Banking and Finance Law Daily OCC files reply brief in fintech charter appeal
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Friday, August 14, 2020

OCC files reply brief in fintech charter appeal

By Nicole D. Prysby, J.D.

The OCC argued that the case is not yet justiciable, that it is entitled to deference for its interpretation of the term "business of banking," and that the judgment should be geographically limited.

The Office of the Comptroller of the Currency submitted a reply brief to the Second Circuit Court of Appeals in its ongoing battle with the New York Department of Financial Services (NYDFS) stemming from the OCC’s 2018 decision to grant special-purpose national bank charters to fintech companies. After the federal district court set aside the OCC’s regulation with respect to all fintech applicants seeking a national bank charter that do not accept deposits, the OCC appealed. The OCC’s reply brief reiterated its main arguments: that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term "business of banking," and the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York.

In 2018, the Superintendent of NYDFS filed a complaint in the federal district court in the Southern District of New York seeking declaratory and injunctive relief against the Office of the Comptroller of the Currency in connection with the OCC’s July 2018 decision to immediately begin accepting applications from, and grant special-purpose national bank charters to, financial technology companies—including companies that do not accept deposits (see Banking and Finance Law Daily, Sept. 17, 2018). The NYDFS’s complaint contended that the decision exceeded the OCC’s authority under the National Bank Act (NBA) and violates the Tenth Amendment to the Constitution. In addition, the NYDFS maintained that the OCC’s regulation covering special-purpose national banks is null and void because the agency exceeded its authority by defining the "business of banking" to include non-depository institutions. In October 2019, the court issued a judgment in favor of NYDFS; the court set aside the OCC’s regulation, with respect to all fintech applicants seeking a national bank charter that do not accept deposits (see Banking and Finance Law Daily, Oct. 22, 2019). The court did not limit the order geographically to New York.

The OCC appealed the decision and argued that the district court erred in three respects (see Banking and Finance Law Daily, July 28, 2020). First, the NYDFS lacked standing and its claims were not ripe because the OCC has not yet received a single charter application for a New York fintech. Second, OCC was entitled to Chevron deference because the term "business of banking" is ambiguous, and OCC’s resolution of that ambiguity was reasonable. Third, the district court erred in the geographic scope of the judgment because it prohibits OCC from entertaining charter applications from all fintechs—even those without any connection to New York. The NYDFS responded that the district court was correct to hold that OCC had exceeded its statutory authority in deciding to issue federal bank charters to nondepository fintech companies and that the claims were ripe because there was a substantial risk of harm. Thus, there is no need to wait until the OCC actually issues a federal bank charter to a fintech company. And geographically limited language for the final judgment would have presented significant challenges of administration. The location of a fintech company at the time it is chartered has little relevance to its ultimate effect on New York, because an OCC charter confers nationwide preemption.

In OCC’s reply brief, it again stressed its argument that the case is not justiciable because OCC has neither received nor taken any action to approve a special purpose national bank charter, let alone one from a non-depository fintech with a nexus to New York. NYDFS’s alleged injuries are speculative (for example, it argued that it has standing based on regulatory costs, but it has incurred no such costs because no charter has been issued) and accordingly, NYDFS lacks standing. The case is not ripe and will not be ripe until OCC considers an actual application from a fintech. Only at that point may the court consider the relevant factual questions, which it must do, despite NYDFS’s argument that the case presents only a question of law. There is no harm to NYDFS in delaying this action unless and until a fintech charter is issued.

On the merits, OCC argued that NYDFS cannot show the statutory term "business of banking" is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter. Although the NYDFS argued that nineteenth-century dictionary definitions of "bank" and "banking" unambiguously establish the existence of a deposit-taking requirement, at most this shows that deposit-taking was a typical but not necessary bank function. The "business of banking" has evolved over the last 160 years and, for example, just as national banks need not issue currency to properly engage in the business of banking, there is no requirement that an applicant for a national charter accept deposits if it can present the OCC with a viable business model that does not require it. The NYDFS’s argument that Alexander Hamilton viewed deposit-taking as the central activity of a national bank is flawed and in reality, Hamilton omitted deposit-taking from his articulation of the First Bank’s core purpose. OCC’s regulation interpreting the ambiguous phrase "business of banking"—which, consistent with Supreme Court precedent, looks to the three "core banking functions" identifiable elsewhere in the National Bank Act—is reasonable. Finally, DFS’s argument that the Administrative Procedure Act (APA) mandates a nationwide setaside of OCC’s ability to charter non-depository fintechs is inconsistent with another decision of this court as well as principles of equity and the APA’s text and history. The court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York.

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