On April 26, a group of state bank regulators filed a lawsuit to block the Office of the Comptroller of the Currency from issuing special charters to fintech firms. The regulators argue that the OCC fintech charter will improperly displace already effective state laws regulating fintech companies, that the OCC lacks the authority to issue charters to fintech firms because fintech firms do not engage in the business of banking, and that the OCC failed to go through the necessary notice and comment rulemaking as required by the Administrative Procedures Act.
In December 2016, the OCC announced plans to issue special purpose charters to fintech firms. The charters would allow fintech firms that collect deposits, issue checks, or make loans, among other traditional banking activities, to have a single national standard for their operations, allowing them to operate across the country in exchange for strict oversight, according to the OCC. Although the OCC has not formally defined “fintech,” the term is generally understood to encompass a broad array of technology-driven financial services providers, including third-party payment processors.
The Conference of State Bank Supervisors, a nationwide organization comprised of state banking regulators in the United States, brought the lawsuit challenging the OCC’s decision to create a special-purpose national bank charter for fintech firms and other nonbank companies. The CSBS argues that state regulators have been successfully overseeing and regulating nonbank companies – including fintechs – for many years. State regulations require certain companies to meet safety and soundness requirements and to conform to both state and federal consumer-protection and anti-money-laundering laws. The CSBS alleges in its lawsuit that the OCC’s fintech charter would displace those already effective state laws and create significant preemption issues.
The state bank regulators also allege that the OCC lacks the authority granted to it by Congress under the National Banking Act and other federal banking laws to create a national bank charter for nonbanking companies like fintechs. Those laws authorize the OCC only to charter institutions to carry on either the “business of banking” or certain special purposes expressly authorized by Congress, according to the state bank regulators. The state bank regulators argue that the OCC lacks authority to issue to fintech charters because fintechs do not engage in deposit-taking and do not engage in the “business of banking.”
Finally, the state banking regulators allege that the OCC failed to follow the proper notice and comment procedures as required by the Administrative Procedures Act, instead opting to publish a “high-level white paper and a supplement to the Comptroller’s Licensing Manual and seeking public ‘feedback’ regarding the mechanics of its new charter.” The state bankers note that the OCC has indicated that it will determine which federal banking laws will be applied to each charter holder and will incorporate those laws through private operating agreements individualized to the business model of each applicant. According to the state bankers, “the OCC’s failure to follow proper rulemaking procedures in effecting such a fundamental change in national bank regulatory policy [violates the Administrative Procedures Act].”
From an industry perspective, the OCC has publicly stated that the bar for obtaining a charter will be quite high, and it expects only a handful of fintech firms to obtain a charter. Accordingly, small- to medium-sized fintech entities may decline to obtain a charter from the OCC.
In January 2017, the TPPPA responded to the OCC’s Request for Comment on the fintech charter. The TPPPA indicated in its comment letter that the fintech charter could provide “clarity of the rules,” to an otherwise murky regulatory landscape. The TPPPA wrote that “no federal regulator directly supervises payment processors and there is not a body of federal law that is particular to payment processors. … Rather, payment processors have had to deal with federal rulemaking through enforcement and inconsistent state laws. Given that there is little to no uniformity with respect to the state laws that apply to payment processors and money transmitters, these companies have encountered problems trying to comply with the inconsistent state laws.” The TPPPA concluded that “if payment processors and money transmitters are allowed to operate under a national bank charter, these companies will have more clarity on the uniform set of laws that they must follow instead of trying to follow the different and sometimes inconsistent state laws.”