New York DFS Files Second Suit Over OCC Fintech Charter

Financial Services Law

Here we go again: The New York Department of Financial Services (DFS) has filed its second lawsuit against the Office of the Comptroller of the Currency (OCC) over the agency’s plan to permit fintech companies to apply for Special Purpose National Bank Charters.

A nearly identical suit filed by the DFS last year was dismissed for lack of ripeness. Now that the OCC has finalized its fintech charter plans, the state regulator is hoping for a favorable outcome on the merits.

What happened

In 2016, the OCC initially considered whether to accept applications from fintech companies for Special Purpose National Bank Charters. After accepting comments on its proposal, the OCC published draft licensing standards in 2017. In response, both the Conference of State Bank Supervisors (CSBS) and the DFS filed suit to challenge the proposal.

But U.S. District Judge Naomi Reice Buchwald granted the OCC’s motion to dismiss both lawsuits, agreeing with the agency that the claims were not ripe for judicial review.

In July, the OCC announced that it will accept applications for Special Purpose National Bank Charters for fintech companies. The move ended months of speculation over whether the agency would actually follow through on the initiative. It also triggered a new lawsuit from the DFS.

“The Fintech Charter Decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State,” according to the complaint filed by Maria T. Vullo in her capacity as superintendent of the DFS.

“Weighty policy flaws” found in the OCC’s decision include “weakening regulatory controls on usury, payday loans, and other predatory lending practices; consolidating multiple non-depository business lines under a single federal charter thus creating even more institutions that are ‘too big to fail’; creating an unlevel and unfair playing field to the detriment of New York’s strong community banking system that complies with New York law and serves New York’s communities throughout the State; [and] creating competitive advantages for large, well-capitalized ‘fintech’ firms, which can overwhelm smaller market players and thereby stunt rather than foster innovation in financial products and services.”

Moreover, the “OCC’s action is legally indefensible because it grossly exceeds the agency’s statutory authority,” the DFS added, as the OCC’s power to charter banks pursuant to the National Bank Act is limited “to carry[ing] on the business of banking,” which has been interpreted for many years to require that the bank receive deposits.

“If validated by the courts, this agency sleight-of-hand, practiced on the barest of administrative records, plus a ‘whitepaper’ and a manual … would upend almost one and a half centuries of established federal banking law and displace a nation of 50 state financial regulators that annually supervise hundreds of billions of dollars in non-bank transactions,” according to the complaint.

The DFS requested that the court declare the OCC’s decision null and void and permanently enjoin the agency from implementing fintech charters.

To read the complaint in Vullo v. Office of the Comptroller of the Currency, click here.

Why it matters

This suit is yet another volley from a state seeking to limit federal government pre-emptive action that would carve out jurisdictional control over fintech companies. The DFS remains confident it will prevail in its action against the OCC, though the lawsuit still must clear several procedural and substantive obstacles. In addition to facing a battle over the extent of the OCC’s powers, the state regulator may still have a problem with ripeness. The agency announced its intent to accept applications for fintech charters but has yet to grant any, and, in fact, no applications to our knowledge have yet been filed. Interestingly, the CSBS indicated that it plans to file a second lawsuit as well—but elected to wait for “a time deemed appropriate.”



pursuant to New York DR 2-101(f)

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