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Fintech Special Purpose National Bank Charter Moves Closer to Reality

June 21, 2018, 07:00 AM

The Office of the Comptroller of the Currency (OCC), having recently defeated a second lawsuit challenging its authority to issue special purpose national bank (SPNB) charters to nondepository fintech companies, appears close to reaching a decision on whether it will move forward on its December 2016 proposal to issue such charters.  According to media reports, Comptroller Joseph Otting recently stated that the OCC expects to announce its decision on whether it will issue the charters in July 2018.

In May 2018, a D.C. federal district court dismissed the lawsuit filed by the Conference of State Bank Supervisors (CSBS) in April 2017 challenging the OCC’s authority to issue SPNB charters to nondepository companies.  That dismissal followed the December 2017 dismissal by a New York federal district court of a lawsuit filed by the New York Department of Financial Services (DFS) that also challenged the OCC’s authority to grant SPNB charters.  The D.C. court found that the CSBS had failed to establish any injury in fact necessary for Article III standing and that the case was not ripe for judicial review, which were the same grounds on which the New York federal court dismissed the DFS lawsuit.

In dismissing the CSBS lawsuit, the D.C. federal court observed that all of the potential injuries identified by the CSBS in its complaint were contingent on whether the OCC charters a fintech company and that a chain of speculative events had to occur before a charter was issued, including the OCC’s finalization of the procedures for applying for a SPNB charter and a decision by the OCC to grant a charter to a fintech company.  As a result, the CSBS had failed to establish an injury in fact to a CSBS member under the test that a threatened injury was “certainly impending” or under the test that there was “substantial risk” that such injury would occur.  (The court observed that “there was no doubt” if the OCC were to charter a fintech company, “then that national charter would preempt conflicting state laws” and would allow an impacted state to allege an injury in fact.”)

With regard to ripeness, the court concluded that the CSBS’s claims were neither constitutionally nor prudentially ripe.  According to the court, the claims were not constitutionally ripe for the same reason that Article III standing was lacking–namely, the CSBS had not established an injury in fact.

The court also found that the claims were not prudentially ripe. In its view, because “the recent leadership changes at the OCC [make] it particularly speculative to guess whether the OCC will continue down paths considered by a previous Comptroller,” the OCC’s actions were not yet “sufficiently settled to be fit for review.”  The court further found that the legal issues presented by the dispute were unfit for review before the OCC had made a decision “to adopt and apply a regulatory scheme to a particular Fintech charter.”  According to the court, at that point “the agency action will become sufficiently settled and courts will have a more concrete setting to resolve the legal disputes.”

Finally, the court found that the CSBS had failed to show that delay in obtaining a decision would cause it hardship, with the court observing that there would be “hardship to the OCC if each minor step towards a potential agency policy were litigated one-by-one as the policy becomes more settled.”

As the D.C. federal court observed in dismissing the CSBS lawsuit, the OCC has not yet announced a final decision on whether it will move forward with its SPNB charter proposal. The OCC's decision to defend its authority to issue SPNB charters in the two lawsuits was made under Acting Comptroller Keith Noreika’s leadership.  Since taking over the OCC's leadership from Mr. Noreika in November 2017, Comptroller Otting has not taken a yet taken a public position on the charter proposal.  However, in public remarks, he has been dismissive of the argument made by opponents of the proposal that it may lead to an inappropriate mixing of banking and commerce and has questioned the continuing need for the current barriers between banking and commerce.

In addition to giving a July 2018 timetable for the OCC's decision on the charter proposal, Otting is reported to have indicated that there has been a loss of interest in obtaining a SPNB charter once potential applicants have learned more about the process for becoming a bank. Otting is also reported to have indicated that such loss of interest has resulted in a greater focus on bank partnerships by potential charter applicants.  In such partnerships, a bank can use its authority to originate loans under federal law to export a uniform interest rate nationwide from the state where the bank is located.

Photos of Partners Alan S. Kaplinsky and Scott M. Pearson of Ballard Spahr

Alan S. Kaplinsky & Scott M. Pearson
Partner | Ballard Spahr
Alan S. Kaplinsky is Co-Practice Leader of Ballard Spahr's Consumer Financial Services Group, which has more than 115 lawyers. He devotes his practice exclusively to counseling financial institutions on bank regulatory and transactional matters, particularly consumer financial services law, and defending financial institutions that have been sued by consumers in individual and class action lawsuits and by government enforcement agencies.

Scott Pearson focuses his practice on the defense of regulatory enforcement actions and class actions, other complex business litigation, and regulatory compliance counseling. He leads Ballard Spahr's Marketplace Lending Team, which focuses on the representation of Fintech companies and their business partners. He is widely recognized as one of the preeminent authorities on the unique issues facing that industry.
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