OCC’s Fintech Charter Survives After Reversal in the Second Circuit

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After years of litigation, the Office of Comptroller of the Currency’s (“OCC”) special purpose national bank charter (“fintech charter”) survives to see another day.  On June 3, 2021, the Second Circuit reversed the district court’s decision denying the OCC’s motion to dismiss, delivering a blow to the New York Department of Financial Services (“DFS”) and paving the way for the OCC to again accept applications for its fintech charter.

The special-purpose charter, initially proposed by former Comptroller Thomas Curry in December 2016, would permit non-depository fintech companies to operate under a federal charter overseen by the OCC without the burdens of state-by-state regulation and licensing. In 2018, before any companies submitted an application, the DFS filed suit against the OCC challenging the OCC’s authority to provide the fintech charter under the National Bank Act (NBA).  After the OCC moved to dismiss, Judge Marrero in the U.S. District Court for the Southern District of New York denied  the OCC’s motion to dismiss and agreed that the DFS had demonstrated a substantial risk that harm will occur to establish Article III standing.  Substantively,  the court held that the term “business of banking,” contrary to the OCC’s interpretation, “unambiguously requires receiving deposits[.]” As a result, the court held that fintech charter would exceed what Congress contemplated in passing the NBA.  With the substantive legal issues decided, the court entered a judgment and the OCC appealed to the Second Circuit.

In its opinion, the Second Circuit reversed the lower court’s ruling on the basis that the DFS lacked Article III standing to challenge the fintech charter because the DFS failed to allege that the OCC’s decision caused any actual or imminent injury. The Second Circuit focused primarily on the fact that no company had applied for a fintech charter, thus any injury is “too speculative to meet the requirements of Article III standing.”  Even if a company had applied for the fintech charter, the Second Circuit casted doubt as to whether the DFS could establish standing, noting that “it is not entirely clear that the regulatory disruption that DFS fears will actually occur.” Without standing, the Second Circuit held that claims were constitutionally unripe.  Notably, the Second Circuit did not address the lower court’s ruling that the “business of banking,” under the NBA, requires the taking of deposits.  Instead, the opinion made clear that it expressed no view on the lower court’s determination and remanded the case to the district court with instruction to enter a judgment of dismissal without prejudice in favor of the OCC.

While the opinion re-opens the fintech charter to potential applicants, the DFS and other state regulators may renew this challenge if the OCC grants a charter.  With the threat of looming litigation, it remains uncertain whether companies will continue to explore applications for the fintech charter.  The Second Circuit’s decision also coincides with increased scrutiny of new banking charters, including the fintech charter, the OCC’s proposed payments charter, and the approval of national trust bank charters for cryptocurrency companies.  Acting Comptroller of the Currency Michael Hsu has indicated that the OCC will review its past actions related to these charters and look for ways to coordinate a safe fintech charter with the FDIC, Federal Reserve, and state regulators.

While the OCC and the new administration’s approach to charters remains unknown, we expect this issue will remain hotly litigated as the OCC continues to propose ways to innovate in the changing banking system.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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