United States: The Fintech Charter Lives To See Another Day: Second Circuit Reverses Anti-Fintech Charter District Court Ruling

The U.S. Court of Appeals for the Second Circuit revived the Office of the Comptroller of the Currency's (OCC) controversial special-purpose national bank charter that had been challenged by the New York Department of Financial Services (NYDFS) and effectively suspended by a ruling from the U.S. District Court for the Southern District of New York. On June 3, 2021, the Second Circuit reversed and remanded the lower court's ruling, holding that the NYDFS lacked standing to challenge the Fintech charters and that NYDFS's claims were not constitutionally ripe. Lacewell v. OCC, No. 19-4271, 2021 WL 2232109 (2d Cir. June 3, 2021).

Background and SDNY Ruling

Quickly following the OCC's 2017 announcement that it would start accepting applications for Special Purpose National Bank charters, the NYDFS and the Conference of State Bank Supervisors (CSBS) filed a federal suit challenging the OCC's authority to grant such charters and seeking injunctive relief. The NYDFS and CSBS made similar arguments that the OCC exceeded its authority under the National Bank Act (NBA) when it decided to start accepting applications for its Special Purpose National Bank Charter. The NYDFS's argument was premised on the requirement that national banks accept deposits as part of the "business of banking" as used in the NBA. The NYDFS argued that the OCC had exceeded its authority because the Special Purpose National Bank charter did not require such chartered entities to accept deposits. The OCC moved to dismiss the action on several grounds, including that the NYDFS lacked standing, the NYDFS's claims were not ripe, and, because the "business of banking" in the NBA is ambiguous, the OCC is entitled to Chevron deference in interpreting the "business of banking" and its interpretation was reasonable.

The district court disagreed with the OCC and denied the OCC's motion to dismiss. Pointing to the plain language and legislative history of the NBA, the court ruled that the OCC had exceeded its authority under the NBA, finding that the term "business of banking" required that chartered entities accept deposits, and found the OCC was not authorized to accept charter applications from non-depository Fintechs.

Second Circuit Ruling

The Second Circuit held that because no non-depository entity had applied for the Special Purpose National Bank charter, and the OCC had not granted an application for a Special Purpose National Bank charter, the NYDFS's "asserted risk of regulatory injury" was "too speculative" to meet Article III standing requirements. The Second Circuit was "unpersuaded" by the NYDFS's argument that the NYDFS had standing due to the loss of revenue from assessments on non-depository Fintechs that obtained a Special Purpose National Bank charter.

For the same reasons, the Second Circuit found that the NYDFS's claims were not constitutionally ripe.

Takeaways

Although the Second Circuit remanded the case to the district court with instructions to grant the OCC's motion to dismiss, the Second Circuit did not address the lower court's ruling on the merits: that the term "business of banking" under the NBA "unambiguously" requires a Special Purpose National Bank charter holder to accept deposits. It seems likely that the NYDFS will act quickly to press its claims in court if and when a non-depository Fintech applies for a Special Purpose National Bank charter and/or the OCC actually grants a non-depository Fintech a Special Purpose National Bank charter. That said, the Second Circuit did express some skepticism, noting that "even if the OCC grants a [Special Purpose National Bank] charter to some non-depository [F]intech, it is not entirely clear that the regulatory disruption that the [NYDFS] fears will actually occur." Id. At *9.

We note, too, that the Second Circuit's decision comes against the backdrop of other Fintech challenges, including efforts for a Congressional Review Act resolution to repeal the OCC's May 2020 "true lender" final rule and state AG's challenge to the FDIC's "valid when made" final rule. 

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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