Take Two: CSBS Files Second Suit Challenging OCC Fintech Charters

Financial Services Law

Just a few weeks after the New York Department of Financial Services (DFS) filed its second lawsuit challenging the decision by the Office of the Comptroller of the Currency (OCC) to offer a federal bank charter for fintech firms, the Conference of State Bank Supervisors (CSBS) followed suit and filed its second federal complaint.

Both the DFS and CSBS previously attempted to halt the OCC’s efforts, only to have their lawsuits dismissed as unripe earlier this year.

What happened

The battle over the OCC’s plan to offer special-purpose national bank (SPNB) charters for fintech companies dates back to December 2016, when the agency originally announced the plan.

After accepting comments on the proposal—ranging from staunch opposition to possible acceptance with some caveats and recommendations for the regulator—the OCC published draft licensing standards in March 2017.

In response, the CSBS filed suit, followed by the DFS. Both actions were dismissed last year as unripe.

“If the OCC had received 20 to 80 Fintech charter applications, then CSBS would have a much stronger argument for standing,” the court wrote. “But not a single Fintech has ever applied for a charter. Because it is not ‘certainly impending’ that this chain of events will take place and the present situation does not expose CSBS to a ‘substantial risk’ of harm, CSBS fails to establish injury in fact.”

Fast-forward to July 2018, when the OCC announced that it will accept applications for SPNB charters for fintech companies. The move triggered a new lawsuit from the DFS and now from the CSBS.

The OCC acted beyond its statutory authority and not in accordance with the law, the CSBS alleged. The National Bank Act (NBA) provides the agency with the authority to charter only institutions that carry on the “business of banking” or certain special purposes expressly authorized by Congress.

“By creating a national bank charter for nonbank companies like fintech firms, the OCC has gone far beyond the limited authority granted to it by Congress under the NBA and other federal banking laws,” according to the complaint filed in Washington, D.C., federal court. “It is well settled by court precedent, federal banking laws and historical chartering practice that carrying on the ‘business of banking’ under the NBA requires, at a minimum, engaging in receiving deposits. Yet the OCC has, through its latest effort, created without express statutory authorization a new type of charter for nonbank companies that would neither carry on the business of banking (because chartered companies would not be engaged in deposit-taking), nor any expressly authorized special purpose.”

The OCC also failed to adequately consider and address “the myriad policy implications and concerns,” the CSBS told the court, deeming its actions “arbitrary, capricious and an abuse of discretion,” and forgot to follow the applicable notice and comment procedures.

Like the DFS, CSBS expressed concern that fintech entities chartered by the OCC would be allowed to operate outside the bounds of state laws and regulations, eliminating many consumer protections such as interest rate caps or usury limits, mandated consideration of a borrower’s ability to repay, and restrictions on loan flipping.

To read the complaint in Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, click here.

Why it matters

While both the DFS and the CSBS viewed the OCC’s July announcement that it would begin to accept fintech charter applications as a turning point, it remains to be seen whether the courts will agree the challenges are ripe for review, with no charters yet issued, or soon to be issued, by the agency. The CSBS attempted to strengthen its position by quoting OCC Comptroller Joseph Otting’s public statements that “the OCC has had in-depth discussions with, and is vetting, several companies and expects to receive applications by the end of 2018, with charter decisions made by mid-2019.” However, given the long lead time for preliminary approval of a charter application, even that schedule appears optimistic, calling into question the ripeness of the new challenges. 



pursuant to New York DR 2-101(f)

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