Comptroller of the Currency Joseph Otting has not weighed in on the fate of a fintech charter yet, but the ball is now squarely in his court.
The agency that Otting was just appointed to run scored a victory earlier week when a judge dismissed a lawsuit from the New York Department of Financial Services, which had challenged the Office of the Comptroller of the Currency's authority to create a charter for fintech firms.
But that victory may set up future legal challenges. U.S. District Court Judge Naomi Reice Buchwald said the case was merely premature since the OCC has not actually granted a charter yet. That raises the prospect of the case returning if the OCC moves ahead. Meanwhile, a separate legal challenge by the Conference of State Bank Supervisors is still pending.
Former acting Comptroller Keith Noreika, who was at the helm of the agency when the lawsuit was filed, said the decision is a benefit to the OCC, which can now focus on which direction it wants to take with the fintech policy without having to simultaneously fight the case.
"This sort of takes a little of pressure off the OCC so they can decide how they want to proceed," said Noreika. "The judge did the right thing. There wasn't anything yet there to decide."
Yet others said the decision really just kicks the can down the road, especially if the OCC decides to charter fintech firms.
"If the OCC actually proceeds to finalize the requirements and decides to offer charters, the NYDFS will be able to file a new suit and the process will begin anew," Brian Knight, a senior research fellow at the Mercatus Center at George Mason University, wrote in a blog post. "In other words, a NYDFS lawsuit has not been removed from the realm of possibility, only delayed; a potential lawsuit sits like a landmine in the OCC’s path."
The mere possibility of granting bank-like powers to fintech providers such as online lenders or nonbank payments companies has opened a can of worms. The OCC's policy proposal, which was first unveiled by former Comptroller Thomas Curry, not only reveals fissures between the federal agency and states — which now regulate fintech firms — but also raises more competitive questions for banks trying to keep pace with nonbank rivals.
Observers are also watching for whether the dismissal of the N.Y. DFS case will impact the separate lawsuit brought by CSBS, which sued the OCC in April. Both lawsuits argued that the National Bank Act did not provide the agency with statutory authority to create a special-purpose charter for fintech firms.
Some expect the CSBS suit could be dismissed for the same reason as the DFS case was — because the OCC has not taken any action yet on a fintech charter. But that scenario means continued uncertainty over the OCC's legal backing to proceed.
"If the CSBS lawsuit also gets dismissed for a lack of jurisdiction, then the question of whether or not the OCC has the authority to issue special purpose non-depository charters is up in the air," said Knight, of the Mercatus Center, in an interview.
Both N.Y. DFS and the CSBS have claimed that the National Bank Act gives the OCC the authority to charter only those firms engaged in the "business of banking." The states claim that the OCC would need "specific Congressional approval" to create a charter for non-depository institutions.
Margaret Liu, a senior vice president and deputy general counsel at CSBS, said in a statement following the dismissal of the N.Y. DFS suit that the states are confident the courts "will determine that Congress has not given the OCC this authority."
But both Noreika and Curry have said the OCC has the legal power to offer a fintech charter. They cite an amendment to a 2003 final banking rule that provides that a national bank "may be a special purpose bank that limits its activities to fiduciary activities or to any other activities within the business of banking.”
The states' argument is also complicated by the fact that the OCC rule they are citing became effective in 2004, and has a six-year statute of limitations under the Administrative Procedure Act.
States have argued that a fintech charter would preempt their authority to impose consumer protection requirements, such as usury caps, on fintech companies seeking to get a national bank charter.
The states also have a financial incentive since their operations are funded, in part, by assessments levied on state-licensed financial institutions. If a fintech firm received an OCC charter in place of a state license, it would deprive the states of operating expenses, state regulators claim.
In dismissing the N.Y. DFS lawsuit, Buchwald said the department was challenging the charter too early in the process.
"Claims are not ripe if they depend on the occurrence of contingent future events that may never occur at all," the judge wrote.
She suggested that the OCC should provide N.Y. DFS "with notice as soon as it reaches a final decision given DFS's stated intention to pursue these issues and in consideration of potential applicants whose interests would be served by the timely resolution of any legal challenges."
That is seen as meaning that a legal challenge to the OCC's fintech charter will still come up at some point.
"There is no indication that the OCC was infinitely ready to use it for a fintech charter, so the question becomes, when the OCC is open for business to grant a fintech charter, it allows [the states] to come back and challenge based on the merits," Noreika said.
In the meantime, the OCC has some options. The agency could issue final agency guidance on a fintech charter or it could grant a fintech license and then the states would file suit again.
"The OCC is going to have this choice either of fighting to protect their authority or telegraphing and acknowledging that they don't have the authority to do this," Knight said. "If the OCC views the fintech as something they're not into, they also can just let it sit."
Alhough the OCC has been actively talking to potential fintech applicants, Norieka said there were only a few good candidates, and the granting of a charter would be at least "probably a year off."