N.Y. regulator’s suit to stop fintech charter gets green light

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WASHINGTON — A federal judge ruled Thursday that the New York State Department of Financial Services can proceed with its lawsuit seeking to invalidate a new federal bank charter for fintech firms.

Judge Victor Marrero of the U.S. District Court for the Southern District of New York denied a request by the Office of the Comptroller of the Currency to dismiss the case. The New York regulator claims the OCC went beyond its statutory authority when it began offering the special-purpose charter last July. A similar case brought by the Conference of State Bank Supervisors is pending.

Both the New York agency and the bank supervisor group argue that the OCC is misinterpreting the National Bank Act, which the federal regulator says gives it the power to charter fintech firms. Marrero suggested the state regulators' argument may have merit.

“Such dramatic disruption of federal state relationships in the banking industry occasioned by a federal regulatory agency lends weight to the argument that it represents exercise of authority that exceeds what Congress may have contemplated in passing the NBA,” the judge said in his order. “Indeed, if DFS's characterization of the impact is accurate — which the Court assumes, given the posture of this Order ... the OCC's reading is not so much an ‘interpretation’ as ‘a fundamental revision’ of the NBA.”

The OCC filed motions earlier this year to dismiss both the NYDFS and CSBS's claims on grounds that no fintech company has yet applied for the new charter.

The New York agency and the bank supervisor group initially filed lawsuits in 2017 when the OCC’s charter was just a proposal. Both cases were dismissed then for not being ripe. The cases were refiled late last year after the OCC finalized its charter offering on July 31.

Merrero said the New York case is now ripe partly because Comptroller of the Currency Joseph Otting has repeatedly said the OCC has met with hundreds of fintechs and one is soon to apply for the charter.

“In light of these expectations, DFS has demonstrated a ‘substantial risk that the harm will occur,' " he said in the order. “Moreover, based on DFS's allegations about the threats of federal preemption and the unique characteristics of the dual banking system, DFS faces the current risk that entities may, at any moment, leave its supervision to seek greener pastures.”

“Such risks will color all agency action until this dispute is resolved,” Merrero added.

However, Merrero denied a separate claim by the New York agency that the OCC was in violation of the 10th Amendment to the U.S. Constitution by setting up a conflict with state law.

OCC spokesman Bryan Hubbard said the agency was reviewing the decision.

Acting NYDFS Superintendent Linda Lacewell called the decision “a resounding triumph for consumers and the regulated banking industry not just in New York, but across the nation."

“The court has recognized the expertise of DFS and other state banking regulators and the significant role we play in regulating nonbank financial services, promoting innovative fintech products, helping to achieve a level playing field for regulated banking institutions, and most importantly, protecting consumers,” Lacewell said in a statement. “DFS, which was created in response to the financial crisis, will continue to lead and fill any and all voids that misguided federal policy decisions create.”

Maria Vullo, the former superintendent of the New York agency, who initially filed the complaint, praised the decision in a statement on LinkedIn.

“I’m very pleased that the federal court ... agreed with NYDFS’s position that the OCC’s ‘fintech’ charter is unlawful because the National Bank Act does not authorize the OCC to preempt the states by chartering nondepository institutions,” she wrote. “The OCC’s purported charter was a power grab, not innovative. As I have said from the beginning of this flawed OCC effort, it is the states that innovate and protect consumers by licensing and supervising nondepository companies.”

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Fintech regulations Licenses and charters State regulators Maria Vullo Joseph Otting OCC NYDFS