The New York Department of Financial Services has filed a memorandum of law opposing the OCC’s motion to dismiss the NYDFS’s second lawsuit seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.

In its motion to dismiss, the OCC argued that the court lacks subject matter jurisdiction over the NYDFS’s claims because (1) the NYDFS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could the NYDFS suffer an injury in fact, and (2) the OCC has not yet received an application for an SPNB charter or granted a charter, thus making the matter not ripe for judicial review.  The OCC also argued that the NYDFS’s claims are time-barred because it can no longer challenge the OCC’s regulation (12 C.F.R. section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act and that the NYDFS’s complaint fails to state a claim because the OCC’s regulation is entitled to deference.

In opposing the motion to dismiss, the NYDFS argues:

  • Even if it has not yet suffered actual injury, it has standing because injury to NYDFS is “imminent” as a result of the OCC’s decision to accept applications for SPNB charters.
  • The OCC’s public announcement that it will accept applications for SPNB charters and has taken substantial steps towards issuing such charters makes the matter ripe for judicial review.
  • Because the NYDFS is challenging the OCC’s July 31, 2018 decision to issue SPNB charters and the OCC has admitted that it has never relied on its regulation to issue national bank charters to non-depository institutions, the NYDFS’s action accrued on July 31, 2018 and is not time-barred.
  • The OCC’s interpretation of the business of banking is not entitled to deference because it constitutes “a manifestly unreasonable interpretation of the NBA.”

Based on arguments substantially similar to those it made in moving to dismiss the NYDFS’s lawsuit, the OCC also filed a motion to dismiss the second lawsuit filed by the Conference of State Bank Supervisors (CSBS) to block the OCC from issuing SPNB charters.  In addition to filing a brief opposing the OCC’s motion to dismiss based on arguments substantially similar to those made by the NYDFS, the CSBS filed an alternative motion for leave to conduct jurisdictional discovery.

 

Earlier this month, the Conference of State Bank Supervisors (CSBS) filed a brief opposing the OCC’s motion to dismiss the second lawsuit filed by CSBS to stop the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.  That brief was accompanied by an “Alternative Motion for Leave to Conduct Discovery” filed by CSBS.

The OCC argued in its motion to dismiss that CSBS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could a CSBS member suffer an injury in fact.  According to the OCC, since it is still several stages away from actually granting an SPNB charter, the matter continues to be both constitutionally and prudentially unripe for judicial review.

In opposing the motion to dismiss, CSBS argues that even if it has not yet established actual injury because no charter has been granted, it has standing because the current facts show that injury is “certainly impending.”  Such facts are the “OCC’s unequivocal decision to issue charters, its public statements stressing the imminence of an actual charter, and the extensive steps it has taken toward vetting and chartering applicants.”

Similarly, in support of its alternative motion, CSBS states that while the OCC “depicts the eventual granting of a nonbank charter as far off, speculative, and contingent…the facts belie OCC’s assertions.”  It contends that since announcing its decision to grant SPNB charters, the OCC “has stated that it has held ‘hundreds of meetings’ with interested companies, a number of which are finalizing applications, and further, that the OCC expects to approve a charter by mid-2019.”  CSBS asks the court to allow it “to conduct jurisdictional discovery because it will allow CSBS to supplement its jurisdictional allegations to establish standing and ripeness—specifically, to resolve factual disputes concerning the status of OCC’s implementation of the [SBNB charter] Program (to the extent the Court finds the current allegations insufficient.)”  Among other things, CSBS asks 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 asserts that because CSBS cannot establish that any of its members have suffered an injury until an SPNB charter is finally approved and whether a charter application has been filed or a charter has been granted is a matter of public record (e.g. disclosed on the OCC website), the discovery sought by CSBS is “entirely unnecessary.”  In addition, the OCC agrees 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 OCC also asserts that “granting CSBS (and presumably its members) access to OCC’s licensing materials on the terms proposed by CSBS…would have a chilling effect on the interest of fintech companies in pursuing an SPNB Charter.  Knowing that discussion materials-however informal-reflecting an entity’s potential business plans may be made available to the state regulators that make up CSBS and who view the SPNB Charter as a threat to their own jurisdiction and initiatives in the fintech area would intimidate anyone seeking to open a discussion with the OCC.  And this may be the primary purpose behind CSBS’s request….”

The other pending lawsuit seeking to block the OCC’s issuance of SPNB charters to fintech companies is the second lawsuit filed in September 2018 by the New York Department of Financial Services (DFS).  Like the first CSBS lawsuit, the first DFS lawsuit was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.

