New York Pressed By Second Circuit on Fintech Charter Challenge

New York’s top financial regulator faced Second Circuit judges’ questions over whether the state’s challenge of federal authority to license fintech lenders was too early since no charters have been issued.

The Office of the Comptroller of the Currency wants the appellate court to overturn a 2019 ruling that struck down agency rules on special national charters for fintech companies. A New York district court said the OCC 2017 rules violated the 1863 National Bank Act because they would allow firms that don’t collect customer deposits to obtain banking charters.

The U.S. Court of Appeals for the Second Circuit on Tuesday focused on whether the New York Department of Financial Services’ lawsuit was premature. The appellate judges questioned whether the agency faced any realistic harm since no fintech companies have filed for charter applications with the OCC, let alone approved.

New York Solicitor General Barbara Underwood, representing the state Department of Financial Services, said that the case needed to be decided now because fintech lenders may have started getting advice on applications in advance of expected filings.

“There is no suggestion that this will not go forward, so there is no need to wait,” Underwood told Judges Pierre N. Leval, Gerard E. Lynch, and Joseph F. Bianco at an audio-only Zoom hearing.

Christopher Connolly, an assistant U.S. Attorney of the Southern District of New York representing the OCC, said the agency’s final approval of a fintech charter application may take only a few months after it’s filed.

But the case was not yet ripe for a ruling because “the OCC has not yet received, much less acted upon” an application, Connolly said.

The New York finance regulator sued the OCC in September 2018, alleging that the fintech charter would allow companies to evade state regulation, such as interest rate caps. the New York regulator said.

A judge in the U.S. District Court for the Southern District of New York struck down the OCC rules in 2019, limiting the agency’s chartering authority to deposit-taking banks.

Bipartisan Effort

The OCC began discussing a national charter for fintechs, including those that don’t take deposits, during the Obama administration. The agency finished rules on fintech charters in 2017 under former Comptroller Joseph Otting, a Trump appointee.

Many fintechs have complained of the cost and rigors of obtaining multiple state licenses in order to operate nationally. The OCC’s special bank charter would give companies the chance to be overseen by a single federal regulator.

State regulators and consumer advocates raised concerns about the charter from the beginning. The Conference of State Bank Supervisors filed a separate suit in the U.S. District Court for the District of Columbia, but it was dismissed as not ripe since no OCC charters had been issued.

The OCC under the Trump administration promptly appealed New York’s 2019 court win, and has since encouraged payments companies to apply for national charters. The agency has also discussed potential charters for crypto companies.

The Biden administration hasn’t nominated a new comptroller of the currency, making it difficult to assess where it stands on the issue.

The Second Circuit judges repeatedly asked Underwood, New York’s solicitor general, about whether harm was imminent, as well as whether the history of banking allowed for the chartering of non-depository institutions.

But the bulk of the questions were on New York’s standing given the timing.

The case is Lacewell v. Office of the Comptroller of the Currency, 2d Cir., No. 19-04271, oral arguments 3/9/21