The OCC has filed its reply brief with the Second Circuit in its appeal from the district court’s final judgment in the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s issuance of special purpose national bank (SPNB) charters to non-depository fintech companies.

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 National Bank Act  (NBA) “unambiguously requires receiving deposits as an aspect of the business.”  Because 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 has been unable to approve any applications for SPNB charters from non-depository fintech companies regardless of whether the applicant has a New York nexus.  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 an appeal.  The OCC filed its opening brief in April 2020 and the DFS filed its opening brief last month.

In its reply brief, the OCC renews the following principal arguments made in its opening brief:

  • DFS’s claims are not justiciable for the following reasons: (1) DFS lacks standing because its alleged injuries are speculative as they rely on a series of events that have not yet occurred: the OCC receiving and approving an SPNB charter application for a non-depository fintech company that intends to conduct business in New York, and then does so in a manner that causes the harms identified by the DFS, and (2) even if the DFS has standing, its claims are not prudentially ripe because the dispute would benefit from further factual development and the DFS would not experience any detriment if the dispute is not adjudicated now.
  • OCC’s interpretation of “business of banking” is reasonable and entitled to Chevron deference.  The NBA’s text and structure do not render deposit-taking an unambiguous requirement of the “business of banking,” historical practice and the NBA’s legislative history do not resolve the NBA’s ambiguities, other federal banking laws do not establish that institutions must accept deposits to engage in the “business of banking,” and courts have recognized that “business of banking” is a flexible concept.
  • DFS was not entitled to nationwide relief.  Even if the court concludes that DFS’s claims are justiciable and disagrees with the OCC’s interpretation of the NBA, it should reject nationwide relief and only set aside 12 C.F.R. § 5.20(e)(1) with respect to non-depository fintech applicants that have a New York nexus.

As we have previously commented, we continue to be puzzled by the OCC’s focus on the standing argument.  Unless reversed, the district court’s decision will continue to be a cloud that deters the filing of SPNB charter applications.  It will also negatively impact the OCC’s recently-previewed plans to introduce another special purpose national bank charter that would give payment companies a nationwide servicing platform and federal preemption of state laws regarding licensing and regulation of money transmitters and payment services providers.  Accordingly, it would seem to be in the interest of all concerned for the Second Circuit to issue a decision that resolves the issue on the merits.

 

The New York Department of Financial Services (DFS) has filed its opening brief with the Second Circuit in the OCC’s appeal from the district court’s final judgment in DFS’s lawsuit challenging the OCC’s issuance of special purpose national bank (SPNB) charters to non-depository fintech companies.

 

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 National Bank Act  (NBA) “unambiguously requires receiving deposits as an aspect of the business.”  Because 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 has been unable to approve any applications for SPNB charters from non-depository fintech companies regardless of whether the applicant has a New York nexus.  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 an appeal.  The OCC filed its opening brief in April 2020.

 

In its brief, DFS makes the following principal arguments: 

  • DFS has standing and its claims are ripe.  The OCC has argued that DFS cannot show that it has suffered an “injury in fact” because its claims are entirely speculative and rely on a chain of events that has not occurred and may 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 asserts that DFS’s claims do not satisfy the test for prudential ripeness—they are not fit for judicial consideration because they are contingent on the chartering of an applicant with a New York nexus and there is no present hardship to DFS from the court withholding a decision on its claims.  In response, DFS argues that standing and ripeness exist not only when injury has already occurred, but also when it is imminent or when there is a substantial risk of harm.  It asserts that injury to DFS’s sovereign interests is not speculative and sufficiently impending to support both standing and ripeness because (1) the OCC has actively invited and solicited the fintech industry to apply for charters and has represented that companies had begun the application process, and (2) one of the OCC’s stated objectives in deciding to accept applications is to allow fintech companies that receive an SPNB charter to escape state regulation.
  • Nondepository institutions are not engaged in the “business of banking” within the meaning of the NBA.  The OCC has argued that its interpretation of the “business of banking” is reasonable and entitled to Chevron deference because the NBA’s language is ambiguous as to whether deposit-taking is a necessary component of the “business of banking” and its legislative history does not support a finding that deposit-taking is necessary.  In response, DFS argues that when the NBA was enacted in 1863, banks were understood to be depository institutions and that understanding is reflected in the NBA itself.  In addition, the broader federal statutory scheme applicable to banks (which includes the Federal Reserve Act, the Federal Deposit Insurance Act, and the Banking Holding Company Act) presumes that banks regulated by the OCC will be depository institutions.  DFS contends that when Congress has authorized the OCC to charter nondepository institutions, it has done so by amending the NBA outside of the business-of-banking clause.
  • DFS is entitled to nationwide relief.  The OCC has asserted that a federal court only has power under Article III to provide a remedy that is tailored to redress the plaintiff’s injury and DFS’s alleged injuries, and any remedies to which it is entitled, are limited to New York.  In response, DFS argues that both the Administrative Procedure Act’s plain language and applicable precedent hold that when a court finds a regulation to be contrary to law, the regulation must be set aside.

