The new special-purpose fintech charter unveiled July 31 by the Office of the Comptroller of the Currency was blasted by state regulators who had already unsuccessfully tried challenging the idea in court.
Conference of State Banking Supervisors President John Ryan called the OCC’s fintech charter “a regulatory train wreck in the making.” New York Department of Financial Services Superintendent Maria Vullo labeled it “an entirely unjustified federal regulatory scheme.”
The CSBS and NYDFS filed separate lawsuits challenging the OCC’s fintech charter proposal last spring. Both cases were dismissed by a federal judge on the grounds that the cases were not ripe because the national bank regulator had not decided whether to issue those charters nor granted an application.
“We expect to see some kind of movement from the states,” Ashley Hutto-Schultz, a Hogan Lovells LLP senior associate who represents fintech firms, told Bloomberg Law in a July 31 phone interview. “I don’t see why they wouldn’t challenge this.”
Both NYDFS and the CSBS said the federal charter would allow marketplace and even payday lenders to get licenses allowing them to operate in states with hard interest rate caps and payday loan bans.
“Let us not forget that the last time the OCC pre-empted state consumer protection laws in a sweeping manner — in the early 2000s — predatory lenders were let off the hook and contributed to the largest number of home foreclosures since the Great Depression,” Ryan of the CSBS said in a July 31 statement.The states had argued in their failed court challenge that the National Bank Act, which the OCC is using as the legal basis for its chartering authority, does not give the OCC the authority to issue the new, nontraditional charter.
That argument remains now that a federal policy in place.
“As DFS has noted since the OCC’s proposal, a national fintech charter will impose an entirely unjustified federal regulatory scheme on an already fully functional and deeply rooted state regulatory landscape,” Vullo said in a July 31 statement.
Neither Vullo nor Ryan said they were definitely going to refile their cases, but that remains likely.
Vullo is considering her options at this point, a spokeswoman for the DFS said.
It appears that the OCC took the litigation threat into account when it designed the fintech charter by mandating potentially stringent financial inclusion, capital and liquidity and contingency planning requirements for applicants.
A key tell is the repeated use of the phrase “consistent banking standards” when describing how those requirements will work.
“This charter, while special, is very closely aligned with existing bank charters, and that helps the OCC stay within its authority,” Scott Talbott, the senior vice president of government affairs at the Electronic Transactions Association, told Bloomberg Law in a July 31 phone interview.
Still, even if the OCC fintech charter is crafted to be almost litigation-proof, states will likely file their lawsuits once the OCC is considering its first application. That could drive off some potential applicants who do not want to get tied up in the legal fight, Justin Slaughter, a partner with Mercury Strategies who advises fintech firms, told Bloomberg Law.
“No one ever wants to be the test case,” he said in a July 31 phone interview.
Despite that risk, there is a demand for the charter, and some company will have to go first. The most likely candidate will be a mature company that can handle the delay, Hutto-Schultz said.
“It would be a company that, by applying, wouldn’t necessarily be putting their businesses on hold for months,” she said.
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