In December 2018, the OCC submitted a letter to the court indicating that it intends to file a motion to dismiss the DFS lawsuit based on grounds that substantially mirror the OCC’s arguments for dismissal in the CSBS lawsuit.  The DFS also submitted a letter to the court in which, in addition to outlining the arguments it would make in opposing an OCC motion to dismiss, it indicated that it intends to file a motion for a preliminary injunction to prevent the OCC from issuing any SPNB charters while the lawsuit is pending.  On February 12, the court directed the parties to submit a proposed briefing schedule by letter.

 

 

Last July, the OCC announced its decision to accept applications for special purpose national bank (SPNB) charters from fintech companies.  At that time we observed that, while not discussed in the materials released by the OCC, it appeared that a fintech company holding an SPNB charter would be required to be a member of the Federal Reserve System and be subject to oversight as a member bank.  As a Federal Reserve member, an SPNB would have access to the Federal Reserve discount window and other Federal Reserve services.

According to a Reuters article published today, Federal Reserve officials have expressed reservations about allowing such access to fintech companies.  Reuters reports that “many Fed officials fear that these firms lack robust risk-management controls and consumer protections that banks have in place.”  The article quotes the President of the St. Louis Fed as having expressed concern that “fintech will be the source of the next crisis.” The Atlanta Fed President is quoted as having said that “almost none of [the fintech entrepreneurs he has talked to] has risk at the top of what they’re thinking about, and that makes me nervous.”

Despite its reported reservations about the SPNB charter, the Federal Reserve has acknowledged the increasing role played by fintech in shaping financial and banking landscapes and indicated that it is interested in developing policy solutions that would result in greater efficiencies and benefits to all parties.  To that end, the Philadelphia Fed sponsored a conference last November on “Fintech and the New Financial Landscape.”  At the conference, Ballard Spahr partner Scott Pearson was a member of a panel that discussed “The Roles of Alternative Data in Expanding Credit Access and Bank/Fintech Partnership.”

 

 

 

The OCC has filed a motion to dismiss the lawsuit filed in D.C. federal district court in October 2018 by the Conference of State Bank Supervisors (CSBS) to stop the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.

The CSBS had previously filed a lawsuit challenging the OCC’s authority to grant SPNB charters to fintech companies at a time when the OCC had not yet decided whether it would move forward on its charter proposal.  That lawsuit was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The new 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 brief, the OCC makes the following principal arguments in favor of dismissal:

  • CSBS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could a CSBS member suffer an injury in fact.
  • Because the OCC “remains several stages away from actually granting an SPNB Charter” and “has not finalized its decision to issue an SPNB Charter to a particular applicant,” the matter remains both constitutionally and prudentially unripe for judicial review.
  • Because the OCC’s July 2018 announcement was not a final agency action within the meaning of the Administrative Procedure Act, it is not subject to judicial review under the APA’s arbitrary and capricious standard.
  • The OCC’s July 2018 announcement does not represent a preemption determination to which notice and comment procedures apply “because the question of whether granting a proposed national bank will result in the preemption of any particular state consumer financial law is not relevant to the chartering process.”  (According to the OCC, in deciding whether to grant a charter, its focus is on ”the proposed institution’s prospects and whether it will operate in a safe and sound manner.”)
  • The OCC’s rule (12 C.F.R. Section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act by reference to three core banking functions—receiving deposits, paying checks, or lending money—represents a reasonable interpretation of such term and supports treating any one of such functions as the required core activity for purposes of the OCC’s chartering authority.  Nothing in the NBA identifies deposit-taking as an indispensable function for a national bank to be engaged in the “business of banking.”

In September 2018, the New York Department of Financial Services (DFS) filed a second in a New York federal district court to block the OCC’s issuance of SPNB charters.  Like the first CSBS lawsuit, the first DFS lawsuit challenging the OCC’s authority to grant SPNB charters was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.

Last month, the OCC submitted a letter to the court indicating that it intends to file a motion to dismiss the DFS lawsuit. The grounds for the motion set forth in the OCC’s letter substantially mirror its arguments for dismissal above in the CSBS lawsuit.  The DFS also submitted a letter to the court in which, in addition to outlining the arguments it would make in opposing an OCC motion to dismiss, it indicated that it intends to file a motion for a preliminary injunction to prevent the OCC from issuing any SPNB charters while the lawsuit is pending.

The next step in the case is likely to be the entry of an order by the court setting a motion schedule.  However, based on a docket entry indicating that a standing order was entered on December 27 requiring the U.S. Attorney’s Office to notify the court immediately upon the restoration of DOJ funding, it appears any further developments will not occur until the partial government shutdown ends.