Acting Comptroller of the Currency Brian Brooks recently previewed the OCC’s plans to introduce another special purpose national bank charter that would give payment companies a nationwide servicing platform and federal preemption of state laws regarding licensing and regulation of money transmitters and payment services providers.  The outcome of the litigation in the Second Circuit can be expected to impact those plans.

The OCC has filed its opening brief in its appeal to the Second Circuit 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 May 2019, the district court denied the OCC’s motion to dismiss and found that the term “business of banking” as used in the National Bank Act  (NBA) “unambiguously requires receiving deposits as an aspect of the business.”  Because 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 could not approve any applications for SPNB charters from non-depository fintech companies regardless of whether the applicant had a New York nexus.  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 an appeal.

In its brief, the OCC makes the following principal arguments:

  • DFS lacks standing.  DFS cannot show that it has suffered an “injury in fact” because no actual, imminent injury exists.  DFS’s claims are entirely speculative because they rely on a chain of events that has not occurred and may 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).  Neither can DFS establish standing and constitutional ripeness under the alternative “substantial risk” test because DFS did not allege that it would presently have to incur specific costs to mitigate the alleged harms arising from the OCC’s decision to accept SPNB charter applications from non-depository fintechs.  Even if DFS has standing, the district court should not have reached the merits because DFS’s claims do not satisfy the test for prudential ripeness—they are not fit for judicial consideration and there is no present hardship to DFS from the court withholding a decision on its claims.  With regard to fitness, DFS’s claims are contingent on the chartering of an applicant with a New York nexus.  With regard to hardship, instead of alleged injuries that arise solely from the OCC’s decision to accept SPNB charter applications from non-depository fintechs, DFS has only alleged injuries that flow from a fintech conducting business in New York pursuant to a charter.  Further, as a practical matter, DFS would not be prejudiced by waiting to resolve its claims until the OCC has taken affirmative steps to approve a charter application from a fintech with a New York nexus.  The requirement that charter applicants give public notice of their applications at the time of filing coupled with the time period between the OCC’s preliminary approval of an application and final approval would give DFS ample opportunity to then challenge the application.
  • OCC’s decision to accept SPNB applications from non-depository fintechs is reasonable and entitled to Chevron deference.  The NBA’s language is ambiguous as to whether deposit-taking is a necessary component of the “business of banking” and the NBA’s legislative history does not support a finding that deposit-taking is necessary.  Also, the existence of flexibility in the phrase “business of banking” is demonstrated by the fact that what activities constitute the “business of banking” has evolved over time in response to developments in business practices and consumer needs.  The OCC’s interpretation in 12 C.F.R. § 5.20(e)(1) of the NBA’s ambiguous language is reasonable because it is consistent with NBA provisions identifying core banking functions as interpreted in U.S. Supreme Court decisions and does not conflict with other federal banking regulations.  As a result, it is entitled to deference.
  • DFS was not entitled to nationwide relief.  Nationwide relief is incompatible with Article III of the U.S. Constitution.  A court only has power under Article III to provide a remedy that is tailored to redress the plaintiff’s injury.  DFS’s alleged injuries, and any remedies to which it is entitled, are limited to New York.  Similarly, traditional equitable principles provide that remedies should not extend beyond what is necessary to redress a plaintiff’s alleged injuries.  While the Administrative Procedure Act provides that unlawful, arbitrary, or capricious agency action should be “set aside,” the APA does not mandate that agency action should be set aside globally rather than as applied to the particular plaintiff who brought the lawsuit.  In addition, the district court’s entry of nationwide relief prevents other courts from considering the issue.

We find it a bit puzzling why the OCC has devoted 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 would seem to be in the interest of all concerned for the Second Circuit to issue a decision that resolves the issue on the merits.

 

 

The OCC has appealed to the Second Circuit from the district court’s final judgment entered in October 2019 in the lawsuit filed by the New York Department of Financial Services seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.  In the final judgment, the district court denied the OCC’s motion to dismiss and found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”  Because the district court also ruled that its decision should have nationwide effect regardless of whether the charter applicant has a New York nexus, the final judgment prevents the OCC from approving any applications for SPNB charters to non-depository fintech companies.

In September 2019, the D.C. federal district court hearing a similar lawsuit filed by the Conference of State Bank Supervisors (CSBS) against the OCC granted the OCC’s motion to dismiss on ripeness grounds.  The time for CSBS to file an appeal with the D.C. Circuit has expired.

