On March 9, 2021, the Second Circuit heard oral arguments in connection with the New York Department of Financial Services’ (“DFS”) challenge to block the Office of Comptroller of the Currency’s (“OCC”) special purpose national bank charter (“fintech charter”). The lawsuit was filed in the Southern District of New York in September of 2018, shortly after the OCC made available its special purpose bank charter.
The fintech charter would allow certain non-depository fintech companies to operate as “special purpose national banks” under the National Bank Act (“NBA”), which is overseen by the OCC without the burden of state-by-state regulation and licensing. The OCC views deposit-taking as just one of the activities undertaken by banks in the “business of banking” under the NBA. However, critics, including the DFS, argue deposit-taking is essential to the “business of banking,” which should preclude non-depository fintech companies from obtaining national bank protections.
The case, Lacewell v. Office of the Comptroller of the Currency, has been pending on appeal in the Second Circuit since April of 2020, after the district court denied the OCC’s motion to dismiss and found that DFS has standing to sue. The DFS argues that the NBA only gives the OCC the authority to provide banking charters to depository institutions, not non-depository institutions, like fintech companies. The DFS has argued that extending the OCC’s reach over fintech companies would threaten the DFS’s authority over hundreds of non-depository fintechs in its jurisdiction.
At oral argument, a Second Circuit panel of three judges pressed the DFS on whether it had standing to challenge the fintech charter as a threat to DFS’s authority. Notably, there have been no applications by companies seeking to apply for the fintech charter, so the OCC has never approved a fintech charter. Thus, Judge Gerard Lynch asked “Why is that a case or controversy if there’s no clear indication that they ever will?”
Similarly, in response to the DFS’s alleged injuries including diminished regulatory authority and reduced revenue if state-licensed fintech companies exit its jurisdiction, Judge Joseph Bianco suggested these injuries may be too speculative to serve as the basis for DFS standing, since there have been no applications. Still, the panel of judges expressed some doubt over the OCC’s interpretation of its authority under the NBA.
Even though the fintech charter has been in flux for several years, fintech companies continue to seek federal regulatory approval even within the existing framework. For instance, Varo Money obtained a full-service banking charter from the OCC in July 2020. Other fintechs recently submitted their application to the OCC for the same. While the OCC’s fintech charter would open the door to streamlined regulatory scheme under the OCC for non-depository fintechs, fintech companies seeking to become full-service national banks are working within the OCC’s current regulatory scheme as necessary.
The case is Lacewell v. Office of the Comptroller of the Currency, case number 19-4271, in the U.S. Court of Appeals for the Second Circuit.
Prior McGuireWoods coverage of the lawsuit:
OCC Urges Second Circuit to Reverse Fintech Charter Decision, April 29, 2020