A New York federal district court has dismissed the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s authority to grant special purpose national bank (SPNB) charters to nondepository fintech companies.

When the DFS lawsuit was filed, we commented that because the OCC had not yet finalized the licensing process for fintech companies seeking an SPNB charter, the DFS was likely to face a motion to dismiss for lack of ripeness and/or the absence of a case or controversy.  Consistent with our expectations, the OCC filed a motion to dismiss the lawsuit in which its central arguments were that because it has not yet decided whether it will offer SPNB charters to companies that do not take deposits, the DFS complaint should be dismissed for failing to establish any injury in fact necessary for Article III standing and because the case was not ripe for judicial review.

In dismissing the DFS lawsuit, the district court agreed with both of the OCC’s arguments.  As an initial matter, the court observed that the DFS’s claims were based on the premise that the OCC had reached a decision on whether it would issue SPNB charters to fintech companies (Charter Decision).  The court concluded, however, that the DFS had failed to show that the OCC had reached a Charter Decision.  In reaching its conclusion, the court pointed to statements made by former Acting Comptroller Keith Noreika indicating that the OCC was continuing to consider its SPNB charter proposal but had not made a decision as to its ultimate position.  It also noted that Joseph Otting, the new Comptroller, has not yet taken a public position on the SPNB charter proposal.

With regard to Article III standing, the court concluded that the injuries that the DFS alleged would result from the Charter Decision “would only become sufficiently imminent to confer standing once the OCC makes a final determination that it will issue SPNB charters to fintech companies.”  Such alleged injuries included the potential for New York-licensed money transmitters to escape New York’s regulatory requirements and for their consumers to lose the protections of New York law as well as the DFS’s loss of the funding it receives through assessments levied on the New York-licensed financial institutions that would obtain SPNB charters.  According to the court, in the absence of a Charter Decision, “DFS’s purported injuries are too future-oriented and speculative to constitute an injury in fact.”

With regard to ripeness, the court concluded that DFS’s claims were neither constitutionally nor prudentially ripe.  According to the court, the claims were not constitutionally ripe for the same reason that Article III standing was lacking–namely, the claims were not “actual or imminent” but instead were “conjectural or hypothetical.”  The court also found that the claims were not prudentially ripe because they were contingent on future events that might never occur–namely, an OCC decision to issue SPNB charters to fintech companies.

The court noted that it had received a letter from DFS requesting the court, if it dismissed the case on the basis of ripeness, to require the OCC to provide “prompt and adequate notice to the Court and [the DFS] if and when a decision is made to accept applications from so-called fintech companies for [SPNB charters], and (2) allow [the DFS] to reinstate the case on notice with adequate opportunity for the issues to be briefed and argued prior to the granting of any application by the OCC.”  The court stated that because it did not have subject matter jurisdiction, it could not grant the requested relief.  Nevertheless, the court suggested “that it would be sensible for the OCC to provide DFS with notice as soon as it reaches a final decision given DFS’s stated intention to pursue these issues and in consideration of potential applicants whose interests would be served by timely resolution of any legal challenges.”

Another lawsuit challenging the OCC’s SPNB proposal was filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court and in July 2017 the OCC filed a motion to dismiss in that case.   On December 5, the case was reassigned to Judge Dabney L. Friedrich.  Prior to the reassignment, the CSBS had filed a motion requesting oral argument and the court entered an order indicating that it would schedule oral argument if it “in its discretion, determines that oral argument would aid it in its resolution of Defendants’ motion.”

A group of Democratic House members led by Rep. Maxine Waters has introduced H.R. 3937, the “Megabank Accountability and Consequences Act of 2017,” that would require federal bank regulators to consider the revocation of a bank’s charter and deposit insurance if the bank is found to have engaged in a “pattern or practice” of violations of federal consumer protection laws.  The bank’s officers and directors would also be subject to civil and criminal liability.

The 45-page bill includes 10 pages of “findings.”  One such finding is that since the enactment of Dodd-Frank, “some very large banking organizations operating in the United States have repeatedly violated Federal banking and consumer protection laws by engaging in unethical business practices” and that such banks “continue to act with impunity and violate numerous laws designed to protect consumers” despite enforcement actions that have been taken “most notably” by the CFPB.

Other findings include:

  • Senior bank executives “rarely have been held personally accountable for Federal consumer protection law violations and other illicit practices that occurred during their tenure.”
  • Federal prudential banking agencies, despite their wide-ranging statutory powers to address violations, “continue to rely on enforcement tools such as consent orders, cease and desist orders, and civil money penalties, even in instances when an institution’s violations have demonstrated unsafe or unsound business practices and past supervisory and enforcement actions have not sufficiently deterred illegal practices.”
  • Institutions have continued to engage in inappropriate and illegal practices because the federal prudential banking agencies have failed to “exercise statutorily provided enforcement authorities—such as revoking a bank’s national charter or terminating its Federal deposit insurance” or “hold the institution’s board of directors and senior officers accountable.”
  • Even if a bank’s violations of federal consumer financial laws “are deemed not to technically constitute unsafe or unsound banking practices, it may still demonstrate a pattern of wrongdoing causing unacceptable harm to its customers, such that continuing to enable it to engage in the business of banking distorts the regulatory purpose of providing national banks charters, deposit insurance and other benefits.”

