By Nicole D. Prysby, J.D.
DFS argues that New York has standing because an injury is sufficiently imminent, and that the claims are not time barred because it is challenging the OCC’s July 2018 decision to allow fintechs to apply for special purpose national bank charters, not the promulgation of the regulation allowing the special purpose charters. The OCC’s action fails on the merits because Congress unquestionably intended the phrase "business of banking" to include deposit taking.
On March 19, 2019, the New York State Department of Financial Services (DFS) filed a memorandum opposing a motion to dismiss its complaint challenging the decision of the Office of the Comptroller of the Currency (OCC) to grant national bank charters to fintechs. OCC argued in its motion to dismiss that the suit is premature and should fail on the merits. DFS argued that the OCC’s decision to issue special purpose charters to fintechs creates a sufficiently imminent injury, even though no charter has been issued. The claims are not time-barred, because DFS is challenging recent actions by the OCC (specifically the fintech charter decision on July 31, 2018), not the OCC’s 2004 adoption of a more general regulation (12 C.F.R. § 5.20(e)(1)) for "special purpose" banks. And on the merits, the OCC’s interpretation of 12 C.F.R. § 5.20(e)(1) is not a reasonable interpretation of the term "business of banking" because Congress unquestionably intended the phrase "business of banking" to include deposit taking. This is evident because the numerous federal laws governing banking regulation cannot be read in harmony unless the "business of banking" requires that national banks engage in receiving deposits (Vullo v. Office of the Comptroller of the Currency, Case No. 1:18-cv-08377-VM).
Background. As previously reported, the National Bank Act (NBA) authorizes the OCC to grant a charter if it appears that the applicant is lawfully entitled to commence the "business of banking." 12 U.S.C. § 27(a). In July 2018, the OCC announced that it would start accepting applications from fintech companies for special purpose bank charters for national banks that pay checks or lend money, but that do not accept deposits. DFS challenged the OCC’s decision to consider applications for a special purpose national bank charter from fintech companies. The OCC moved to dismiss the DFS’s action, arguing that the suit is premature given that the OCC has not even received an application from a company doing business in New York, let alone granted a charter. The OCC also contended that the suit fails on the merits because the regulation pursuant to which the OCC intends to issue such charters reflects a reasonable interpretation of the OCC’s authority under the "business of banking" provision in the NBA. DFS filed a memorandum opposing the motion to dismiss the complaint.
DFS argues against dismissal of the complaint. On the jurisdiction issue, DFS argued that New York has standing because OCC has already decided that it will issue fintech charters, which preempts New York banking law. In a prior case, the court ruled that injuries alleged by DFS will "become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue SPNB charters to fintech companies" (Vullo v. OCC, S.D.N.Y. Dec. 12, 2017). That has now occurred. The charter decision is ripe for review, given the OCC’s public statements that it has begun accepting applications under its policy statement and finalized manual. The claims are not time-barred, because DFS is challenging recent actions by the OCC (specifically the fintech charter decision on July 31, 2018), not OCC’s 2004 adoption of a more general regulation (12 C.F.R. § 5.20(e)(1)) for "special purpose" banks. In addition, the reopening doctrine prevents the OCC from asserting a limitations defense in this case, because of the changed circumstances since the 2004 "special purpose" rule was promulgated—namely, OCC’s decision to license fintechs under that rule.
On the merits, DFS argued that OCC’s interpretation of 12 C.F.R. § 5.20(e)(1) is not a reasonable interpretation of the term "business of banking" because Congress unquestionably intended the phrase "business of banking" to include deposit taking. The NBA is just one piece of the overall federal law governing banking regulation. These statutes (which include the Federal Deposit Insurance Act and the Federal Reserve Act) cannot be read in harmony unless the "business of banking" requires that national banks engage in receiving deposits. For example, federal law requires that all national banks be members of the Federal Reserve System and all members of the Federal Reserve System must be insured by the FDIC. A bank, however, must accept deposits in order to be an insured bank. A bank that does not take deposits cannot be an insured bank, which means it cannot be a member of the Federal Reserve System, which further means it cannot be lawfully engaged in the business of banking under the NBA, thus precluding the OCC from issuing a charter to such an entity. The only interpretation of the "business of banking" that ensures harmony among the statutes is one that requires deposit taking.
Even if the phrase "business of banking" is ambiguous, the court should reject the OCC’s statutory construction as unreasonable. The OCC’s interpretation equates "business of banking" in Section 5.20(e)(1) with 12 U.S.C. § 36(j)—a provision of the NBA that defines when an office of a national bank will be considered a "branch." Nothing in the text, structure, or legislative history of the NBA or the legislation establishing the branching rules suggests that Congress meant for the definition of "branch" in Section 36 to define the minimum activities required for a national bank charter.
The DFS also asserted that it has alleged a valid Tenth Amendment claim because it alleged that OCC acted beyond its statutory authority promulgating Section 5.20(e)(1) and issuing the Fintech Charter Decision, that the decision conflicts with state law, and that Congress did not intend to preempt state law in this area.
Attorneys: Eamon Gilroy Rock, NY State Department of Financial Services, for Maria T. Vullo. Christopher Kendrick Connolly, U.S. Attorney's Office, for the OCC and Joseph M. Otting.
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