Banking and Finance Law Daily State regulators’ group sues to block OCC’s planned fintech charter
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Wednesday, April 26, 2017

State regulators’ group sues to block OCC’s planned fintech charter

By Richard A. Roth, J.D.

The Conference of State Bank Supervisors has sued the Office of the Comptroller of the Currency in an effort to block the agency from creating a new special purpose fintech charter. Calling the OCC’s plan "an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks," CSBS says that the OCC only can charter financial institutions that engage in the business of banking. At a minimum, such an institution must accept deposits, but the OCC intends that companies holding the special purpose charters might not accept deposits, meaning they will not be engaged in the business of banking, CSBS charges (Conference of State Bank Supervisors v. OCC ).

According to CSBS President and CEO John W. Ryan, state authorities already supervise tens of thousands of bank and nonbank financial services companies, including more than 75 percent of U.S. banks. This has created "a robust platform for innovation." The OCC’s plan will preempt state consumer protection laws, he added.

CSBS objections. The complaint alleges that the OCC claims the authority to create charters for a broad variety of nonbank financial services providers, regardless of whether they might be thought of as fintech companies. This exceeds the agency’s authority under the National Bank Act.

CSBS complains that the OCC has decided to act simply by publishing a white paper and then asking for public comments on a supplement to its Licensing Manual. The agency should have proposed regulations. In fact, while the white paper sought comments on how the OCC should issue nonbank charters, it did not seek comments on whether the agency had the authority to issue nonbank charters.

The complaint alleges that the OCC intends, as part of the chartering process, to negotiate a secret agreement with each company about which federal banking laws will be applied to it. Also, by virtue of their federal special purpose charters, the companies will be exempt from state banking laws and regulations. This will create significant preemption issues.

OCC chartering authority. According to the CSBS complaint, the OCC has the authority to issue charters to companies to engage in the business of banking and to issue limited special purpose charters. While the NBA does not explicitly define what constitutes the business of banking, law and practice make clear that it must include taking deposits, CSBS asserts.

Previous OCC efforts to issue charters to companies that do not take deposits have been rejected by the courts, according to the complaint. There are three exceptions—Congress has explicitly authorized the agency to charter trust banks, banker’s banks, and credit card banks. The special purpose nonbanks contemplated by the OCC would not fit into any of those categories. Congress has rejected efforts to create other special purpose charters, CSBS notes.

Comptroller of the Currency Thomas J. Curry has said the OCC will issue special purpose charters to companies that engage in at least one of three activities—taking deposits, handling funds transfers such as paying checks, or making loans. While an OCC regulation might permit that broader definition of the business of banking (12 CFR 5.20(e)), the law does not, CSBS argues. In fact, the OCC has pointed only to that regulation, and not to any statute, as its authority.

Moreover, the OCC appears to contemplate allowing special purpose nonbanks to engage in activities that have never been determined to be part of or incidental to banking.

Specific claims for relief. CSBS wants a declaratory judgment preventing the issuance of nonbank special purpose charters for several reasons:

  1. The OCC does not have the statutory authority to issue special purpose charters to nonbanks.
  2. To the extent that 12 CFR 5.20(e) defines the business of banking in a manner that does not require deposit-taking, its adoption exceeded the OCC’s authority.
  3. The OCC failed to follow the required Administrative Procedures Act notice-and-comment rulemaking process.
  4. The OCC has not considered the effects of its actions on state regulatory powers, has not carried out a cost-benefit analysis, and has not provided a reasoned explanation, making its actions arbitrary and capricious.
  5. Since Congress has not authorized the OCC to preempt state law in this area, issuing special purpose charters to nonbanks would violate the states’ Tenth Amendment right to regulate the companies.

The case is No. 1:17-cv-00763.

Attorneys: Jennifer Ancona Semko, John F. Kosmidis, Steven M. Chasin, and Graham Cronogue (Baker & McKenzie LLP) for the Conference of State Bank Supervisors.

Companies: Conference of State Bank Supervisors

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