Federal court allows NYSDFS lawsuit against OCC FinTech charter to proceed, raising further questions about the charter’s viability.

By Alan W. Avery, Todd Beauchamp, Loyal T. Horsley, Pia Naib, and Charles Weinstein

In a May 2 order, US District Court Judge Victor Marrero rejected the Office of the Comptroller of the Currency’s (OCC’s) recent motion to dismiss the New York State Department of Financial Services’ (NYSDFS’) new lawsuit challenging the OCC’s FinTech charter, and by doing so, may have put the charter in limbo for the foreseeable future.

Overview

As detailed in this previous commentary, the NYSDFS’ then-Superintendent Maria T. Vullo sued the OCC and then-Acting Comptroller Keith Norieka in response to the OCC’s 2016 White Paper — “Exploring Special Purpose National Bank Charters for Fintech Companies.” Superintendent Vullo and the NYSDFS alleged that granting the proposed charter was outside the scope of the OCC’s statutory authority and would be harmful to the US financial system. The suit, however, was dismissed, primarily on the grounds that it was premature given the OCC had not yet taken any official action on the chartering process (i.e., the OCC had only released the White Paper). Following the dismissal of the NYSDFS suit, as well as the dismissal of a similar suit brought by the Conference of State Bank Supervisors, the OCC issued a policy statement in July 2018 announcing that it would begin accepting applications for special purpose national bank (SPNB) charters for non-depository FinTech companies. In the wake of this more formal movement on the FinTech charter, Superintendent Vullo again sued the OCC and the new Comptroller, Joseph Otting, in September 2018, seeking to block the OCC from taking further action to implement the chartering process. The OCC moved to dismiss the new NYSDFS suit, arguing that the claims were still premature because the OCC had not yet received — let alone approved — any FinTech charter applications.

Nonetheless, in allowing the new NYSDFS suit to go forward, Judge Marrero found that the OCC indicated a “clear expectation of issuing SPNB charters,” and that the NYSDFS has sufficiently alleged “at least some demand for, and interest in, such charters.” Accordingly, the NYSDFS demonstrated that there is now a “substantial risk that the harm will occur” — specifically, (1) New York citizens will lose “critical financial protections” that the dual banking system and state regulatory oversight affords, and (2) the NYSDFS will be deprived of future revenue in connection with assessments it levies upon New York State licensed institutions.

Impact

Judge Marrero’s order is certainly a significant setback for the OCC and for supporters of the FinTech charter. The OCC already faced a significant challenge in terms of practical utility of the FinTech charter, as FinTech companies grapple with important questions and issues when evaluating whether the FinTech charter would provide a viable long-term regulatory approach. While a few FinTech companies have publicly announced their charter applications or their desire to begin the chartering process, none have actually completed the arduous and time-consuming process. In addition, several FinTech companies recently announced their intention to pursue a full national bank charter, forgoing the FinTech charter altogether. Now, in addition to all of the other factors FinTech companies must weigh in choosing whether to pursue a FinTech charter, they must also consider litigation risk, as resolving the NYSDFS’ pending lawsuit will take time and the status of the FinTech charter will remain in question until the lawsuit is completed.

So, to charter or not to charter? Given the growing uncertainty on various fronts, companies are unlikely to pursue FinTech charters at this point, particularly as other viable alternatives — such as obtaining the appropriate state licenses (i.e., money transmitter licenses or lending licenses) or entering into partnerships with banks or other licensed entities — are becoming increasingly common and the implementation process is becoming more efficient.