Bank Wars Episode 1: The Fintech Menace
Bank Wars Episode 1: The Fintech Menace
The OCC’s fintech charter was controversial from the start, and has prompted the state bank regulators to file suit to try and stop it.
The OCC’s fintech charter was controversial from the start, and has prompted the state bank regulators to file suit to try and stop it.
In a surprise to absolutely no one, the Conference of State Bank Supervisors (CSBS), the organization that represents state bank and financial firm regulators has sued the Office of the Comptroller of the Currency (OCC) to stop the OCC from issuing any charters under the proposed special purpose national bank regime the OCC has been pursuing. The CSBS is seeking an injunction against the OCC to prevent it from issuing charters and a declaration from the court that the OCC lacks the statutory authority to issue such charters and that the OCC failed to follow the required process under the Administrative Procedure Act in not creating the charter via notice-and-comment rulemaking.
The CSBS’s argument breaks down along three broad lines: 1. The OCC is not legally able to issue this type of charter; 2. Even if the OCC had the authority, the process it used to create the charter was fatally defective and made the OCC’s decision arbitrary and capricious; and 3. The OCC’s actions improperly intrude on an area of state sovereignty without the needed Congressional authorization. Sprinkled among the legal arguments are policy arguments as to why an OCC charter is just a bad idea, presumably put in to assuage any concern the court may have that stopping the OCC charter would harm the public. Given how much is going on we will give each issue its own post. I’ll tackle the first issue below.
The OCC can’t do this
The CSBS starts its argument by trying to define what a bank is, and isn’t. The CSBS argues that the “business of banking” has deposit taking as a necessary component. Given that the OCC’s charter is explicitly aimed at non-depositories, the CSBS argues that the OCC is exceeding its authority.
While the CSBS acknowledges that the National Bank Act (NBA), the statute that authorizes the creation of national banks, does not explicitly define what the business of banking entails, the CSBS argues that the statute’s authors had deposit taking in mind. The CSBS points to the relevant portion of the law (12 U.S.C. § 24 (Seventh)) to argue that deposit taking is the least circumscribed power. While this may be true (the statute is NOT a model of statutory clarity), it does not say that deposit taking is an essential requirement of being a bank. Lending and circulating notes (presumably the basis for banks’ money transmission authority) are listed independently of deposit taking without language mandating one be tied to the other.
While the NBA doesn’t give the clarity the CSBS is looking for, the CSBS does point to other statutes, such as the Bank Holding Company Act (BHCA) and the Federal Reserve Act (FRA), that either explicitly define bank for the purposes of the statute as being a depository institution, or at least heavily imply it. However, while the CSBS may be right that being a bank requires being a depository for the purposes of these statutes that does not necessarily mean that the only definition of bank under federal law is a depository.
The CSBS also looks to case law to buttress its argument. The CSBS cites two Supreme Court cases to show that historically the business of banking was defined by deposit taking, but the actual support for the idea that deposit taking is essential is thin. The CSBS cites Mercantile Bank v. New York (cited by CSBS as Mercantile National Bank v. Mayor) for the proposition that “the ‘business of banking, as defined by law and custom, consists . . . in receiving deposits payable on demand.’” However, the full quote is less supportive. In full, the court in Mercantile Bank said that:
The business of banking, as defined by law and custom, consists in the issue of notes payable on demand, intended to circulate as money where the banks are banks of issue; in receiving deposits payable on demand; in discounting commercial paper; making loans of money on collateral security; buying and selling bills of exchange; negotiating loans, and dealing in negotiable securities issued by the government, state and national, and municipal and other corporations.
The Mercantile Bank court basically just listed all of the powers granted to banks under the NBA, without giving deposit taking any special pride of place. As such, it is questionable that the Mercantile Bank court thought deposit taking was essential. Further, Mercantile Bank is a tax case; the court wasn’t seeking to address the question at issue in the current litigation.
Likewise, the Supreme Court in United States v. Philadelphia National Bank, which the CSBS cites for the proposition that “[c]ommercial banks are unique among financial institutions in that they alone are permitted by law to accept demand deposits.”, wasn’t tasked with determining whether a bank needed to accept deposits to be a bank. Philadelphia National Bank is an anti-trust case and the court took note of the depository function to acknowledge how important banks are, not that banks by definition needed to take deposits.
More directly, the CSBS cites two cases that did hold that deposit taking was an essential element to the business of banking. The CSBS cites Independent Bankers Assn. of America v. Conover, №84–1403-CIV-J-12, 1985 U.S. Dist. LEXIS 22529 at *32, Fed. Banking L. Rep. (CCH) P86, 178 (M.D. Fla. Feb. 15, 1985) and National State Bank v. Smith, №76- 1479 (D. N.J. Sept. 16, 1977) (which was reversed on the basis that the NBA was amended to explicitly permit the transaction in question, leaving the original question unresolved). While these cases are more directly relevant they are also unpublished (and in one case reversed) district court opinions and not binding precedent. The legal arguments might be right, but the court in the current case is in no way obligated to agree.
The CSBS then moves on to the Jazz portion of the statutory analysis, in that it argues the court needs to pay attention to the laws Congress didn’t pass. The CSBS argues that after the Conover decision Congress declined to change the law to permit the OCC from issuing non-depository bank charters and amended the BHCA to codify that non-depositories were not banks for the purposes of the BHCA. However, Congress didn’t also amend the NBA to make it explicit that deposit taking was required, and there is no controlling precedent cited to clarify whether Congress meant to enshrine deposit taking in all cases, or just those relevant to the BHCA.
Continuing the Jazz theme, the CSBS then points to two failed legislative efforts to expand charters to non-depository institutions, the FFSCC Charter Act of 2011 (2011) and the Consumer Credit Access, Innovation and Modernization Act (2012), as evidence that the OCC lacks the authority and Congress doesn’t want to give it to the OCC. However, it is important to note that the bills in question direct the OCC to issue charters. It can be argued that the purpose of the bills was not to give the OCC power it lacked under the NBA, but rather to force it to use that power (under certain conditions) whether to OCC wanted to or not. The CSBS’s position may be right, but it is not clear.
While the CSBS acknowledges that there are limited cases where special purpose non-depository banks are allowed (12 U.S.C. § 27(a — b); 12 U.S.C. §§ 1841(c)(2)(D — F)), it argues that these narrowly tailored exceptions show that the general rule is that deposits are required. CSBS also argues that the OCC’s view that an institution performing one of the following: take deposits, make loans, or pay checks (e.g. money transmission) qualifies for a special purpose bank (12 CFR § 5.20(e)(1)) is overly broad and inconsistent with the depository requirement found in federal law.
All in all it seems to me that the CSBS has colorable arguments that the OCC lacks the authority, but no slam dunk. Instead, these arguments highlight the law’s ambiguity, and frequently ambiguity about an agency’s statute gets resolved in the favor of the federal administrative agency. Which is why the CSBS’s process arguments may prove very important. Why? Well, you will need to read the next installment to find out.