Court Permits New York State Department of Financial Services Suit Against Office of the Comptroller of the Currency Regarding FinTech Charter to Proceed

Following the Fintech Charter Decision, on September 14, 2018, the DFS filed a complaint seeking to enjoin further actions by the OCC to implement the Fintech Charter Decision and the OCC’s implementation of 12 C.F.R. § 5.20(e)(1), which defines “business of banking” for purposes of the National Bank Act (NBA) to include activities of certain nondepository institutions. Counts I and II in the DFS complaint argued that the Fintech Charter Decision and 12 C.F.R. § 5.20(e)(1) exceed the OCC’s statutory authority, and Count III in the DFS complaint argued that the Fintech Charter Decision violates the Tenth Amendment by purporting to insulate certain entities from state regulation without a proper delegation of such power.^2 3

The OCC moved to dismiss the DFS complaint for lack of subject matter jurisdiction and, alternatively, for failure to state a claim on which relief may be granted.

The May 2 decision denied the OCC’s motion to dismiss with respect to Counts I and II and granted the motion with respect to Count III for failure of the DFS to state a claim.

The court first rejected the OCC’s “lack of subject matter jurisdiction” argument. The court found that the DFS has standing to bring the claim and that the claim is ripe. The DFS alleged that New York citizens would suffer by losing critical financial protections under state law, specifically that the removal of state regulations would affect DFS regulation of nondepository institutions. The court stated that these threats to New York’s sovereignty “are so clear that OCC does not even mention, let alone contest, the state’s interests.” In finding that the case was ripe, the opinion discussed specific steps the OCC had taken to demonstrate an expectation that it will proceed with issuing SPNB charters⁴ and the ongoing risk the DFS faces that entities may, at any moment, leave its supervision if they believe there will be a benefit from federal supervision resulting from the SPNB charters.

The court also rejected the first part of the OCC’s failure to state a claim argument, which was based on the Administrative Procedures Act (APA). Essentially, the OCC argued that under the APA, it is entitled to deference in its interpretation of the NBA. In disagreeing with the OCC, the court found that the term “business of banking,” as used in the NBA, unambiguously requires receiving deposits as an aspect of the business of banking and consequently it did not need to reach the question of whether the OCC’s interpretation of the NBA was entitled to deference. Thus, it concluded that the DFS stated a valid APA claim under Counts I and II.

Finally, the court granted the OCC’s motion to dismiss Count III, finding that the DFS failed to state a valid Tenth Amendment claim. The court reasoned that to violate the Tenth Amendment, an action must exceed the federal government’s enumerated powers. The power to regulate national banks is a power of the federal government under the Commerce Clause of the Constitution, and the NBA represents the implementation of that power under the Necessary and Proper Clause of the Constitution.

The case should now proceed on Counts I and II, with the OCC filing an answer and discovery, if any, commencing, likely followed by cross-motions for summary judgment. Thus, it appears that the Fintech Charter Decision is likely to be bogged down in litigation for the near future, through the ongoing DFS litigation and any related appeals and a separate federal suit filed by the Conference of State Bank Supervisors. Fintech companies that were considering applying for an SPNB charter would benefit from evaluating their other options in the near term.

¹ The OCC announced the Fintech Charter Decision on July 31, 2018. The OCC indicated it would not grant a charter to a fintech company that wishes to accept deposits or engage in fiduciary activities. The Fintech Charter Decision is discussed in greater detail in a prior Sidley Banking and Financial Services Update, available at https://www.sidley.com/en/insights/newsupdates/2018/08/us-occ-to-issue-fintech-charters.

² The DFS originally filed a similar complaint in federal court against the OCC in early 2017 following two publications by the OCC in 2016 discussing the possibility of granting a SPNB charter, without deposit-taking authority, to fintech companies. On December 12, 2017, the district court judge in the case granted the OCC’s motion to dismiss, finding that the action was not yet ripe. Vullo v. Office of the Comptroller of the Currency, 2017 U.S. Dist. LEXIS 205259 (S.D.N.Y. Dec. 12, 2017).

³ A more detailed discussion of the DFS complaint can be found in another prior Sidley Banking and Financial Services Update, available at https://www.sidley.com/en/insights/newsupdates/2018/09/nysdfs-challenges-occs-authority-to-grant-fintech-charters.

⁴ For example, the opinion discussed OCC’s having invited fintech companies to its offices to discuss SPNB charters, the numerous years the OCC spent developing the Fintech Charter Decision and comments from the Comptroller of the Currency in the press indicating that the OCC is in informal discussions with numerous fintech companies for expected SPNB charters.