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Bank Wars Episode VIII: The next to last filing (maybe)
On September 13th the Conference of State Bank Supervisors (CSBS) filed a memorandum of law opposing the OCC’s motion to dismiss. The CSBS seeks to rebut (1) the OCC’s argument that the CSBS’ lawsuit should be dismissed because it is untimely; and (2) the OCC’s further contention that even if the challenge isn’t premature, the OCC has the authority to offer non-depository fintech charters anyway. As one might expect, the CSBS’ arguments closely follow those it made in its initial complaint and try to poke holes in the OCC’s arguments. We will cover some of the CSBS’ arguments briefly below, but I suggest you read the CSBS’ memo because there is a lot going on.
If you will recall, the OCC’s argument that the CSBS’ case should be dismissed fell into two general buckets: procedural and substantive. The procedural arguments were that the CSBS’ suit was untimely because the OCC hadn’t done anything sufficiently final on the fintech charter to harm the CSBS or its members and the window to sue over the underlying regulation had closed. The OCC’s substantive argument was that it has the necessary authority under the National Bank Act (NBA) to issue a non-depository charter. The CSBS response addresses both types of arguments.
In response to the OCC’s argument that the CSBS lacks standing, the CSBS counters by arguing that its members have in fact been harmed by the announcement of the charter. Even though the OCC has not yet issued a charter, the possibility that one will be issued is casting doubt on the states’ ability to enforce their laws. The CSBS argues that states are entitled to “special solicitude” for standing purposes when they are suing to vindicate their sovereign interests. The CSBS further argues that the OCC has announced its intent to launch a non-depository charter creates a “substantial risk” that the states will be harmed. While the OCC had sought to use Acting Comptroller Noreika’s July speech — which came after the CSBS filed suit — to emphasize the inchoate nature of the charter, the CSBS argues that standing is determined at the time the complaint is filed. Any subsequent efforts by the OCC to undermine standing by making the charter a less certain proposition (without fully renouncing it) are unavailing. Further, since the CSBS has plausibly pled that the OCC’s actions have injured its members, the causation and redress prongs for standing naturally follow: the OCC’s actions caused the harm and the court stopping the OCC would address the harm. The CSBS also argues that it has standing for its claim that the OCC failed to follow the appropriate procedure in establishing the charter.
The OCC argued that since it has not finalized the non-depository charter, the CSBS’ lawsuit is premature. After all, how do we know if the OCC’s charter is illegal if we don’t know exactly what it is? In response, the CSBS argues that at the time the complaint was filed the OCC’s charter was final enough. The CSBS argues that 12 CFR 5.20(e)(1), the regulation the OCC uses as a basis for the non-depository charter is final, which is true. It also argues that the OCC’s announced plan to issue a non-depository charter was final enough to be sued over. The CSBS’s position is that while there may be some uncertainty as to exactly what the charter will entail, there is certainty on the part the CSBS wants to sue over, namely the non-depository character of the charter. The CSBS argues that the OCC’s subsequent statements that it has not decided whether to issue a non-depository charter are not sufficient to defeat finality. Finality is determined at the time the complaint was filed, and at least according to the CSBS, the OCC has not backed off the non-depository nature of the charter. The CSBS also argues that it makes sense for the court to treat the issue as final since waiting for a charter to actually be issued before the CSBS could sue might strand companies that obtained a charter if the charter was later found to be invalid.
While the OCC contends that the case is not yet ripe since it had not finalized the requirements for or issued a charter, the CSBS disagrees. As with finality, the CSBS argues that the issue is sufficiently developed that the court could address it now. In particular, the CSBS argues that the question of whether the OCC could issue a non-depository bank charter under its 5.20(e)(1) regulation is a question of law that the court could review without having to wait for a charter to actually be issued. The CSBS also argues that the OCC has failed to offer a compelling reason why the court should delay in hearing the case.
Recall that the OCC argued that any challenge of the legitimacy of 12 CFR 5.20(e)(1) itself was time barred because the statute of limitations had expired. The CSBS disagrees. The CSBS argues that because the non-depository charter relies on 5.20(e)(1) the CSBS may challenge the rule’s legitimacy under the “application exception” to the statute of limitations. Further, the CSBS argues that the OCC reopened 5.20(e)(1) to challenge by soliciting feedback on the non-depository charter, since that charter is the first use of the power it claims. The CSBS also argues that by basing the non-depository charter on the rule the OCC significantly changed the “stakes” of the rule, and the CSBS should be allowed to challenge that move. Finally, the CSBS argues that because it could reopen 5.20(e)(1) to challenge by filing a petition with the agency for amendment or rescission, the court should just cut to the chase and allow the CSBS to challenge the rule now.
The OCC is not entitled to Chevron Deference
The OCC had argued that because the definition of “business of banking” in the National Bank Act (NBA) was ambiguous, the court should defer to the OCC’s interpretation. The CSBS argues that the meaning of “business of banking” (BoB) is not actually ambiguous when looked at in context. The CSBS argues that if the court were to look at the entire statutory scheme surrounding bank regulation it is clear that Congress considers deposit taking to be an essential component of banking. The CSBS points to the Federal Deposit Insurance Act (FDIA), Federal Reserve Act (FRA), and Bank Holding Company Act (BHCA), which the CSBS argues all contain provisions defining banking as involving a depository (with some explicit statutory carve-outs that would not cover the OCC’s proposed charter). The CSBS argues that these other statutes should inform the court’s interpretation of what BoB means.
The CSBS also makes a related argument that even if BoB in the NBA may have included non-depository banks, it also requires that a bank’s operation not be inconsistent with the law to obtain a charter. The CSBS argues that Congress, by defining banking as deposit taking in other statutes, has foreclosed the possibility of the type of non-depository charter the OCC proposes.
Courts have struck down previous attempts by the OCC to charter non-depository banks
The CSBS again refers to previous cases where a trial court struck down an attempt by the OCC to charter a non-depository bank. While the cases are not controlling precedent the CSBS points to them as evidence that the OCC requires explicit Congressional approval to charter a bank.
The OCC is wrong to focus on the “outer-limits” of the business of banking
Responding to the cases the OCC cited for the proposition that it has flexibility in determining the scope of what constitutes BoB, the CSBS argues that those cases dealt with the “outer-limits” of banking, not the “inner-limits”. The question shouldn’t be whether the OCC can empower banks to incorporate lines of business outside the traditional scope of banking, but whether the OCC can, without Congress, grant a bank charter to a firm that does not engage in core banking functions. According the CSBS, the cases the OCC cites do not speak to the latter question.
Additionally, the CSBS argues that the OCC’s argument conflates the definition of a branch with the definition of a bank. While a bank need not perform every core function at every branch, the bank must perform core functions to be a bank.
The CSBS’ 10th Amendment claim is valid
The CSBS argues that the NBA does not support the OCC’s effort to create a non-depository charter that would preempt some state laws. While the OCC is right that the NBA displaces state law where the laws conflict, here the laws do not conflict. The CSBS then argues that the OCC cannot, on its own, preempt state law.
The OCC was required to go through notice-and-comment rulemaking
Finally the CSBS argues that, at a minimum, the OCC was required to go through notice-and-comment rulemaking to promulgate a non-depository charter.
The OCC’s response is due in early October. After that we will get to wait on the court’s decision, which will bring an end to the first battle, but not the Bank Wars will undoubtedly continue.