2020 – End or Revival of the OCC Fintech Charter?

Lacewell v. Office of the Comptroller of the Currency, Case 1:18-cv-08377-VM (S.D.N.Y. Oct. 21, 2019), hosted by us.archive.org.

The original April 2, 2020 deadline for appellant brief filing by the Office of the Comptroller of the Currency (“OCC”) has just passed. As the Second Circuit gave a 21-day filing extension due to the current COVID-19 situation, the OCC earned more time to prepare its appeal against the Lacewell ruling that blocked it from chartering fintech companies (the “Fintech Charter”). This ongoing fight between the OCC and the New York State Department of Financial Services (“DFS”) has created considerable legal uncertainty for the future scope of the special purpose national bank (“SPNB”) charter.

Would the year of 2020 mark the end or revival of the OCC Fintech Charter?

On October 21, 2019, U.S. District Judge Victor Marrero of the Southern District of New York entered his final judgment against the OCC in Lacewell. When deciding between two proposals offered by the OCC and the DFS, the court went with that of the DFS. Specifically, the court held that the Fintech Charter is beyond the OCC’s authority and set aside OCC’s existing regulation, 5 C.F.R. § 5.20(e)(1)(i), “with respect to all fintech applicants seeking a national bank charter that do not accept deposits.” This ruling effectively blocked the OCC’s ability to grant the SPNB charter to any fintech company—not just in the state of New York, but anywhere in the United States. In explaining his decision, Judge Marrero cited a previous case—Vullo v. Office of Comptroller of Currency, 378 F. Supp. 3d (S.D.N.Y. 2019)— and concluded that the National Bank Act's “business of banking” clause, read in the light of its plain language, history, and legislative context, “unambiguously requires that, absent a statutory provision to the contrary, only depository institutions are eligible to receive national bank charters from OCC.”

A Dorsey & Whitney report offers helpful insights into the long lasting dispute between the OCC and the DFS. To the OCC, its SPNB regulations are pursuant to the National Bank Act of 1864. If the regulations are implemented, it would allow fintech companies to apply to the OCC for charters without facing state-by-state regulations. To the New York State DFS, however, granting SPNB charters to non-depository institutions clearly exceeded the OCC’s authority under the NBA, undermining the state’s ability to regulate and protect its consumers and markets. Such SPNB charters, the DFS alleged, would essentially exempt fintech applicants from federal standards such as safety and soundness.

After the case was decided, Joseph Otting, the Comptroller of the Currency, stated that he believed that the OCC would eventually be able to offer that charter, because the Fintech Charters are squarely within the OCC's authority. According to Otting, the Charters are a "stepping stone to a full-service bank charter, where [Fintech companies] could take deposits and make loans."

OCC’s ability to issue SPNB charters to fintech companies is important. As Messer Strickler reports, fintech charters promise a national preemptive lending license, which removes the compliance burden of state-by-state licensing. However, it remains unclear whether the Second Circuit will come to a different conclusion, and what impact the previous and future rulings would have on the fintech industry. On one hand, as a report from Sullivan & Cromwell LLP indicates, a successful appeal by the OCC could greatly expand and simplify the ability of certain fintech companies to make loans. On the other hand, fintech companies might not be impacted as much as many have thought. As a National Law Review article notes, the ruling does not affect their ability to apply for a full-service national bank charter, and fintechs can pursue state banking charters, including industrial loan company charters. Moreover, most fintech companies provide services by partnering with banking institutions or acquiring alternative licenses. Major cryptocurrency companies like Coinbase, Gemini and BitGo are licensed money transmitters and/or have established state-chartered trust companies. The industry thus has and will likely continue to operate and expand through the bank partner and state-based regulatory approaches, concluded the National Law Review article.

Mandy Mengyu Li is a 1L student at Harvard Law School. She is a report writer for JOLT Digest on FinTech and antitrust related topics.