Bank Wars: The Empire Setback
The New York Department of Financial Services (NYDFS) suffered a setback in its effort to prevent the Office of the Comptroller of the…
The New York Department of Financial Services (NYDFS) suffered a setback in its effort to prevent the Office of the Comptroller of the Currency (OCC) from issuing special purpose national bank (SPNB) charters to fintech firms today. Judge Buchwald of the Southern District of New York dismissed the NYDFS’s case because the court lacked subject matter jurisdiction. While this is a blow to the NYDFS’s efforts, it is not necessarily fatal, and the NYDFS may still prevail, even if it doesn’t win at court.
If you will recall, the OCC asked the court to dismiss the NYDFS case because it was premature. The OCC argued that since it hadn’t issued a charter, or even finalized the requirements the OCC’s actions couldn’t have hurt the NYDFS and therefore there was not a sufficiently concrete risk of harm for the court to have jurisdiction. After all, courts don’t take cases on mere speculation that a harm may occur.
The court agreed that the case should be dismissed because “the OCC has not reached a final ‘Fintech Charter Decision’…plaintiff has suffered no injury in fact as required for Article III standing and because Plaintiff’s claims are not ripe.” You can read the decision for the in-depth legal reasoning but the upshot is that the court did not hold that the OCC is right on the law, it concluded only that the OCC hasn’t done anything that could give the court the ability to hear the case.
Although the NYDFS’s case goes away for the time being, it doesn’t mean smooth sailing for the OCC’s fintech charter. If the OCC actually proceeds to finalize the requirements and decides to offer charters, the NYDFS will be able to file a new suit and the process will begin anew. In other words, a NYDFS lawsuit has not been removed from the realm of possibility, only delayed; a potential lawsuit sits like a landmine in the OCC’s path.
Even with this defeat, the NYDFS has several potential options if it wants to prevent the OCC from issuing a non-depository charter:
1. Appeal the court’s decision. The NYDFS could go to the United States Court of Appeals for the Second Circuit and try to get the judge’s decision reversed. A successful appeal would allow the case to proceed, but the OCC also moved to dismiss the case on the grounds that the NYDFS failed to state a claim for which relief could be granted because the OCC hadn’t completed a final agency action and because the OCC has the right to issue charters under the law. As such, a win at the Second Circuit wouldn’t mean final victory for the NYDFS, but they may be able to get to the merits of whether the OCC can issue fintech charters.
2. Wait for the CSBS case. Remember the Conference of State Bank Supervisors (CSBS) and its lawsuit against the OCC for the exact same thing? Well, it is still live. The OCC has moved to dismiss the suit for the same reasons, but so far the judge (a different one than the one in the NYDFS case) hasn’t ruled on that motion. If the CSBS has better luck than the NYDFS and wins, then the OCC will be prohibited from issuing fintech charters (subject to appeal) and the NYDFS gets its desired outcome without further litigation on its part.
3. Wait for the OCC to progress. The NYDFS could also wait and see if the OCC finalizes the fintech charter and renew the suit then. It is possible that the new leadership at the OCC is less invested in the idea than former Comptroller Curry and will be content to let the charter languish in limbo. The threat of a lawsuit may encourage the OCC not to act in a way an actual ongoing lawsuit may not. If the OCC is forced to choose between defending its ability to issue non-depository charters and surrendering it, the OCC might fight it out. If the OCC wins it may be more inclined to use a power it knows it has. If on the other hand there is the mere threat of a suit but the question of whether the OCC has a certain power is left unresolved, the OCC may be willing to not push the issue for a policy it is not particularly invested in. Of course, if the CSBS lawsuit forces the question, it won’t matter that the NYDFS waited, but if the CSBS’ suit gets dismissed as premature as well, it may behoove the states to let sleeping dogs lie.
4. Sue to undo 12 CFR 5.20(e)(1). The OCC bases its authority to issue a non-depository fintech charter on 12 CFR 5.20(e)(1), which says that a Special Purpose National Bank must either engage in fiduciary activities or one of the following: deposits, lending, or paying checks (read as money transmission). The NYDFS/CSBS position is that this regulation represents OCC overreach and that absent a statutory carve-out, national banks must be depositories. Even if threatening a suit is enough to dissuade the OCC now, a future Comptroller may want to move forward on a fintech charter or other non-depository innovation. Undoing 12 CFR 5.20(e)(1) would significantly hamper the ability to do so. While the OCC has argued that it is too late to challenge 12 CFR 5.20(e)(1) the CSBS has argued that filing a petition for amendment or rescission would reopen the regulation to suit. Presumably the NYDFS could do the same. A suit over 12 CFR 5.20(e)(1) would not be about the fintech charter per se, but it would directly threaten the OCC’s authority to issue such a charter.
As you can see, while the NYDFS has lost the battle, it is far from clear that New York will lose the war, if you define victory is the OCC not actually issuing non-depository fintech charters. Just as the Empire struck back after the Rebel Alliance destroyed the Death Star, NYDFS is likely to press ahead.
Of course, the NYDFS could also lay down its arms and accept the innovation the OCC charter represents. Rather than fighting progress, New York could petition Congress to grant greater powers for state licensed and chartered entities so that they could compete on more equal regulatory footing with national banks. I won’t hold my breath, but it would be a wonderful holiday gift to see the end of the Bank Wars.