We continue to hope that the Second Circuit will address the chartering issue on the merits and reverse the district court (whose decision we believe is incorrect and outcome-oriented) and will not duck the issue by finding the matter premature for adjudication.

 

 

 

In May 2019, a New York federal district court denied the OCC’s motion to dismiss a lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.  In doing so, the court found that the term “business of banking” as used in the National Bank Act (NBA) “unambiguously requires receiving deposits as an aspect of the business.”  At the time, we criticized the decision as incorrect and outcome-oriented.  We also commented that in light of the importance of the issue and because the decision casts doubt on SPNB chartering, we would welcome a Second Circuit decision at the earliest opportunity.  With the consent of both the OCC and the NYDFS, the court has now entered a final judgment against the OCC.  This positions the OCC to appeal the May decision.

In entering final judgment, the district court resolved one issue that remained in dispute between the OCC and NYDFS—whether the court’s decision should have nationwide effect or apply “merely” to  SPNB applicants “that have a nexus to New York State, i.e., applicants that are chartered in New York or that intend to do business in New York (including through the Internet) in a manner that would subject them to regulation by DFS.”  On this issue, too, the court sided with the NYDFS.  Accordingly, the final judgment prevents the OCC from approving applications for SPNB charters to non-depository fintech companies regardless of whether the applicant has a New York nexus.

As previously reported, last month the D.C. federal district court hearing a similar lawsuit filed by the Conference of State Bank Supervisors (CSBS) against the OCC granted the OCC’s motion to dismiss on ripeness grounds.  No appeal has been filed by CSBS.

We hope that the Second Circuit will address the chartering issue on the merits—in favor of the OCC—and will not duck the issue by finding the matter premature for adjudication.

The D.C. federal district court has granted the OCC’s motion to dismiss the lawsuit filed by the Conference of State Bank Supervisors (CSBS) to block the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.

The CSBS lawsuit was the second lawsuit filed by CSBS attempting to block the OCC from issuing SPNB charters.  The first lawsuit, which was filed in April 2017, was dismissed in May 2018 for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The second lawsuit was filed in response to the OCC’s July 2018 announcement that it would begin accepting applications for SPNB charters from fintech companies.

In its opinion granting the OCC’s motion to dismiss, the court found that in the absence of an allegation that a charter application has been filed or that the OCC has issued an SPNB charter, CSBS had still failed to plead an injury in fact that was either actual or imminent.  It also found that the second complaint remained inadequate because it had not identified particular CSBS members that face imminent injury, stating that until a charter application is filed, “CSBS can only guess which states and which members face imminent injury.”  In addition, the court found that the dispute was still not constitutionally or prudentially ripe for determination.   

CSBS’s opposition to the OCC’s motion to dismiss was accompanied by an “Alternative Motion for Leave to Conduct Discovery” in which, among other things, CSBS asked for discovery to determine the nature and number of companies the OCC has met with concerning the SBNB charter and the status of any draft applications, including which companies are preparing or have submitted draft applications and the content of such applications.  In opposing CSBS’s alternative motion, the OCC indicated that it “voluntarily will undertake to immediately inform the Court and CSBS when an SBNB Charter applicant makes public notice required by [OCC regulations.”]

The district court denied the alternative motion, finding that it was unwarranted because the court will lack jurisdiction over CSBS’s claims at least until a charter application is filed and OCC regulations will require public notice of such filing.  In addition, the court pointed to the OCC’s agreement to notify the court and CSBS of a filing.

In May 2019, a NY federal district court denied the OCC’s motion to dismiss a similar second lawsuit filed by the New York Department of Financial Services (NYDFS).   (The NYDFS’s first lawsuit was dismissed for lack of standing.)  The court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

Despite the dismissal of the CSBS lawsuit, the decision in the NYDFS lawsuit denying the OCC’s motion to dismiss casts doubt on the SPNB charter.  Since the denial of its motion, the OCC has sought several extensions of the deadline for answering the complaint to confer with the NYDFS regarding the language of a proposed final judgment.  The current filing deadline is September 30, 2019.

 

 

Opposition from state regulators to the OCC’s decision to issue special purpose national bank (or fintech) charters continues to be vigorous.  In this podcast, we review the charter’s potential benefits, assess the legal arguments made by its opponents, discuss the federal court decision refusing to dismiss the NY banking regulator’s lawsuit, why we think it’s incorrect, and possible next steps for the OCC, and look at fintech charter alternatives.

Click here to listen to the podcast.

Last Thursday, the OCC filed a letter with the New York federal district court hearing the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies in which the OCC advised the court that it will be conferring with the NYDFS on a proposed final judgment.  The letter also asked the court for a second extension of the date by which the OCC must answer or otherwise move with respect to the complaint.  The court granted that request, extending the answer date until June 28, 2019.