The bill’s provisions would apply to a national bank, federal savings association, state Federal Reserve member bank, insured depository institution, foreign bank, or federal branch or agency of a foreign bank if such entity is “affiliated with a global systematically important bank holding company.”  A “global systematically important bank holding company” is defined as a bank holding company that the Fed has identified as a “global systematically important bank holding company” or a “global systematically important foreign banking organization” pursuant to existing federal regulations.

The bill contains a definition of “pattern or practice of unsafe or unsound banking practices or other violations related to consumer banking” that lists 7 types of activities and provides that a bank satisfies the “pattern or practice” definition if it engages in all of such activities “to the extent each activity was discovered or occurred at least once in the 10 years preceding the date of the enactment of this Act.”  It also contains a definition of “pattern or practice of violations of federal consumer protection laws.”

The bill includes the following requirements and sanctions:

  • If the OCC, after consultation with the CFPB, determines that a bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the OCC must “immediately initiate proceedings to terminate the [bank’s] Federal charter…or appoint a receiver for [the bank].”
  • If the FDIC, after consultation with the CFPB, determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the FDIC must “immediately initiate an involuntary termination of the [bank’s] deposit insurance.”
  • If the Fed, after consultation with the CFPB, determines that a state member bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate such bank’s membership in the Federal Reserve System.”
  • If the Fed, after consultation with the CFPB, determines that a foreign bank or federal branch or agency of a foreign bank “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm,” the Fed must “immediately initiate proceedings to terminate the foreign bank’s ability to operate in the United States” or recommend to the OCC that the branch’s or agency’s license be terminated.
  • If the OCC, Fed, or FDIC makes a determination to initiate proceedings to terminate a bank’s charter or deposit insurance, the agency must notify the bank “that removal is required of any director or senior officers responsible, as determined by [that agency], for overseeing any division of the [bank] during the time the [bank] was engaging in the identified pattern or practice of unsafe or unsound banking practices.”  Any current or former director or senior officer determined to have such responsibility “shall also be permanently banned from working as an employee, officer, or director of any other banking organization.”
  • If the FDIC determines that an insured depository institution “is engaging or has engaged in a pattern or practice of unsafe or unsound banking practices and other violations related to consumer harm” or is notified by the OCC or Fed of the termination of a bank’s charter or an agency’s or branch’s license, the FDIC must not only initiate an involuntary termination of deposit insurance, it also must place the institution into receivership and can transfer the institution’s assets as provided in the bill.
  • Every “executive officer and director” of a national bank or federal savings association or a branch, representative office, or agency of a federally-licensed foreign bank must annually certify in writing to the appropriate banking agency, the CFPB, and any relevant federal law enforcement agency, that he or she has “regularly reviewed the institution’s lines of business and conducted due diligence to ensure,” that the institution (1) has established and maintained internal risk controls to identify significant federal law consumer compliance deficiencies and weaknesses, (2) has promptly disclosed all known violations of applicable federal consumer protection laws to the CFPB and appropriate banking agency, (3) is taking all reasonable steps to correct any identified federal law consumer compliance deficiencies and weakness based on prior examinations, and (4) is in substantial compliance with all federal consumer protection laws.
  • An officer or director who submits a certification that contains a false statement is subject to a fine or imprisonment if the statement is “done knowingly” or “done intentionally.”
  • An officer or director who knowingly violates any federal consumer protection law or directs any of the institution’s agents, officers, or directors to violate such a law is personally liable for any damages sustained by the institution or any other person as a result of the violation.  An officer or director who knowingly causes an institution to violate any federal consumer protection law or directs any of the institution’s agents, officers, or directors to commit a violation that results in the director or officer “being personally unjustly enriched and the institution being conducted in an unsafe and unsound manner” can be fined in an amount up to all of the compensation he or she received during the period in which the violations occurred or in the one to three years preceding discovery of the violations, and is subject to up to 5 years imprisonment.  The OCC, Fed, or FDIC, as applicable, must remove an officer or director who engaged in the foregoing conduct from his or her position and permanently ban such person from being involved in the operation and management of a federally-chartered or federally-insured bank.

Were it to become law, the bill’s certification requirement would likely make it very difficult for banks to attract and retain highly-qualified officers and directors.  It could also lead to instability in the banking system by creating a  “run” on deposits by depositors of a bank that became subject to the bill’s sanctions, particularly those whose deposits at the bank exceeded the insured deposit limit.

Fortunately, given the large Republican majority in the House, the bill is very unlikely to advance.