Congress, not the OCC, decides what is and isn't a bank
The Office of the Comptroller of the Currency continues to overstep its reach by calling anything that touches money a bank. And in the process, preempt local authority that protects consumers and the entire financial system.
This pattern of the OCC’s flouting congressional limits on its authority must stop. This is a federal banking regulator that should be reminded — again — that only Congress can define a bank.
Congress defines a bank as an institution that takes deposits. A bank can also make loans or process payments, but the deposits function is not optional.
The OCC began considering applicants for a special-purpose national bank charter built for nonbank fintech companies in 2018. But the Southern District of New York invalidated the regulation underlying the fintech charter in 2019 in a lawsuit brought by the New York State Department of Financial Services.
The court determined the OCC lacks authority to issue charters to fintech companies that do not receive deposits because, under federal banking laws, the “business of banking” requires receiving deposits. And the court explicitly said that its decision applies nationwide.
The OCC appealed this decision. State regulators, through the Conference of State Bank Supervisors, filed a brief with the U.S. Court of Appeals for the Second Circuit supporting New York’s regulator and opposing the OCC’s attempt to overturn the Southern District’s decision.
Consumer groups, a national banking trade group and legal scholars have also filed briefs supporting the NYDFS.
Acting Comptroller Brian Brooks recently announced the OCC’s pivot to focus the fintech charter on nonbank payments companies — a plan that the entire banking and credit union sectors have criticized.
To accomplish this, Brooks claims the OCC has blanket authority under the National Bank Act to define what it means to be a bank.
But to be a bank means to take deposits, and no individual federal regulator gets to declare everything that touches money to be banking. There is no difference between the OCC’s proposed fintech charter that the New York federal court invalidated and the OCC’s new payments charter proposal. Both are invalid because the OCC does not have blanket authority or power to define a bank.
That is up to Congress. A federal charter — or really, the federal authorization to do business — is the exception, not the rule, under the U.S. Constitution.
Congress must establish the authority to confer such a license and does so only to serve compelling public-policy goals.
Brooks says it is hard to understand why a payments business operating on a global scale has to be separately licensed and regulated in each state, suggesting that a new federal charter would be one of convenience. But convenience for a select few vested interests does not seem the same as meeting a public need.
That convenience would be a mistake. The state licensing system serves a very important public purpose. State regulators support market competition and innovation while at the same time making sure consumers are well protected.
State legislatures created licensing and regulatory regimes for payments companies to serve the interests of consumers, industry and local economies. That gives consumers more control over their financial well-being, including the terms of credit offered in their communities.
Importantly, unlike their federal counterparts, state regulators don’t exclusively look at systemic problems: They also work directly with consumers and companies to address and resolve complaints.
Brooks markets his plan as promoting innovation. Preempting important state financial regulation and consumer protection laws is not the solution. State regulators encourage innovation from all financial institutions, not just the major players, ultimately providing more options for consumers.
The states oversee companies responsible for $1.4 trillion in payments annually, encompassing organizations from small brick-and-mortar companies to large, internationally active corporations moving billions of dollars. This includes transactions across the dinner table as well as domestic and international borders.
This network of licensing and supervision ensures financial strength, consumer protection and compliance with anti-money-laundering laws.
For years now, state regulators have been innovating their own processes and tools to harmonize licensing and supervisory approaches across the country. Through a CSBS set of initiatives known as Vision 2020, states use tech tools to better supervise a variety of nonbank institutions, including those that call themselves fintechs.
State regulators together are moving supervision to tech platforms that facilitate remote supervision and regulatory coordination and leveraging data to assess risk scope. The coronavirus pandemic has only served to accelerate these efforts.
The balance between state and federal authority is as old — actually older — than the Republic. In the financial services sector, this balance has been shaped by the Constitution, the courts, state laws and Congress.
State regulators remain committed to holding the OCC accountable to these same limitations while focusing on our clearly defined responsibilities to protect consumers and ensure a safe and sound financial system.