Second Circuit grapples with standing in case challenging OCC’s fintech charter

On March 9, a three-judge panel of the Second Circuit heard oral argument on the question of whether the OCC can legally issue national bank charters to non-depository financial technology (fintech) firms. The case is Lacewell v. Office of the Comptroller of the Currency, and its resolution could determine whether the fintech charter program, which has been mired in legal challenges since it was announced in 2018, emerges as a viable option for fintech firms.

If the court rules on the question of whether the “business of banking” under the National Bank Act requires deposit taking, this should provide clarity on whether the fintech charter program has legs. On the other hand, if the court finds a lack of standing in the case without addressing the question of what constitutes the “business of banking,” the fintech charter program will remain in legal limbo. The line of questioning from the panel of judges focused on the standing question, but there was no clear indication which way the court may go in its opinion expected later this year. We previously wrote about the charter proposal and legal challenges to it here and here.

The OCC fintech charter program is at the center of the current tug-of-war between state and federal regulators for supervisory authority over fintech firms offering loans and payments solutions. The states have traditionally licensed and supervised such firms as consumer lenders and money transmitters. With the preemption privileges of a national bank charter, fintech firms could side-step state licensure and regulatory requirements.

The New York Department of Financial Services (NY DFS) and the Conference of State Bank Supervisors (CSBS) filed separate, though similar, suits alleging that the fintech charter program exceeded the OCC’s authority to charter national banks under the National Bank Act. The Act authorizes the OCC to issue charters to entities engaged in the “business of banking”, a phrase that the DFS and the CSBS, as well as consumer advocacy groups, have interpreted as requiring deposit taking.

The CSBS suit was dismissed on ripeness grounds, but the NY DFS suit was allowed to continue and resulted in a ruling in favor of the NY DFS in the District Court for the Southern District of New York. The OCC appealed to the Second Circuit.

The oral argument held on Tuesday indicates that the ripeness issue remains front and center. The panel focused on the fact that the OCC has yet to receive a formal charter application and repeatedly pressed New York Solicitor General Barbara Underwood, representing the NY DFS, to articulate an actual or imminent harm. In response, Underwood stated that harm was imminent because there was no indication that the charter program would not go forward, and the NY DFS would be obliged to monitor the migration of state-regulated entities to OCC supervision and accelerate ongoing enforcement actions ahead of that migration.

Underwood discounted the significance of the OCC’s not having received a formal application, a step which she noted usually occurs later in the chartering process, after an extended period of behind-the-scenes consultation between the applicant and the agency. Representing the OCC, Christopher Connolly with the U.S. Attorney’s Office for the Southern District of New York did not give a specific timeframe but said that the time from receipt of a formal application to issuance could be “measured in months” and that preliminary, conditional approval of a charter application would be the earliest point at which harm could be considered imminent.

The Second Circuit panel’s questioning indicated a strong desire to have the record developed more fully on the issue of how close the OCC is to receiving a formal application and issuing a charter. The judges struggled with the lack of concrete examples of applicants’ business models to inform their decision and complained that the litigants appeared to be asking…