Banking and Finance Law Daily OCC moves to dismiss claims attempting to block fintech charters
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Wednesday, January 9, 2019

OCC moves to dismiss claims attempting to block fintech charters

By Nicole D. Prysby, J.D.

The Office of the Comptroller of the Currency has filed a motion to dismiss claims brought by the Conference of State Bank Supervisors (CSBS) in an attempt to block the OCC’s plans to issue special purpose fintech charters. The OCC asserted a number of standing, ripeness, and related issues, including issue preclusion based on a prior case finding that the CSBS has no standing to bring the claims because no fintech charter has yet been issued. The OCC also asserted that the CSBS lacks Article III standing and that the claims are not ripe for judicial review. Should the court chose to go forward, the OCC argued that the claims should be dismissed on the merits because the OCC’s special purpose bank chartering regulation is a reasonable construction of the National Bank Act’s term, "business of banking." The OCC’s conclusion that a national bank need only be engaged in one of the three core banking functions—receiving deposits, paying checks, or lending money—in order to be engaged in the "business of banking" aligns with the context and structure of the National Bank Act and controlling caselaw (Conference of State Bank Supervisors v. Office of the Comptroller of the Currency).

Background. As previously reported, the CSBS has again sued the Office of the Comptroller of the Currency in an effort to block the agency from creating a new special-purpose fintech charter (Banking and Finance Law Daily, Oct. 25, 2018). The CSBS previously filed suit against the OCC in 2017. After that suit was filed, the OCC announced that it had not yet determined whether it would move forward with the new charter, and the court decided that the issue was not ready for consideration. The CSBS is now seeking court action based on the OCC’s announcement in July 2018 that it is accepting applications for the new bank charter for fintechs as well as the OCC’s publication of a Licensing Manual Supplement. The complaint argues issuance of a Nonbank Charter is now clearly imminent.

The OCC filed a motion to dismiss, asserting that the lawsuit must be dismissed at this time because the CSBS does not have standing, since the OCC has not approved any application for a Special Purpose National Bank Charter (SPNB Charter). The OCC also argued that even if the CSBS has standing, the action should be dismissed for failure to state a claim.

Standing, ripeness, and related issues. The OCC asserted a number of standing, ripeness, and related issues. First, the CSBS has already litigated the issue of whether, absent a grant of an SPNB Charter, it has Article III standing to sue or whether its claims are prudentially ripe. The OCC argued that the court should conclude that CSBS cannot re-litigate the prior holding to avoid the inevitable conclusion that CSBS’s claims are still premature. Because there has been no material change (i.e., no issuance of an SPNB Charter) since the prior decision which held that the decision to accept applications for the Charter does not create an in injury in fact, issue preclusion applies. The OCC also argued that the CSBS still lacks Article III standing to sue because the CSBS has not shown how the OCC’s decision to accept applications for SPNB Charters has injured any particular CSBS member.

The OCC argued that the case is not ripe for judicial review, again because it has not issued an SPNB Charter. Therefore, the CSBS does not face a sufficiently "imminent" injury in fact. The matter is prudentially unripe because the OCC has not finalized its decision to issue an SPNB Charter to a particular applicant. There is no sufficiently final action to review, and withholding a decision will not impose an "immediate and significant" hardship on the parties.

The CSBS asserted that the OCC failed to consider the effect of its actions on state regulatory authority, and that this purported failure rendered the OCC’s action arbitrary, capricious, and an abuse of discretion under the Administrative Procedure Act. The OCC argued that the CSBS was actually challenging the special purpose bank regulation on which the July 2018 announcement was based, 12 CFR 5.20(e)(1), which provides that the OCC may charter a special purpose bank that conducts activities other than fiduciary activities if it engages in at least one "core banking function"—receiving deposits, paying checks, or lending money. That regulation was promulgated 15 years ago and a challenge would be time-barred. Any cause of action challenging the OCC’s adoption of the regulation accrued on January 16, 2004, when the final rule became effective. Therefore, the OCC concluded, the time for filing a facial challenge to the regulation expired in January 2010. And because only final agency actions are subject to judicial review under the APA’s arbitrary and capricious standard, and the July announcement was not a final agency action, the court should decline review.

The OCC also argued that to the extent that the CSBS has based claims on the OCC’s preemption determination with respect to SPNBs, those claims should fail because the Comptroller is not required to make a preemption determination covering all of the state consumer financial laws that could be preempted every time a new national bank is launched and begins operations. Neither the OCC’s July 2018 announcement nor the Licensing Manual Supplement addresses preemption, nor do they propose the preemption of any particular state laws. The question before the OCC after receiving an SPNB Charter application will be whether to grant or deny the application, not whether a particular state consumer protection law should be preempted.

Case should be dismissed on the merits. The OCC argued that, should the court disagree with its arguments on standing and ripeness, the case should be dismissed for failure to state a claim, because the OCC’s special purpose bank chartering regulation is a reasonable construction of the National Bank Act’s term, "business of banking." The term is not defined in the National Bank Act and therefore the OCC has the authority to interpret the term. The OCC states that courts have found that it has the ability to interpret the term and has the discretion to grant a national bank charter with limited powers. The "core banking functions" requirement in the regulation was based on a reference to the National Bank Act, which defines a national bank "branch" as a branch place of business "at which deposits are received, or checks paid, or money lent" (12 U.S.C. § 36(j)). Therefore, the OCC’s conclusion that a national bank need only be engaged in one of the three core banking functions—receiving deposits, paying checks, or lending money—in order to be engaged in the "business of banking" aligns with the context and structure of the National Bank Act and controlling caselaw.

The OCC also argued that the court should reject the CSBS’ claims that deposit-taking is a mandatory national bank power. According to the OCC, the CSBS based its assertion on the National Bank Act provision that requires a bank’s "organization certificate" to identify the place where its operations of "discount and deposit" are to be conducted. But nothing in the language of the statue makes the discounting of notes or deposit operations mandatory; it simply requires the organizers to identify the place where these activities would be conducted if a particular bank engages in them. The court should similarly reject the CSBS’s claims that Congress intended to withhold the authority of the Comptroller to charter other types of special purpose banks and that statutes other than the National Bank Act limit the OCC’s interpretation of that Act. The OCC concluded that, because the CSBS has identified no authority either within the National Bank Act or within other applicable law to support the proposition that a national bank must take deposits to be engaged in the business of banking, the claims should be dismissed.

The case is No. 1:18-cv-02449-DLF.

Companies: Conference of State Bank Supervisors

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