Bank Wars Episode 2: Attack of the Procedure
In the previous installment of Bank Wars, we discussed the Conference of State Bank Supervisors’ (CSBS) argument that the Office of the…
In the previous installment of Bank Wars, we discussed the Conference of State Bank Supervisors’ (CSBS) argument that the Office of the Comptroller of the Currency (OCC) is exceeding its authority and cannot issue its proposed fintech charter. This installment covers the CSBS’s fallback argument that even if the OCC can issue such a charter, the process the OCC has used in developing and rolling out the charter is fundamentally inconsistent with the requirements of the Administrative Procedure Act (APA). The CSBS further argues that the procedural defect dooms the charter, or at the very least the OCC will need to start over and go through the right process if it wishes to proceed.
The CSBS argues that by offering a new charter to non-depository institutions the OCC is creating a “’rule’ of general application that creates new rights, privileges, and duties” under the APA. The APA is, as the name implies, a law governing the procedure an agency must follow, not the underlying substance of any given rule. It is there to make certain agencies are being transparent, provide the public with an opportunity to be heard and considered, and provide appropriate due process. It forces the agency to “show its work”.
For a rule to be valid, the agency must go through the legally mandated procedure. This includes, among other things, a requirement that the agency provide notice of the proposed rulemaking, along with other information including the legal authority the agency relies on. The agency is also required to provide “interested persons” with the opportunity to submit comment for the record, which the agency needs to consider as it finalizes the rule.
The CSBS argues that the OCC failed to follow this necessary procedure. The OCC did publish a public whitepaper saying it would offer a fintech charter (though not in the Federal Register as required by the APA). This whitepaper laid out the OCC’s position on their legal authority and solicited comment from the public. The OCC followed that up with a summary of the comments it received and a draft change to the licensing manual that would govern fintech banks, on which it again sought comment. While the OCC’s procedure in many ways parallels the APA requirements, the CSBS argues that they are deficient and under the APA the OCC’s actions are unlawful.
The CSBS also argues that because the OCC failed to properly solicit, consider, and address comments from interested parties its decision making as it developed the charter was “arbitrary and capricious”, which the APA prohibits. If the court agrees then the OCC will need to start over and show that it took the necessary steps to properly consider the rule.
The CSBS’s argument that the OCC’s decision to issue the fintech charter was flawed and arbitrary and capricious can also have an impact on the debate over whether the OCC has the authority to issue the charter in the first place. To dramatically oversimplify (any admin law experts, feel free to correct me): courts often defer to administrative agencies when those agencies interpret the statute it is organized under or responsible for administrating. However, if an agency fails to follow the proper procedure in creating a rule, or if its decision making is arbitrary and capricious, then the agency is not due deference from the court on its interpretation.
Why is this important here? Because the OCC and CSBS disagree on what the National Bank Act (NBA) says. If the court defers to the OCC’s definition of their powers under the NBA then the OCC has a huge advantage because it side steps the question of whether the NBA allows it to issue the charter. However, if the court refuses to defer and looks at the issue de novo (lawyer speak for the court starting from scratch), then the CSBS could potentially win on the question of whether the OCC actually has the authority. A victory for the CSBS on that question (assuming it survives appeal) would mean the OCC couldn’t do a non-depository fintech charter no matter what procedure it follows unless Congress intervenes to grant them the authority.
The OCC’s rebuttal to this argument is that it has the necessary authority under existing laws and regulations, so there isn’t a need for a new rule or APA procedure. The OCC (presumably) argues it already did the APA required procedure when it promulgated 12 CFR § 5.20(e)(1) and the OCC is just operating under the existing rule. Of course, the CSBS argues that 12 CFR § 5.20(e)(1) is not supported by the law and should be struck down, therefore the OCC cannot rely on it.
The procedural arguments the CSBS is making show how important it is that agencies follow the proper steps before making rules. This isn’t to say the OCC didn’t do this — it very well might have — but it is nice to live in a country where even the government has to show its work to get credit on the test.
Next time we will address the CSBS’s third legal argument: that the OCC is intruding on the prerogative of the states inappropriately. We will then wrap it up with a survey of the policy arguments the CSBS is making.