A federal bank regulator’s recent moves to assert its authority to define the business of banking is likely to trigger more legal battles with state regulators.
Acting Comptroller of the Currency Brian Brooks’ plans to craft a special banking charter for payment companies could draw a challenge similar to the states’ so-far successful lawsuit against the OCC’s national charter for fintech lenders.
The federal agency’s ability to offer a federal alternative to state regulation of non-banks and designate them as national banks remains “a real live question,” Kristin Johnson, a Tulane University law professor who specializes in financial markets and cyber regulation, told Bloomberg Law.
“That’s potentially the seedling that may require U.S. Supreme Court intervention,” she said.
State regulators see Brooks’ plans for a national charter for payment companies as a willful disregard of a 2019 federal court ruling that limited the agency’s chartering authority to banks, said Margaret Liu, senior vice president and deputy general counsel at the Conference of State Bank Supervisors.
The U.S. District Court for the Southern District of New York in October 2019 said the OCC exceeded its National Bank Act authority by offering special charters to fintech lenders. The court said the agency can’t issue charters to companies that don’t take deposits.
“That holding and the nationwide applicability of that order apply regardless of whether you’re talking about a company that lends or does payments services,” Liu said.
Brooks, a former general counsel at virtual currency exchange Coinbase, said in May that the OCC will not only defend its special charter for fintech lenders, but possibly extend new ones in the payments space, including to crypto firms that generally operate under state money transmitter licenses. The federal regulator appealed the 2019 ruling to the U.S. Court of Appeals to the Second Circuit.
“I don’t think one district judge out of 93 is the last word on the subject,” Brooks said in June 26 remarks to the the Financial Health Network.
Brooks said Supreme Court precedent is the OCC’s side on its authority to define the business of banking, adding: “I’m not going to let those powers get eroded on my watch.”
Can’t Pass Up
A potential national payments charter could prove too attractive for crypto firms and other payments companies to pass up, said Christina Grigorian, a partner in Katten Muchin Rosenman LLP’s corporate and financial markets practice in Washington.
A national payments charter would simplify operations for money transmitters by providing companies with a single regulator, Grigorian said. It would also spare companies significant time and costs in applying for, and maintaining, money transmitter licenses in nearly every state, she said.
“There are probably a number of money transmitters having those discussions with counsel” about being the first to apply, she said.
New York, which spearheaded the legal challenge against the OCC’s fintech charter, has been active in licensing crypto companies that support trading or investing in cryptocurrencies. The state’s Department of Financial Services has issued 25 licenses since it’s first-in-the-nation crypto regulatory regime launched in 2015.
Consumers could be harmed if states are displaced from the frontlines on non-bank regulation and oversight, Johnson said.
“As long as bad actors stick to certain populations or low dollar amounts,” there’s a possibility that federal regulators won’t expend the resources to go after them, she said.
The OCC’s planned payments charter is part of a broader push to keep up with a flurry of technological changes in the banking sector, said Scott Pearson, a partner at Manatt, Phelps & Phillips LLP in Los Angeles.
While the OCC is taking a more assertive approach to its jurisdiction under Brooks, that stance didn’t start with him, Pearson said. The Trump administration has had “a traditional view of strong federal power” in banking, he said.
State and federal regulators have a long history of turf battles, including legal disputes on so-called “visitorial powers” rules that limit the ability of state officials to investigate nationally chartered banks, Pearson said.
“State regulators may not have as much authority as they think” over areas of law under the OCC’s purview, he added.
Those squabbles have even extended to Covid-19. The OCC issued a bulletin June 17 claiming preemption of state and local responses to the ongoing economic crisis, including moratoriums on foreclosures and repossessions, as well as limits on bank interest and fees.
State regulators were surprised by the unexpected missive.
Foreclosures are “pretty clearly the domain of state law,” CSBS’s Liu said. Other aspects of the bulletin could reach into state restrictions around credit reporting during the pandemic, she added.
The idea of a national payments charter is already drawing concerns about opening the door to “Big Tech” companies like Amazon.com, Inc. and others to more fully integrate banking into their operations and control even larger amounts of consumer data.
Those concerns shouldn’t hold up a special banking charter for true payments companies, said Nick Catino, head of policy for the Americas at Transferwise, an online international money transmitter.
A financial services company that specializes in payments “is a different beast to regulate” and doesn’t pose the same risks to the financial system as larger companies that view payments as just one aspect of their business, Catino said.
Transferwise is hoping the OCC’s charter would eventually allow payments companies to join the Federal Reserve’s payments system, Catino said. Transferwise was the first non-bank to gain access to the U.K.'s payments system.
Brooks has said a first version of a national payments charter would be limited to an OCC license. Potential Fed access wouldn’t come until a second iteration of the charter at a later date, he said in a June podcast with the American Bankers Association.
Allowing non-banks to access the Federal Reserve system could cause banks to join states against the OCC’s chartering ambitions.
Payments processors already access the Fed’s payments system through their bank partners, said Chris Cole, vice president and senior regulatory counsel at the Independent Community Bankers Association. The OCC hasn’t shown a compelling need for them to get direct access, other than avoiding state regulation, he said.
The October 2019 ruling against the OCC’s “fintech charter” doesn’t bode well for another special charter, Cole added.
“I think he’s on dubious legal ground at this point,” he said.