 

 

The OCC’s decision to issue special purpose national bank (or fintech) charters has sparked renewed litigation.  In this episode, we review the charter’s potential benefits and drawbacks, provide a litigation update and examine its possible impact on charter applicants, and flag issues for potential applicants.  We also look at fintech charter alternatives, including full-service and Utah industrial banks.

To listen and subscribe to the podcast, click here.

 

 

The Conference of State Bank Supervisors (CSBS) has filed a second lawsuit in D.C. federal district court to stop the Office of the Comptroller of the Currency (OCC) from issuing special purpose national bank (SPNB) charters to fintech companies.  A similar lawsuit was filed last month in a New York federal district court by the New York Department of Financial Services.

The CSBS and the DFS had previously filed lawsuits challenging the OCC’s authority to grant SPNB charters to fintech companies at a time when the OCC had not yet decided whether it would move forward on its charter proposal.  Both lawsuits were dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The new lawsuits were filed in response to the OCC’s July 2018 announcement that it would begin accepting applications for SPNB charters from fintech companies.  In its complaint, the CSBS alleges that “things have changed substantially since the Court’s decision [dismissing the prior CSBS lawsuit].  The issuance of a [SPNB] charter is now clearly imminent.”  It further alleges that “upon information and belief, multiple pre-qualified candidates have already decided to apply (and may have already applied).”

The CSBS challenges the OCC’s SPNB charter plans in the new lawsuit on the following grounds (which generally track those asserted in the first CSBS lawsuit):

  • 12 C.F.R. Section 5.20(e)(1), on which the OCC has relied for its authority to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money—is inconsistent with the National Bank Act because the NBA does not allow the OCC to charter entities that do not receive deposits unless they are carrying on a special purpose expressly authorized by Congress.
  • Because the OCC has indicated that state law would be preempted as to fintech companies that obtain a SPNB charter, the OCC’s plans to issue the charters represent a preemption determination to which notice and comment procedures apply.
  • The OCC’s plans to issue SPNB charters to fintech companies represent a “rule” that was made without compliance with the Administrative Procedure Act and is an arbitrary and capricious action that does not constitute “reasoned decision making” as required by the APA.
  • The OCC’s plans to issue SPNB charters to fintech companies, by enabling nonbank charter holders to disregard state law, violate the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police powers necessary to regulate nonbank providers of financial services and protect consumers and the public interest from unsound and abusive financial practices.

For the reasons discussed in our blog post about the second lawsuit filed by the DFS, we expect the OCC’s power to issue an SPNB charter will ultimately be withheld.

At the Online Lending Policy Institute’s (OLPI) annual summit in Washington, D.C. earlier this week, the OCC’s recent decision to accept applications from non-depository financial technology firms for a special purpose national bank (SPNB) charter was the focus of considerable discussion.

The summit speakers included Grovetta Gardineer, the Senior Deputy Comptroller for Compliance and Community Affairs at the OCC.  Comments made by attendees indicated that there is substantial interest in the SPNB charter but a reluctance to be the first applicant due to concerns about litigation risk and regulatory requirements.  After the OCC announced its decision to accept applications, the Conference of State Bank Supervisors (CSBS) announced that it would again pursue litigation challenging the OCC’s recent decision.  While the CSBS has not yet filed another lawsuit and there is speculation that it is waiting until the first SPNB charter is granted to do so, a second lawsuit challenging the OCC’s authority to issue SPNB charters was filed last month by the New York Department of Financial Services (DFS) in New York federal district court.  (For an analysis of the DFS lawsuit, click here.)

In her remarks and responses to questions, Ms. Gardineer indicated that, although the Community Reinvestment Act does not apply to non-depository institutions, financial inclusion commitments from the SPNB charter applicant will be required and be subject to scrutiny by the OCC.  Questions directed at Ms. Gardineer raised concerns about the application of bespoke capital, liquidity, and risk management requirements for SPNB charter applicants.  And in response to questions about the charter’s implications for Federal Reserve requirements and access to Federal Reserve services, Ms. Gardineer indicated that the Federal Reserve was considering these issues and that they were the subject of ongoing discussions between the OCC and Federal Reserve.

Paul Watkins, recently named by CFPB Acting Director Mulvaney to serve as Director of the Bureau’s Office of Innovation, was also a speaker at the summit.  Mr. Watkins was formerly in charge of fintech initiatives in the Arizona Attorney General’s office, and Arizona is the first state to create a “regulatory sandbox” that allows new financial technologies and products to be tested in a controlled environment with reduced regulatory risk.  Mr. Watkins discussed the CFPB’s proposal to revise its Trial Disclosure Policy and suggested that the program could be used to address a broad range of issues.  For example, Mr. Watkins noted that a trial disclosure could be used to address challenges faced by creditors in supplying reasons for an adverse action where a decision is made through artificial intelligence or mechanical learning.  Mr. Watkins indicated that the CFPB’s no-action letter policy may also be subject to review by the Bureau.  Taken together, the trial disclosure and no-action letter policies appear to be the CFPB’s tools of choice for advancing its efforts to facilitate innovation that might be unduly limited by regulatory constraints.

