State regulators have hit a major obstacle in their
yearslong fight against federal regulators seeking to grant national bank
licenses to financial technology firms, according to legal experts tracking the
effort to launch a new era in banking.
The U.S. Court of Appeals for the 2nd Circuit on June 3
tossed out a New York state financial regulator’s lawsuit challenging a
decision by the federal Office of the Comptroller of the Currency to grant
special types of national bank charters to limited-purpose fintech firms.
Lawyers following the case are asking whether the decision
marks only the latest losing round in the states’ ongoing bout or a more
decisive victory for the federal oversight of fintech.
The appellate court dismissed a suit by the New York
Department of Financial Services superintendent, who sought to block the OCC
from issuing the charters. The Comptroller’s Office is taking applications for
fintech companies that say they are in the “business of banking” — as the term
is used in the National Bank Act — but don’t take deposits.
The court said the New York DFS didn’t have standing to move
ahead with a lawsuit because it failed to allege the comptroller’s decision
caused it to suffer an actual or imminent injury. As a result, the court said,
its claims are premature, or “unripe,” under the Constitution.
New York’s financial services superintendent had claimed
there was a substantial risk the OCC would enable limited-purpose fintechs with
special charters to escape the state’s regulatory jurisdiction by claiming
federal law preempted state law.
But, the 2nd Circuit observed, no nondepository fintech has
yet applied for such a charter, meaning no state law or regulation has been
preempted, according to a June 7 analysis of the decision by lawyer Jeremy T.
Rosenblum. He is co-leader of Ballard Spahr LLP’s consumer financial services
practice and a co-chief of the firm’s fintech industry group.
“At least until a non-depository fintech that DFS currently
regulates — or would otherwise regulate — decides to apply for” a
special-purpose national bank charter, any alleged loss or injury to New York
regulatory agency will remain purely “conjectural or hypothetical,” rather than
“imminent” as the Constitution requires, the court wrote.
The appellate decision reversed a lower court ruling that in
2019 held New York’s claims were timely. The U.S. District Court for the
Southern District of New York had also ruled the OCC exceeded its authority in
deciding to accept the fintech special-purpose applications because the
National Bank Act “unambiguously” requires national banks to accept deposits.
Rosenblum called the lower court’s ruling “clearly
incorrect.”
The lawsuit’s dismissal is the most recent setback for state
regulators looking to preserve their primacy in the oversight and supervision
of fintech companies operating within their jurisdictions. Currently, fintechs
that offer certain products or services are required to be licensed and
regulated by each state in which they transact business.
“Obtaining a ‘FinTech Charter’ from the OCC would leave
companies with one federal regulator,” lawyer Stephen A. Aschettino, a partner
in the New York office of the international law firm Reed Smith LLP, wrote in a
client notice. He said the appellate court’s decision “effectively brought to
an end” New York’s efforts to block national fintech charters.
Years of state resistance
State financial regulators have been fighting the battle for
years.
In December 2017, another judge in New York’s Southern
District dismissed the state Financial Services Department’s first lawsuit
against the OCC, also for lack of standing and ripeness.
The U.S. District Court for the District of Columbia has
dismissed as premature two nearly identical lawsuits — one in 2018 and the
other in 2019 — filed by the Conference of State Bank Supervisors challenging
the OCC’s authority to grant the special fintech licenses.
The CSBS, which in January launched a third lawsuit in D.C.
against the OCC, said the dismissal of the New York suit was a “disappointing
development” but vowed to push forward with its own litigation. The OCC last
month moved to have the third lawsuit dismissed for lack of standing and
ripeness; the motion is pending before the court.
CSBS Executive Vice President Margaret Liu noted the 2nd
Circuit didn’t dismiss New York’s case “on the merits,” meaning the judges
didn’t decide whether or not the OCC actually has the authority to grant the
national charters — only that it was too early to litigate the case.
Last week, the D.C. federal district court hearing the CSBS’
complaint entered an order temporarily staying the lawsuit. CSBS filed a motion
to stay the case, noting that acting Comptroller Michael J. Hsu indicated to
the House Financial Services Committee last month that the OCC under the Biden
administration was currently reviewing the agency’s national bank chartering
policies.
Norman H. Roos, senior counsel at the firm Robinson &
Cole LLP, told CQ Roll Call that it appears the 2nd Circuit took “a somewhat
moderate middle-of-the-road approach” by rejecting New York’s claims on
“procedural grounds,” but “left the door open for the agency to reassert its
claims at a later date.”
Rosenblum said the 2nd Circuit’s decision left him and his
team at Ballard Spahr “disappointed but not surprised” that the court didn’t
reach a decision on the merits of the case. “Our sole real criticism is that
the Second Circuit did not formally vacate the erroneous lower court decision,”
he wrote.
Rosenblum said his firm is confident the appeals court would
uphold the OCC’s national fintech chartering authority if the judges were to
consider the substantive, rather than procedural, issues involved.
Sanford M. Brown, a partner in the Dallas office of law firm
Alston & Bird LLP, called the 2nd Circuit’s decision “well-reasoned” and
“thoroughly vetted.” He said he thought the New York suit was premature,
although it raised reasonable good-faith questions.
Brown told CQ Roll Call he doesn’t think the latest
appellate decision marks an end to the controversy.
“I doubt this is the last we’ve heard from the state bank
regulators on the subject,” he said.
Brown said he’s not confident Congress, in the current
political environment, will settle the issue anytime soon by clarifying the
National Bank Act or passing some other legislation.
“It won’t surprise me one bit if this is an issue that gets
decided by the U.S. Supreme Court,” he said.
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