Federal Appeals Court Considers OCC’s FinTech Charter Authority

What is the “business of banking?”

The Federal Court of Appeals for the Second Circuit is pondering that question as it considers the Office of the Comptroller of Currency’s (OCC) appeal of the trial court’s decision in Lacewell v. Office of the Comptroller of the Currency (formerly Vullo v. the Office of the Comptroller of Currency), a lawsuit which New York’s Department of Financial Services (NYDFS) filed in September 2018.

The lawsuit relates to OCC’s 2003 amendment of its regulations to allow charters for special purpose national banks (referred to as SPNBs)—entities that may not conduct fiduciary activities but provide other services “within the business of banking.” Under the U.S.’s dual-banking system, federal and state governments each have the power to charter and regulate banking institutions. Banks with state charters are subject to state and federal regulations. The National Bank Act authorizes OCC to charter national banks, which are exempt from state regulations where “it appears that such association is lawfully entitled to commence the banking of business.”

Companies that do not receive deposits but use technology to provide other financial services—like mobile payment systems, distributed ledger technology, marketplace lending or crowdfunding sites—have complained about the cost to offer their services nationally because they must obtain licenses from multiple states. During the Obama and Trump administrations, OCC discussed national charters for such FinTechs, eventually announcing in July 2018 that it would begin to accept and review their applications for SPNB charters.

The New York State Department of Financial Services sued to block OCC’s implementation of this decision. According to the NYDFS, the “business of banking” requires accepting deposits—thus, the National Bank Act (NBA) does not authorize OCC to issue national bank charters to non-depository FinTechs. OCC countered that NYDFS’s complaint was not ripe for adjudication, and the state agency had no standing because OCC had not yet accepted, much less approved, any applications. OCC also argued that the term “business of banking” was ambiguous, so the agency’s interpretation was entitled to deference by the court.

The trial court sided with NYDFS, holding that the agency had standing and that the dispute was ripe for consideration. The court then determined that the “NBA’s ‘business of banking’ clause … unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from the OCC.”

OCC appealed. Last month, a three-judge panel of the Second Circuit Court of Appeals heard oral arguments. According to reports in Bloomberg and Reuters, the panel focused its questions on:

• Ripeness. The panel questioned whether the case was premature since OCC had neither received nor granted FinTech applications for SPNB bank charters; and
• Standing. The panel questioned whether New York had suffered harm since no applications had been submitted and no charters issued.

Justices’ questions during oral arguments can indicate their concerns and possibly signal their disposition toward issues, particularly where their questions focus on jurisdictional concerns. Ripeness and standing are fundamental requirements for federal courts’ jurisdiction to hear cases under Article III of the U.S. Constitution. If the Court of Appeals determines that the dispute is not ripe for adjudication or that NYDFS does not have standing, the court must dismiss the case. That would be the second time that NYDFS has been told to await the actual implementation of OCC’s intended FinTech chartering.

Only if it determines that Article III’s jurisdictional requirements are satisfied will the Court of Appeals then turn its attention to the National Bank Act’s “business of banking” clause. OCC argued that the federal Court of Appeals for the D.C. Circuit previously ruled an institution can be in “the business of banking” even if it does “not exercise the full complement of banking powers.” The trial court did not find this reference binding or persuasive. If the Second Circuit agrees with the trial court, an interesting conflict between the circuits could be in the works—potentially paving the way for the U.S. Supreme Court to weigh in.

Meanwhile, President Biden has yet to name his nominee for Comptroller of the Currency. Rumors suggest his nominee may be Mehrsa Baradaran, raising concerns in FinTech circles based on her testimony before the Senate Banking Committee. Whether the Biden administration intends to maintain the posture that OCC established during the Obama and Trump administrations or strike a different chord is yet unknown. And it could affect the posture of this case while the Second Circuit considers the issues. 

Federal courts do not provide advisory opinions—if the Administration signals a sea change in FinTech policy (e.g., under a new Comptroller, if OCC changes its July 2018 announcement), the Second Circuit could dismiss OCC’s appeal as moot.

We will monitor this case and the news emanating from the White House with great interest.

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