The Conference of State Bank Supervisors (CSBS) has filed a lawsuit in D.C. federal district court to block the OCC from granting a national bank charter to Figure Technologies Inc.  According to the complaint, Figure, through a subsidiary, is currently licensed in 49 states and the District of Columbia as a mortgage lender, consumer lender, and/or debt collector and intends to begin engaging in new money transmission activities in early 2021 through another subsidiary.  The lawsuit follows the dismissal on ripeness grounds of two other lawsuits filed by the CSBS in D.C. federal district court challenging the OCC’s authority to issue special purpose national bank (SPNB) charters to non-depository fintech companies.

In the new complaint, CSBS challenges the OCC’s authority to create “a new special-purpose national bank charter for nonbank companies” which it refers to as a “Nonbank Charter.”  For purposes of the complaint, CSBS uses the term “Nonbank Charter” to refer to both a SPNB charter issued to a non-depository institution and a full service national bank charter issued to a depository or non-depository institution that is not insured by the FDIC.  CSBS alleges there is uncertainty as to whether Figure Bank will accept deposits but claims that regardless of whether Figure Bank “will or will not be engaged in receiving deposits,” “it is clear that Figure Bank has applied for a Nonbank Charter” because it will not be FDIC-insured.

CSBS’s uncertainty as to whether Figure Bank will receive deposits apparently reflects the limited information in Figure’s charter application.  A joint letter commenting on Figure’s charter application submitted to the OCC by a group of seven trade associations describes the application as containing “only a skeletal description” of the bank’s proposed activities.  The trade groups state, however, that based on public statements by Figure’s officials, they are aware of additional facts, including that the bank “will accept deposits in minimum denominations of $250,000 from its affiliates and third parties that are ‘accredited investors.’”  (In their comment letter, the associations-which include the American Bankers Association, Consumer Bankers Association, and The Clearing House—also question the OCC’s authority to issue a national bank charter to an uninsured depository institution.)

In the new complaint, CSBS renews the principal arguments made in its prior complaints regarding the meaning of “the business of banking” in the National Bank Act (NBA) and the undermining of the states’ powers to regulate nonbank providers of financial services and protect consumers.  According to CSBS, Figure’s charter application is intended to further “the OCC’s stated goal of deliberately maneuvering around the adverse [New York federal district court ruling in Vullo v. OCC.]  Vullo is the lawsuit filed by the New York Department of Financial Services challenging the OCC’s SPNB charter for non-depository fintechs.  In May 2019, the district court denied the OCC’s motion to dismiss and found that the term “business of banking” as used in the NBA “unambiguously requires receiving deposits as an aspect of the business.”  The district court also ruled that its decision should have nationwide effect regardless of whether the charter applicant has a New York nexus.  The OCC’s appeal of the decision is currently pending in the Second Circuit (which has calendared the case for oral argument during the week of March 8, 2021.)  (We have previously criticized the reasoning of the lower court decision in Vullo.)

In addition to renewing its prior arguments, CSBS alleges that the OCC lacks authority to issue Nonbank Charters to uninsured depository institutions because Section 2 of the Federal Reserve Act (FRA) requires a national bank that receives deposits to be FDIC-insured.  The trade groups also make this argument in their comment letter on Figure’s charter application, and argue further that because Section 2 is part of the FRA, the Fed’s Board of Governors, and not the OCC, has the authority to interpret the FRA.  They claim that, as a result, the OCC cannot issue a national bank charter for an institution with uninsured deposits without an interpretation from the Fed that it is authorized to do so.

Unlike its prior complaints, the relief sought by CSBS in the new complaint is not limited to restricting the OCC’s authority to issue bank charters.  In the new complaint, CSBS also asks the court to declare that the OCC’s preemption regulations (12 C.F.R. 7.4007, 7.4008, 34.4) are invalid because (1) they do not comply with the Dodd-Frank Act’s standard limiting preemption to state consumer financial laws that “prevent or significantly interfere with” the exercise of a national bank’s powers, (2) they were promulgated without the OCC undertaking the case-by-case analysis for preemption determinations required by the Dodd-Frank Act, and (3) the OCC has failed to comply with the Dodd-Frank Act’s five-year periodic review requirement.  While Figure’s application for a Nonbank Charter lessens the ripeness problems associated with the CSBS challenge to the OCC chartering of such banks, the CSBS challenge to the OCC preemption regulations would seem to suffer from severe ripeness problems.