The U.S. Court of Appeals for the Second Circuit held oral argument last week in the OCC’s appeal from the district court’s final judgment in the lawsuit filed by the New York Department of Financial Services (DFS) seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to non-depository fintech companies.
In July 2018, the OCC issued a policy statement confirming that it would begin accepting applications for SPNB charters from non-depository fintechs, together with a supplement to its licensing manual describing its application and decision process for fintechs. In its lawsuit, the NYDFS alleged that the OCC does not have authority under the National Bank Act (NBA) to charter non-depository companies because such companies are not engaged in the “business of banking” as that term is used in the National Bank Act (NBA). The OCC moved to dismiss the complaint, arguing that the DFS did not have standing because it could not show that it has suffered an “injury in fact” since no actual, imminent injury existed. According to the OCC, DFS’s claims were entirely speculative because they rely on a chain of events that had not occurred and might never occur, namely the OCC’s receipt and approval of an SPNB charter application from a non-depository fintech that intends to conduct business in New York and the commencement of business in New York by such fintech in a manner that causes the harms identified by DFS (such as lost revenues).
The OCC also argued that the NBA and 12 C.F.R. § 5.20(e)(1) does give it authority to issue SPNB charters to non-depository companies. Section 5.20(e)(1) provides in part:
The OCC charters a national bank under the authority of the National Bank Act of 1864, as amended, 12 U.S.C. 1 et seq. The bank may be a special purpose bank that limits its activities to fiduciary activities or to any other activities within the business of banking. A special purpose bank that conducts activities other than fiduciary activities must conduct at least one of the following three core banking functions: Receiving deposits; paying checks; or lending money.
According to the OCC, because the term “business of banking” in the NBA is ambiguous, the second step of Chevron deference analysis required the court to consider whether its interpretation in § 5.20(e)(1) was reasonable, and if found to be reasonable, to give its interpretation judicial deference.
After finding that the DFS had standing to file its lawsuit, the district court concluded that the term “business of banking” as used in the NBA “read in the light of its plain language, history, and legislative context, unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters.” Having concluded that the NBA’s text is unambiguous, the district court did not reach the second step of Chevron deference analysis and denied the OCC’s motion to dismiss. Subsequently, with the OCC’s and DFS’s consent, the district court entered a final judgment against the OCC in October 2019, thereby enabling the OCC to file its appeal.
The members of the Second Circuit panel hearing the oral argument were Judges Pierre N. Leval, Gerard E. Lynch, and Joseph F. Bianco. Both Judge Leval and Judge Lynch have Senior status.
Based on the oral argument, it would not be surprising if the panel determines that the DFS does not have standing or remands the case to the district court for discovery relevant to standing. None of the panel members appeared to have formed any clear views on the merits of the case. However, the panel seemed troubled that neither the DFS nor the OCC could clearly describe the types of “fintech companies” that might receive SPNB charters. Also, while the OCC asserted in support of its standing argument that it has not yet accepted an application from a non-depository fintech for an SPNB charter, the panel seemed receptive to DFS’s suggestion that the OCC has been informally vetting potential applicants and that a potential applicant could make substantial progress towards approval even without the filing of a formal application. The panel questioned why discovery regarding the OCC’s interactions with potential applicants had not taken place.
When the OCC filed its motion to dismiss, we found it a bit puzzling why the OCC had decided to devote so much attention to the standing argument. Given that the district court’s decision, unless reversed, would continue to be a cloud that deters the filing of SPNB charter applications, it seemed to be in the interest of all concerned for the Second Circuit to issue a decision that resolves the issue on the merits. However, given that a new Comptroller appointed by President Biden may be more receptive to the views of DFS and other state regulators opposed to the SPNB charter, a decision from the Second Circuit based on standing might now be preferable for the OCC. Indeed, even if the Second Circuit reaches the merits and concludes that the OCC does have authority to issue SPNB charters to non-depository fintechs, a new Comptroller might reverse course and decide not to use that authority.