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National Charter for Fintech Lenders Revived by Second Circuit (4)

June 3, 2021, 3:17 PM; Updated: June 4, 2021, 1:54 PM

The Office of the Comptroller of the Currency can issue federal bank charters to fintech companies that don’t accept deposits, the Second Circuit ruled.

The New York Department of Financial Services failed to show it had suffered actual or imminent injury from the OCC’s 2017 rules allowing special charters for fintech lenders, the U.S. Court of Appeals for the Second Circuit said Thursday. The decision reverses a 2019 district court ruling in favor of the state.

New York’s challenge is too speculative since no charters have actually been issued under the OCC policy, the appellate court said.

“It is unclear at this juncture whether New York law will ever be preempted in the ways DFS fears,” Judge Joseph Bianco wrote for the appellate court.

The U.S. District Court for the Southern District of New York said the threat of federal preemption—and the potential loss of fees from fintech lenders that would otherwise be regulated by the DFS—were sufficient to create Article III standing for imminent harm. The Second Circuit disagreed.

“We find that DFS’s claims are constitutionally unripe for substantially the same reason,” Bianco said.

The case is remanded to the district court with instructions to enter a judgment of dismissal without prejudice.

Regulatory Turf

The litigation is part of an ongoing battle between state regulators and the OCC over who should regulate financial technology firms that don’t take deposits or operate as traditional banks. States generally regulate non-deposit taking financial services companies, including payments and lending companies.

The appellate court didn’t address the district court’s finding the OCC’s special charters for fintech lenders exceeded the agency’s authority under the National Bank Act.

Fintechs had been slow to warm to the OCC’s special purpose charter while the litigation was going on, and the absence of clarity on the agency’s authority in the decision means companies are unlikely to seek one in the near future, said Catherine M. Brennan, a partner at Hudson Cook LLP.

“I don’t know a single company that has high on their list pursuing a fintech charter at this time, because no one wants to be the target” of state regulators, she said.

OCC spokesman Bryan Hubbard said the agency welcomed the Second Circuit’s ruling.

The decision comes as acting Comptroller of the Currency Michael Hsu, a Biden appointee, begins a review of the OCC’s chartering practices. Along with the fintech charter, the OCC under the Trump administration created a charter for payments companies and has issued charters to banks specializing in cryptocurrencies.

“As stated elsewhere, Acting Comptroller Hsu has initiated a review of OCC regulatory matters including those related to the standards the agency uses to evaluate charter applications and to ensure such decisions are carefully weighed in the broader context of our interconnected financial system,” Hubbard said in a statement.

The Second Circuit’s decision likely gives Hsu cover to hold off on any decisions about potential charters, said Todd Baker, a senior business, law, and public policy fellow at Columbia University’s Richman Center.

“The long-term history and interests of his agency suggest that he and his staff won’t want to abandon the idea of the non-depository bank entirely, but the issue is so toxic right now that it’s far easier to downplay the prospects of fintech and payments charter to applicants,” he said.

Fight Continues

New York Superintendent of Financial Services Linda Lacewell said her agency will continue to challenge federal “encroachment” on state financial regulations. The Second Circuit only ruled on the ripeness of the DFS challenge, not the merits of the case, she said in a statement.

Lacewell also urged Hsu to reconsider the OCC’s fintech charter program altogether.

“It is incumbent upon us to work together in our dual state-federal financial system to ensure both safety and soundness of industry and protection of the consumers who rely on financial products and services,” she said.

Several other state regulators are challenging the OCC’s fintech charter through litigation by the Conference of State Banking Supervisors.

CSBS has alleged that the OCC’s potential approval of a standard banking charter application by Figure Technologies Inc., a blockchain-based financial services provider that plans to take uninsured deposits, would essentially result in a fintech charter by another name.

The OCC said it has not acted on or approved a charter to Figure, an agency spokesman said.

CSBS is disappointed in the Second Circuit’s ruling, but confident that courts will “ultimately determine that Congress has not given the OCC this authority, and we encourage the OCC to abandon its pursuit of the chartering of uninsured national banks,” Margaret Liu, CSBS executive vice president for strategic engagement, said in a statement.

The case is Lacewell v. Office of the Comptroller of the Currency, 2d Cir., No. 19-04271, ruling 6/3/21.

(Updates with comments from OCC, CSBS in last two paragraphs)

To contact the reporters on this story: Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com; Evan Weinberger in New York at eweinberger@bloomberglaw.com
To contact the editors responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com; Roger Yu at ryu@bloomberglaw.com

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