Bank Wars V: The Empire State Strikes Bank
The Office of the Comptroller of the Currency’s (OCC) proposed special purpose bank charter for non-depository fintech firms offering…
The Office of the Comptroller of the Currency’s (OCC) proposed special purpose bank charter for non-depository fintech firms offering lending or money transmission services is controversial. How controversial? So controversial that not only is the Conference of State Bank Supervisors (CSBS) suing the OCC to stop it, but the New York Department of Financial Services (NYDFS) has brought its own suit seeking to stop the charter from moving forward. So what is causing the NYDFS to give the OCC’s efforts a Bronx cheer? Read on.
The NYDFS complaint makes many of the same arguments about why the OCC lacks statutory authority to issue a charter and is infringing on the rights of the states without sufficient Congressional authorization, and why the charter would be bad policy. (The NYDFS suit mentions, but doesn’t really engage with questions of whether the OCC followed the appropriate procedure.) However, the NYDFS puts a unique New York spin to some of the policy arguments and makes at least one new one, which is what we will focus on. We will also look at some possible weaknesses in the NYDFS’s arguments.
First, the NYDFS specifically argues that the OCC’s charter will make money transmission less safe. The NYDFS complaint states, “Bonding requirements, liquidity and capitalization standards, and payment obligations to the New York State Transmission of Money Insurance Fund . . . to protect customers against loss in the event that such an institution fails.” According to the NYDFS, a firm with an OCC fintech charter will not be required to meet those same requirements. Further, because a firm with an OCC charter does not take deposits (and therefore does not have federal deposit insurance) there is even less of a buffer to protect customers if the firm runs out of money.
While this could be a reasonable point, it also seems premature. The OCC has said it will impose sufficient requirements to protect customers if the firm fails. Without knowing what those requirements are the NYDFS can’t be sure they will not be adequate to protect New Yorkers.
Second, the NYDFS argues that the OCC fintech charter would help firms evade New York’s usury laws. Under the National Bank Act (NBA), federally chartered banks can export their home state’s laws governing interest when making loans to residents of other states. The NYDFS argues that the OCC charter would allow chartered marketplace lenders to “gouge” New York borrowers. The NYDFS argues that this would be a “perverse regulatory outcome — which Congress plainly did not authorize”.
Except, Congress did sort of authorize it . . . twice. As previously discussed, the NBA allows nationally chartered banks to export interest rate law. In the interests of competitive equity, Congress granted the same ability to state banks. So Congress is explicitly ok with existing out-of-state banks making loans to New York borrowers, even if those loans would be considered usurious under New York law. Then the question becomes, why would it be ok for deposit-taking banks but not non-depository banks? The NYDFS complaint does not really answer that question.
It is possible that the NYDFS is arguing that more lenders outside the scope of its authority would be bad, since more external lenders might equal more external, harmful loans, which would equal more human misery. But that is a speculative argument that runs contrary to the idea that increased competition generally results in better products, prices, and service. In fact, there is good evidence that New York’s restrictive law is cutting off credit access for borrowers most in need of additional options.
Further, as with the money transmission argument above, the argument is premature. The OCC has made noises that it would limit charter access to “responsible” firms. This may mean the OCC would impose a de facto cap that charter recipients could charge. This would be a bad idea and not supported by the law, but it would address the NYDFS’ concern.
Finally, the NYDFS has argued that the OCC’s fintech charter will harm the NYDFS institutionally by cutting it off from fees. The NYDFS funds itself by assessing fees on regulated entities, including non-depository lenders and money transmitters. The NYDFS argues that firms obtaining an OCC charter instead of being regulated by the NYDFS will deprive it of “crucial resources that are necessary to fund the agency’s regulatory function” and that the charter “pose[s] an insidious threat to the health of New York’s regulatory environment”.
This argument is likely driven more by standing than anything else, since it seeks to show that the NYDFS stands to suffer an institutional harm due to the OCC’s actions. But it might cut against the NYDFS since it also supports the view (held by some) that states’ opposition to the OCC has more to do with protecting the states’ turf and revenue streams than customers.
If state regulators should have control over all of the financial transactions occurring in their state, shouldn’t the law be changed to undo interest rate export for banks? A loan that is “dangerous” if made by a non-depository does not suddenly become “safe” if it is made by a depository instead. The states have yet to explain (at least to my satisfaction) why competitors offering similar products should be subject to different rules. After all, the argument that similar products should be regulated similarly was what state banks used to get interest export on par with national banks.
The NYDFS complaint also inadvertently highlights another policy issue that militates for greater federalization of online financial services regulation. In describing itself, the NYDFS says:
New York is a global financial center and, as a result, DFS is effectively a global financial regulator. (emphasis added)
This displays the political equity problem inherent in state-by-state regulation. The NYDFS is answerable only to the citizens of New York, but its de facto authority extends beyond the state’s borders. This creates a lack of legitimacy. As discussed at length in my recent paper, a more federalized regime (whether through the OCC or some other system) would allow for greater democratic participation and accountability because Congress and the President would have a role to play. That fact doesn’t address whether the OCC’s proposed charter is allowed under current law, but it does highlight that to avoid regulation without representation the OCC’s proposal may have some merit.
The next episode of Bank Wars will likely involve the OCC’s response to one or both of the suits against it, unless someone else sues the OCC, which I hope doesn’t happen since I am running out of titles.