On May 2, the court issued a decision denying the OCC’s motion to dismiss in which it concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

The court had previously granted a request from the OCC for an extension of the date it must answer or otherwise move with respect to the complaint until May 30, 2019.  The OCC’s letter requesting the first extension stated that because the OCC had concluded that the court’s May 2 decision likely made the case ripe for entry of a final judgment, it wanted additional time to complete its internal deliberations and confer with the NYDFS.

In its letter requesting a second extension until June 28, the OCC stated that it was making the request “to allow the parties to confer concerning a proposed final judgment to submit to this Court.”  The OCC also stated that it “believes the [May 2] decision renders entry of final judgment in this matter appropriate,” that the NYDFS “agrees that entry of a final judgment is proper,” and that “accordingly, the parties intend to discuss the language of a proposed judgment.”

It remains our view that because of the importance of the issue involved in the decision (which we believe is both incorrect and outcome-oriented) and the doubt the decision casts on SPNB chartering, it would be helpful to have a Second Circuit decision at the earliest opportunity.

 

As we reported, a dark cloud is now hanging over the OCC’s decision to accept applications for special purpose national bank (SPNB) charters from fintech companies as a result of the opinion issued on May 2 by a New York federal district court in the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of the charters.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

For the reasons we discussed in our blog post, we commented that the court’s conclusion struck us as incorrect and outcome-oriented.  We also commented that in light of the importance of the issue and because the decision casts doubt on SPNB chartering, we would welcome a Second Circuit decision at the earliest opportunity and described two options available to the OCC: seeking an interlocutory appeal (which would require consent of both the district court and the Second Circuit) or agreeing to entry of judgment on the pleadings in favor of the NYDFS (which might make it difficult for the OCC to contest some of the NYDFS’ allegations as to the consequences of SPNB chartering).

Yesterday, the OCC submitted a letter to the district court in which it requested a two-week extension to answer the NYDFS’s complaint and stated that that NYDFS has consented to the request.  To explaining the reason for its request, the OCC stated:

“OCC believes the Court’s order likely renders the matter ripe for entry of a final judgment.  We therefore request additional time to complete our internal deliberations on this issue and confer with plaintiff’s counsel.”

The court has entered an order extending the date by which the OCC must answer or otherwise move with respect to the complaint until May 30, 2019.

 

 

The Federal Reserve Board has published in the Federal Register a notice of proposed rulemaking with request for comment on a proposal to simplify and increase transparency of its rules for determining control of a banking organization.  The proposal’s comment period closes on July 15, 2019.

The proposed revisions to the Board’s control regulations would significantly expand the number of presumptions used by the Board to determine control and would, in codifying those presumptions, provide transparency to investors (including private equity investors) regarding what types of relationships and what types of activities would constitute control of a financial institution or holding company under the Bank Holding Company Act (the “BHC Act”).  Under current regulations, private equity firms are ineligible to register as bank holding companies because they are control companies that are engaged in impermissible activities.

Unfortunately, it appears that the proposal will not expand the ability of an entity to control a bank or bank holding company without being presumed to control the bank or bank holding company or enhance the ability of private equity investors to invest in banks and bank holding companies.  As a result, it would not provide an alternative for fintech companies that are considering filing an application with the OCC for a special purpose national bank (SPNB) charter or for an industrial bank charter in a state such as Utah, that permits such charters

Earlier this month, the New York federal district court hearing the lawsuit filed by the New York Department of Financial Services (NYDFS) seeking to block the OCC’s issuance of SPNB charters dealt a blow to the charter.  In denying the OCC’s motion to dismiss, the court concluded not only that the NYDFS had established standing to sue and that its claims were ripe for decision, but also that the NYDFS had stated a claim under the Administrative Procedure Act.  In doing so, the court found that the term “business of banking” as used in the National Bank Act “unambiguously requires receiving deposits as an aspect of the business.”

As we previously commented, the court’s conclusion on this point strikes us as incorrect and outcome-oriented.  Nevertheless, because the decision makes clear that seeking an SPNB charter entails legal risk, companies in a position to do so may wish to consider other alternatives.  Since the Board’s proposal would not make it easier for a company to control a bank or bank holding company without being presumed to be in control, the two other “bank” alternatives would be to acquire or charter a full service national bank or state bank, where ownership would be subject to the BHC Act, or to acquire or charter an industrial bank under Utah law, where ownership would not be subject to the BHC Act.

A third alternative is to continue or revisit bank partnerships and address the risks created by the Madden decision and “true lender” issues.  Risks inherent in these partnerships could (and should) be mitigated by careful structuring and, potentially, OCC and/or FDIC rulemaking.

For more on the proposal, see the attached discussion.