New York Bank Regulator Seconds Challenge to OCC Fintech Bank Charter

Trailing the Conference of State Bank Supervisors (CSBS) April lawsuit opposing the Office of the Comptroller of the Currency’s (OCC) Fintech national bank charter, the New York Department of Financial Services (DFS) filed its own suit on May 12 challenging the OCC’s decision to grant bank charters to financial technology companies engaged in lending and payments-related activities. 

Does the “Business of Banking” Mandate Accepting Deposits?

The key thrust of the DFS and CSBS’ legal arguments centers on the OCC’s authority to charter national banks that are engaged in the “business of banking.” The OCC and CSBS contend that to be engaged in the “business of banking,” a financial services company must accept deposits, unless expressly authorized otherwise by Congress by statute as is the case for trust banks, bankers’ banks, and credit card banks.^[1] In response to similar comments received on its white paper,the OCC counters that it has correctly interpreted its authority to grant bank charters under the National Bank Act in its 2003 rulemaking, which provides that the OCC may grant charters to applicants that either accept deposits, pay checks (the OCC interprets “paying checks” as encompassing various payments activities) or make loans.^[2] The Fintech charter would have lending and payments-related powers, but not the authority to take deposits. The crux of the DFS and CSBS suits is, because Fintech charters would not take deposits, OCC rulemaking is not enough – congressional action is necessary. The DFS and CSBS’ suits are the first court challenges to this rule. Generally speaking, government agencies, like the OCC, enjoy judicial deference to their legal interpretations.

Does the Fintech Charter Compromise or Promote Consumer Protection?

The DFS also makes a public policy argument, professing in its press release that the OCC’s Fintech charter would put New York consumers at risk of exploitation by federally chartered financial technology companies seeking to be “insulated” from New York’s consumer protections.^[3] In its complaint, the DFS charges that companies could, by obtaining the Fintech charter, engage in predatory lending by becoming “immune through federal preemption rules from New York’s . . . strong consumer protection laws (such as tough anti-usury laws, interest rate caps, and prohibitions on pay-day lending schemes).”^[4]

Again responding to the same concerns expressed by some commenters on its white paper, the OCC  states that it has taken steps to eliminate predatory, unfair, or deceptive practices in lending by requiring national banks engaged in lending to take into account the borrower’s ability to repay his or her loan according to its terms.^[5] Also, the OCC indicates that it will take appropriate supervisory action against national banks, including Fintech charters, that impermissibly “target prospective borrowers who cannot afford credit on the terms being offered, provide inadequate disclosures of the true costs and risks of transactions, involve loans with high fees and frequent renewals, or constitute loan ‘flipping.’”^[6] 

The OCC has informed potential Fintech charter applicants that the required financial inclusion portion of their business plans must show how “the applicant will provide fair access to financial services and promote fair treatment of customers.”^[7] In its white paper, the OCC suggests that “financial inclusion” means that “individuals and businesses have access to useful and affordable financial products and services that meet their needs.”^[8] 

The OCC believes that making Fintech charters available to qualified financial technology companies is in the public interest. “According to the OCC, the Fintech charter provides a framework of uniform standards and robust supervision for companies that qualify. Applying this framework to fintech companies would help ensure that they operate in a safe and sound manner and fairly serve the needs of consumers, businesses, and communities.”^[9] Additionally, “the OCC believes supervision by a federal regulator would promote consistency in the application of federal laws and regulations across the country.”^[10]

Without qualification, the OCC states that it will not approve Fintech charter applications from any company that plans to offer financial products and services with predatory, unfair, or deceptive features.^[11]  

Is There a Path Forward to Regulate Financial Technology Companies?

Naturally, the DFS and CSBS are pushing back at the OCC’s attempt to supervise lenders and payments companies traditionally licensed and regulated by the states. New York currently supervises close to 900 financial services licensees, including banks, lenders, mortgage lenders and servicers, sales and premium finance companies, pre-paid card issuers, money transmitters, virtual currency businesses, and check cashers.^[12] At this time, it can take a financial technology company over a year to obtain state lender or money transmitter licenses on a 50-state basis and can cost over $500,000. The DFS’ license approval timing is historically the slowest among the states, in some cases taking as long as a year and a half to process and approve mortgage lender license applications. Rather than engage in a legal match of tug of war over who should regulate the next generation of financial service providers, perhaps more regulator time, energy and resources should be placed on creating an environment that encourages and keeps pace with innovation by incumbents and newcomers, all the while consistent with safety and soundness and practical and adequate consumer protections.

The OCC’s Fintech charter has spurred the CSBS to reexamine its regulation of financial technology companies. Two weeks ago, the CSBS announced Vision 2020, a series of initiatives to modernize state regulation of nonbanks, including financial technology companies. The initiatives are aimed at “harmonizing” multistate licensing and supervision, including building a common technology platform for state examinations.^[13] The CSBS is hopeful that the ultimate completion of the initiatives “should result in a regulatory system that makes supervision more efficient and recognizes standards across state lines – actions that will better support start-ups and enable national scale while protecting consumers and the financial system.”^[14]

The hallmark of banking in the United States is the dual banking system, that is, parallel state and federal banking systems that co-exist. Banks can either be federally or state chartered and can switch their charters, resulting in competition among state and federal regulators to attract and retain charters. Through the years, when state and federal regulators saw banks and their customers migrating from one charter to the other, they responded by improving relationships with their banks and licensees and enhancing the ability of the financial institutions they supervise to provide services that customers want. This is a big reason why there have been so many innovations in financial services in the last 50 years. 

In the end, one measure of the quality of financial services regulation should be its effectiveness in facilitating the ability of financial institutions to serve their customers in a fair manner through competition in a way that benefits all customers. Implementing both the OCC’s Fintech charter and the CSBS’ Vision 2020 would help financial institutions measure up to what customers want and further the principles of our dual banking system. 

According to PitchBook and SNL, Goodwin is one of the 5 most active U.S. law firms advising on publicly disclosed Fintech deals, and has represented more than 25% of companies on the 2016 Forbes Fintech 50 list. With over 200 lawyers practicing in Financial Institutions and Technology, we have experts in every area of Fintech, including Alternative Lending, Payments, Digital Currency and Blockchain Technology, Wealth Management/Advising, Insurance, Bank Charters and Partnerships, and Transactions.