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OCC and N.Y. State Department of Financial Services Trade Contentious Pre-Motion Letters in Fintech Charter Dispute

Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together “the OCC”), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York’s Superintendent of the Department of Financial Services (“DFS”). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS’s lawsuit alleges that the OCC’s decision to accept applications for “Special Purpose National Bank Charters” (or “fintech charters”) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (“NBA”) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (“Vullo I”), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.

In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term “business of banking” in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue fintech charters; (3) DFS’s challenge is barred by the applicable statute of limitations; and (4) the OCC’s decision to issue fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC’s decision to issue fintech charters was the “agency’s final decision,” the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC’s letter emphasizes that while “it will accept applications for fintech charters, [the agency] has not actually received any such applications, let alone granted one.” Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains “future-oriented and speculative.”

DFS filed its own letter in response, announcing not only DFS’s strategy for overcoming the OCC’s anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald’s Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS’s claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in “draft” form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC’s intent to issue fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald’s determination, DFS now has standing to make its claims against the OCC.

DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a fintech charter, and characterized the OCC’s representation to the Court that no fintech charters were currently being considered as “brutishly inconsistent” and duplicitous.

Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC’s traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC’s actions in the realm of offering fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC’s “unprecedented issuance” of fintech charters as “destructive to New York and New Yorkers” insofar as it would preempt state laws that “powerfully protect” consumers from the industry’s “well-known abuses.”

The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties’ jointly proposed briefing schedule, nor DFS’s request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.

While the OCC’s position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a fintech charter may have some merit, it is important to the industry that the legal question of the OCC’s authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.

Copyright © by Ballard Spahr LLP

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About this Author

Elanor Mangin, Ballard Spahr Law Firm, Philadelphia, Finance and Litigation Law Attorney
Associate

Elanor A. Mulhern handles complex commercial litigation with an emphasis on consumer finance litigation and defending individual and class action lawsuits brought by consumers in the area of data and privacy security. In addition, Elanor has experience in civil ligation related to patents, trademark, copyright, and contract litigation. In 2014, she participated in a multimillion dollar federal court trial disputing the reasonable royalty rates on standards essential patents.  

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