Association of State Regulators Sues to Enjoin OCC's Fintech Special-Purpose National Bank Charters

Financial Industry Alert | May.03.2017

Last week, a group of state regulators, the Conference of State Bank Supervisors ("CSBS"), filed suit in the U.S. District Court for the District of Columbia seeking to enjoin the Office of the Comptroller of the Currency ("OCC") from issuing special-purpose national bank charters to non-depository fintech companies.  The OCC first proposed such charters in a white paper last December, and moved forward with a draft licensing manual in March after soliciting public feedback.

CSBS seeks an injunction on four grounds:

  • The complaint argues that the OCC lacks statutory authority to charter non-depository fintech companies.  As a general matter, the National Bank Act authorizes charters only for institutions engaged in "the business of banking," a term the statute does not comprehensively define.  12 U.S.C. § 24.  In 2003, the OCC promulgated a regulation construing "the business of banking" to require just one of three "core banking functions"—receiving deposits, paying checks, or lending money.  12 C.F.R. 5.21(e)(1).

According to the complaint, the OCC's regulation—and, by extension, special-purpose charters for non-depository fintech companies —is impermissibly broad.  CSBS asserts that the statutory phrase "the business of banking" necessarily requires that the chartered entity receive deposits.  In support of that construction, the CSBS points to amendments to the NBA that expressly authorize charters for select non-depository institutions—amendments that would purportedly have been unnecessary if the institutions were otherwise eligible for charters. 

  • For similar reasons, the complaint contends that the states retain regulatory authority over non-depository fintech companies under the Tenth Amendment to the U.S. Constitution because Congress has not preempted that authority.
  • The complaint also alleges that the OCC violated the Administrative Procedure Act ("APA") by developing its special-purpose charter framework through deficient procedures.  In the CSBS's view, that framework constitutes an agency rule and must be promulgated through formal notice-and-comment rulemaking—not merely a white paper paired with public feedback.
  • Finally, the complaint argues that the OCC separately violated the APA by failing to offer a reasoned decision.  According to the CSBS, the agency neglected to conduct an adequate cost-benefit analysis or consider significant concerns raised by the public—shortcomings that CSBS contends render the OCC's decision arbitrary and capricious.
The CSBS may face a threshold challenge to the ripeness of its lawsuit, which it commenced before the OCC began formally considering applications or issuing special-purpose charters.  Assuming it survives that challenge, the suit will likely hinge on several issues of administrative law.   For example, if the court decides that the OCC's 2003 regulation is entitled to deference, it would likely reject the agency's interpretation of "the business of banking" only if the court determined the agency reading to be unreasonable—a high bar in light of the NBA's ambiguities.