New York Challenge to Federal Fintech Charter Dismissed

By Chris Bruce and Lydia Beyoud

A federal judge Dec. 12 dismissed claims by New York bank regulators that U.S. banking authorities can’t issue special charters for financial technology companies, calling the lawsuit premature.

The ruling by Judge Naomi Reice Buchwald of the U.S. District Court for the Southern District of New York marks a victory for the Office of the Comptroller of the Currency, and shifts the focus to a separate challenge against the OCC brought by the Conference of State Bank Supervisors (CSBS).

At issue is a lawsuit by New York Department of Financial Services Superintendent Maria T. Vullo. She sued the OCC in May, challenging an OCC fintech initiative that discussed whether the agency might grant special-purpose national bank (SPNB) charters to financial technology companies.

The New York lawsuit said the OCC’s “Fintech Charter Decision” exceeds the OCC’s authority and that it’s therefore without effect, and that it violates the 10th Amendment to the U.S. Constitution. However, Buchwald dismissed the suit, agreeing with the OCC that the court lacks subject matter jurisdiction because the agency hasn’t yet taken final action that’s reviewable by a court.

“All three of plaintiff’s claims are grounded on the premise that there is a `Fintech Charter Decision’ subject to challenge,” Buchwald said. “However, the OCC has not yet determined whether it will issue SPNB charters to fintech companies, nor has it received or reviewed any applications for any such charter.”

Even so, Buchwald said it would be “sensible” for the OCC to alert New York when it does reach a final decision. Her decision didn’t touch a separate question—whether the OCC has authority to issue fintech charters under the National Bank Act.

New York Responds

Vullo picked up on both of those points in a Dec. 12 statement, citing the court’s “careful consideration of this important matter.”

“Given the OCC’s statements since DFS filed this suit, we hope that the OCC will abandon its pursuit of the chartering of nondepository institutions,” Vullo said.

The decision likely shifts the focus to a separate case now before Judge Dabney L. Friedrich of the U.S. District Court for the District of Columbia. The CSBS filed that challenge in April, just a few weeks before Vullo sued the OCC. It also says the OCC lacks authority to issue special-purpose charters for fintech companies.

The OCC has also moved to dismiss that suit, saying the court doesn’t have jurisdiction because the agency hasn’t taken final action. However, the CSBS says it has alleged final action by the OCC. The regulation cited by the OCC in its relevant fintech initiative is final, and the OCC’s actions “reflect the agency’s definitive legal position on a purely legal question of statutory authority,” the CSBS said in a September filing that opposed the OCC’s motion to dismiss. The CSBS has asked the court to schedule argument, but there’s no ruling on that request so far.

The group said Dec. 12 that it stands by its arguments in the District of Columbia. “At the end of the day, we are confident that the courts will determine that Congress has not given the OCC this authority,” CSBS Senior Vice President and Deputy General Counsel Margaret Liu told Bloomberg Law.

Brian Knight, Senior Research Fellow for the Financial Markets Working Group at the Mercatus Center at George Mason University, said Buchwald’s ruling doesn’t bind the District of Columbia court, but could have persuasive authority.

“This decision doesn’t have any precedential effect on the D.C. District Court judges,” he said. “So that judge could disagree and say there is jurisdiction and deny the motion to dismiss. That said, having this decision out there may be persuasive.”

The charter initiative was the brainchild of former Comptroller Thomas Curry, an Obama-era appointee who left earlier this year. Comptroller Joseph Otting, who was confirmed last month, hasn’t publicly commented on his views about a bank-like charter for fintech lenders.

“The new comptroller will have to determine if he agrees with his predecessor’s point of view on whether the special purpose charter is appropriate and whether the white paper and proposals are consistent with his own frame of mind on a fintech charter,” said Peter Dugas, Managing Principal of Regulatory Intelligence at advisory firm Capco.

Case: Vullo v. Office of the Comptroller of the Currency , S.D.N.Y., 17-cv-03574, 12/12/17

To contact the reporters on this story: Chris Bruce in Washington at cbruce@bloomberglaw.com and Lydia Beyoud in Washington at lbeyoud@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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