law, injecting substantial uncertainty into financial markets, where debts are regularly bought and sold by nonbank actors. In particular, Madden raised existential questions for the business models adopted by many Fintech companies that are not themselves nationally chartered banks. Instead, many Fintech companies partner with banks to originate loans, which are immediately sold to the Fintech company.
In July 2018, the OCC attempted to resolve these questions for Fintech companies by announcing a plan to issue "Fintech Charters," which are special-purpose national bank charters, to nondepository Fintech companies. The OCC's plan was promptly met with litigation from state and local government regulators in both New York and Washington, D.C., each of which raised similar legal challenges to the Fintech Charter plan. See Lacewell, Case 1:18-cv-08377-VM; Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, No. 18-cv-2449 (DLF) (D. D.C.). (The Washington D.C. case was dismissed a second time for lack of standing and ripeness on September 3, 2019.) To date, no company has applied for a charter, perhaps due to the uncertainty created by these pending legal challenges.
In Lacewell, New York's Department of Financial Services ("NYDFS") argued that the OCC's regulatory authority does not include the power to grant a charter to a nondepository institution, such as a Fintech company. In addition to responding that NYDFS's claims were not yet ripe for litigation, the OCC asserted that the NBA expressly authorizes it to grant charters to any institution that is "in the business of banking." The OCC contended that the "business of banking" is not limited to depository institutions and therefore includes Fintech companies. Judge Marrero agreed with NYDFS, stating that the NBA's "'business of banking' clause, read in the light of its plain language, history, and legislative context, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC." Lacewell, Case 1:18-cv-08377-VM (ECF No. 28).
The appeal comes as no surprise following remarks from the Comptroller of the Currency Joseph Otting on October 27, 2019, stating "[w]e don't think [Judge Marrero] made the right decision. We're going to appeal that decision, and we think that, ultimately, the decision will be made that we will be able to offer that charter." According to Otting, the Fintech Charters are squarely within the OCC's authority because they are a "stepping stone to a full-service bank charter, where [Fintech companies] could take deposits and make loans."
The OCC's Fintech Charter is just one front in the endeavor to settle the landscape for nonbank market participants following the Madden decision. As discussed in a recent Jones Day publication, the OCC and the Federal Deposit Insurance Corporation ("FDIC") are also seeking to codify the "valid-when-made" doctrine through rulemaking, after efforts to do so through legislation in or around 2017 stalled. On the other side of the debate, a group of six U.S. senators wrote to the OCC and the FDIC on November 21, 2019, in opposition to the regulators' rulemaking efforts, and consumer advocacy groups continue to push for wider adoption of the Madden rule. On November 7, 2019, 61 consumer, community, and civil rights advocacy groups wrote letters to the Federal Reserve, OCC, and FDIC pledging to "vigorously fight efforts by predatory lenders to shield themselves with a bank charter." At the same time, the trend over the last decade in state legislatures—such as South Dakota and Ohio—toward greater borrower protections will continue into the 2020s with California's Financing Law taking effect, which will, among other things, impose interest rate limits on personal loans and payday lenders.
In the coming year, the landscape may further shift as a number of lawsuits across the United States—including in the Southern District of New York—are poised to address Madden's implications for financial markets, creating opportunities for courts to distinguish or disagree with Madden. See, e.g., In re Rent-Rite Superkegs West Ltd, 603 B.R. 41, 66-67 & n.57 (Bankr. D. Colo. 2019) (court declined to adopt Madden); Zavislan v. Avant of Colorado LLC et al., Case No. 17CV30377 (Co. Dist. Ct. Denver) (state regulator argued that nonbank purchaser of debt could not benefit from NBA preemption and therefore violated state usury law); Cohen v. Capital One Funding, LLC, No. 1:19-cv-03479 (S.D.N.Y) (putative class action asserting that a securitization trust backed by credit card receivables could not benefit from originator's NBA preemption).
Jones Day will continue to monitor developments relating to these issues.