A third summit speaker was Maria Vullo, DFS Superintendent.  Ms. Vullo expressed concern regarding the risks that “regulatory sandboxes” and trial disclosures can create for consumers where they are used for products and services actually offered in the marketplace rather than in a mock setting.  She also expressed concern about the potential for alternative data used in credit decisions to serve as a proxy for prohibited characteristics and suggested that an ability to repay standard should apply to all consumer credit and not be limited to mortgages and credit cards.

Finally, Adam Maarec, Of Counsel in Ballard’s D.C. Office, participated in a panel on data, privacy, and fraud prevention policy.  The panelists discussed the California Consumer Privacy Act’s potential application to financial institutions as a result of shortcomings in the exception for information “collected, processed, sold, or disclosed pursuant to” the Gramm-Leach-Bliley Act.  They also discussed ways for companies to manage the tension between data minimization and artificial intelligence/machine learning priorities, the latter of which depends on the accumulation of large data sets to identify insights.

In a press release, the organizers of Varo Bank, N.A. announced they have been granted preliminary approval by the OCC of their application to form a de novo national bank, which they claim “put[s] Varo on track to become the first all-mobile national bank in the history of the United States.”

In July 2018, the OCC announced that it would begin accepting applications for special purpose national bank (SPNB) charters from financial technology (fintech) companies.  Rather than a SPNB charter, Varo is seeking a full-service national bank charter from the OCC.  A SPNB charter provides an option for a fintech company for whom, because of its own non-financial activities or those of an affiliate, the Bank Holding Company Act would be an obstacle to obtaining a full-service national bank charter.  Obtaining a full-service national bank charter, however, is the preferred option for a fintech company that can do so consistent with the BHCA.  Many years ago, two of my Ballard partners successfully converted a consumer finance company to a full-service national bank.

Federal court lawsuits challenging the OCC’s authority to issue SPNB charters were filed in 2017 by the Conference of State Bank Supervisors and the New York Department of Financial Services.  Both lawsuits were dismissed for failure to establish an injury in fact necessary for Article III standing and lack of ripeness for judicial review.  While such challenges may be renewed now that the OCC has announced that it will begin accepting SPNB charter applications, there would not appear to be any basis for a similar challenge to the issuance of a full-service national bank charter to Varo assuming it satisfies the standard conditions for obtaining such a charter.

On January 30, 2018 at 10 a.m., the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee will hold a hearing, “Examining Opportunities and Challenges in the Financial Technology (“Fintech”) Marketplace.”

The Committee Memorandum states that the hearing “will examine the current regulatory landscape [for fintech], the need to amend or modernize the regulatory landscape or the necessity to amend existing financial laws or develop new legislative proposals that would allow financial services entities to use fintech to deliver new products and services to consumers.”

We find it surprising that neither Joseph Otting, the new Comptroller of the Currency, nor any other federal or state regulator, is slated to testify.  Mr. Otting has not yet taken a public position on the OCC’s proposal to issue special purpose national bank charters to companies that make loans but do not accept deposits.  However, two Ballard attorneys recently authored an article, “Predicting Comptroller Otting’s Impact on Fintech,” in which they expressed the view that he is likely to be supportive of such charters.

Jelena McWilliams, President Trump’s nominee for FDIC chair, is reported to have told Senators in her confirmation hearing last week that she did not believe the FDIC’s grant of industrial loan company charters to fintech and other nonbank firms would pose a safety and soundness risk for the broader financial system and intended to look into why the FDIC has delayed its review of applications for such charters.  Ms. McWilliams is also reported to have said that her position on moving quickly on those reviews should be seen as an invitation for more such charter applications.

 

 

Last week, the OCC announced that it had issued a full service national bank charter to Winter Park National Bank of Florida.

Acting Comptroller of the Currency Keith Noreika released a statement in which he stated that Winter Park is “the first de novo national bank and first de novo approved for federal deposit insurance in Florida since the financial crisis.”  He also commented that while the OCC was seeing “increasing interest in becoming new banks,” de novo banks continue to be “exceedingly rare.”  He then suggested that the charter process needs to be improved, stating “[m]aking the process of establishing de novo banks more efficient can only accelerate the recent positive trend and create more economic opportunity for consumers, businesses, and communities across the nation.”