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.

 

 

The Conference of State Bank Supervisors (CSBS) announced last week that it has agreed to implement 14 recommendations made by its Fintech Industry Advisory Panel (Advisory Panel).

The Advisory Panel was formed in 2017 to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.  It has 33 fintech company members that engage with the CSBS Emerging Payments and Innovation Task Force and other state regulators.  The Advisory Panel has a subgroup focused on lending and another focused on payments.  Both subgroups submitted reports that formed the basis of the recommendations CSBS has agreed to implement.

Those recommendations primarily address creating uniform definitions and practices, increasing transparency, and expanding the use of common technology among all state regulators.  Among the actions CSBS has agreed to take to implement the recommendations are:

  • Developing a 50-state model law to license money services businesses
  • Creating a standardized call report for consumer finance businesses
  • Building an online database of state licensing and fintech guidance, while encouraging a common standard
  • Developing a new technology offering, a State Examination System, to simplify examinations of nonbanks operating in more than one state
  • Expanding the use of the Nationwide Multistate Licensing System (NMLS) among all state regulators and to all nonbank industries supervised at the state level

At the annual NMLS conference in Orlando, CSBS and the Advisory Panel’s payments subgroup reported that in connection with efforts to harmonize state licensing regimes and ultimately to draft a model state law for licensing money services businesses, CSBS is conducting state surveys relating to existing state definitions and exemptions from licensure and will publish  such surveys when complete.

The CSBS initiative is undoubtedly in part a reaction to the OCC’s decision to grant special purpose national bank charters to fintech companies.  Such charters would eliminate the need for fintech companies to obtain multi-state licenses.  In October 2018, CSBS filed a second lawsuit in D.C. federal district court to stop the OCC from issuing such charters.

 

 

 

 

Democratic Congressman Bill Foster, who represents the 11th District of Illinois, has sent a letter to Maxine Waters, Democratic Chairwoman of the House Financial Services Committee, to express his “strong interest in serving as the Chair of the Taskforce on Financial Technology and Innovation that will be convened in the coming weeks.”  Ms. Waters announced her plans to create the Taskforce upon becoming Chairwoman.

In his letter (obtained by Politico), Mr. Foster mentions various credentials he holds, including his “prior career as a scientist and small business owner” and his participation as co-chair in the Blockchain Caucus.  He describes the caucus as working “to understand and explore, among other things, how a new and emerging technology can improve government services, curb identity theft, and put consumers in charge of their own identity.”

Mr. Foster indicates that as Taskforce Chair, he would work closely with Ms. Waters and the subcommittee chairs to understand and examine developments in the Fintech industry, “including marketplace lending for consumers and small businesses, partnerships with traditional financial institutions, cryptocurrency, blockchain, alternative data utilized in credit underwriting, artificial intelligence, and machine learning.”

He references the CFPB’s proposal issued last week to rescind the ability-to-repay provisions of its payday loan rule [link to alert] and states that “[i]n the context of this new development, ensuring that the underserved and underbanked communities have options and access to credit beyond predatory lenders will be a concern at the forefront of our inquiry.”  He also states that “although many financial technology companies are not subject to the same regulatory regime as traditional banks, including compliance with the Community Reinvestment Act, the Taskforce would work to examine how such companies can shoulder their fair share of the obligation to help meet the needs of low- and moderate-income communities, and ensure a fair playing field with community banks and other financial institutions.”

Mr. Foster also indicates that the Taskforce would attempt “to better understand the methods by which financial technology companies use complex algorithms to underwrite loans,” and to also understand what steps such companies are taking “to ensure that they do not engage in discriminatory practices that violate fair lending laws.”

 

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.

 

 

Our guest for this week’s podcast is Paul Watkins, Director of the CFPB’s Office of Innovation.  Paul formerly worked in the Arizona Attorney General’s office where he was in charge of fintech initiatives and led the state’s successful efforts to create the first “regulatory sandbox” in the United States which allows new financial technologies and products to be tested in a controlled environment with reduced regulatory risk.

The Bureau’s Office of Innovation, which was created under the leadership of former Acting Director Mick Mulvaney, is focused on encouraging consumer-friendly innovation through the creation of policies to facilitate innovation, engagement with entrepreneurs and regulators, and the elimination of outdated or unnecessary regulations.  The Office has taken over the Bureau’s work that was formerly done under Project Catalyst, the initiative launched by the CFPB in 2012 for facilitating innovation in consumer financial products and services.

In this week’s podcast, we question Paul about three recent major Bureau proposals intended to support innovation.  The first is the Bureau’s proposal to revise its “Policy to Encourage Trial Disclosure Programs” (TDP Policy), which sets forth the Bureau’s standards and procedures for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.  The second is the Bureau’s proposed revisions to its 2016 final policy on issuing no-action letters (NAL Policy).  The third is a proposal by the Bureau to create a new “BCFP Product Sandbox.”

The issues we discuss with Paul include the key differences between the revised TDP and NAL Policies and the current Policies, the background and objectives of the BCFP Product Sandbox, confidentiality concerns, the scope of protections from liability, and the Office’s efforts to coordinate with other regulators.

To listen to the podcast, click here.   (To listen to our earlier podcast in which we discussed Arizona’s sandbox with Evan Daniels, Fintech Counsel in the Arizona Attorney General’s office, click here.)

 

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.

 

 

 

Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together “the OCC”), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York’s Superintendent of the Department of Financial Services (“DFS”). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS’s lawsuit alleges that the OCC’s decision to accept applications for “Special Purpose National Bank Charters” (or “fintech charters”) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (“NBA”) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (“Vullo I”), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.

In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term “business of banking” in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue fintech charters; (3) DFS’s challenge is barred by the applicable statute of limitations; and (4) the OCC’s decision to issue fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC’s decision to issue fintech charters was the “agency’s final decision,” the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC’s letter emphasizes that while “it will accept applications for fintech charters, [the agency] has not actually received any such applications, let alone granted one.” Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains “future-oriented and speculative.”

DFS filed its own letter in response, announcing not only DFS’s strategy for overcoming the OCC’s anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald’s Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS’s claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in “draft” form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC’s intent to issue fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald’s determination, DFS now has standing to make its claims against the OCC.

DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a fintech charter, and characterized the OCC’s representation to the Court that no fintech charters were currently being considered as “brutishly inconsistent” and duplicitous.

Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC’s traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC’s actions in the realm of offering fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC’s “unprecedented issuance” of fintech charters as “destructive to New York and New Yorkers” insofar as it would preempt state laws that “powerfully protect” consumers from the industry’s “well-known abuses.”

The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties’ jointly proposed briefing schedule, nor DFS’s request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.

While the OCC’s position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a fintech charter may have some merit, it is important to the industry that the legal question of the OCC’s authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.

We talk with Evan Daniels, Fintech Counsel in the Arizona Attorney General’s office, about Arizona’s first-in-the-nation Fintech sandbox and how it is being used to drive innovation in consumer financial services.  We also discuss how the CFPB’s current push to encourage innovation interacts with state efforts, such as those in Arizona.

To listen and subscribe to the podcast, click here.