Mackenzie Humble

The rise of non-depository financial technology firms has been well documented and closely followed since the close of the Great Recession. Partially as a result of the enhanced prudential regulations imposed on traditional depository institutions, a gap in the market for financial products has been filled by new actors who have employed innovative front-end technology to meet the specialized needs of a broad consumer base. However, with the recent regulatory action by the Office of the Comptroller of the Currency (OCC), the fintech space has sparked an entirely new kind of attention – that of the legal community. Most directly, the question at issue following the OCC’s announced regulatory action is whether a federal administrative agency has the authority to regulate fintech entities. The answer, although yet to be determined by the federal courts, will likely turn on whether, fintech firms are found to fall within the definition of a “bank” under the National Bank Act (12 C.F.R. §5.20).

A New Regulatory Paradigm

In 2015, as it became increasingly clear that the rise of fintech was a permanent change to the landscape of the financial services industry, the OCC began exploring a new regulatory paradigm for non-depository financial technology firms. The stated motivation behind expanding the regulatory scope of the OCC was to support the innovative trend in the financial services industry, further the safety and soundness of the financial system by promoting risk management along with responsible innovation, and encourage banks of all sizes to integrate innovation into their strategic planning. Additionally, another motivating factor behind the OCC’s drive to develop a regulatory regime for fintech companies was the banking industry’s early involvement in funding fintech projects and leveraging their services. Specifically, with the involvement of OCC-chartered banks in the space, the agency found their delving into the fintech space to be within the bounds of their authority and responsibility in executing on their mandate to oversee the operations of federally chartered banks and to ensure a safe and sound financial system. Still, despite the noted objective of the OCC to collaborate with other regulators to develop a fintech regulatory paradigm, neither the Federal Reserve nor the Federal Deposit Insurance Corporation (FDIC) participated in its development.

After years of working group research and analysis, the OCC concluded that the best path forward to confront the rise of fintech was to issue Special Purpose National Bank (SPNB) charters, a form of a national bank charter which authorizes “a bank to conduct business on a nationwide basis and subjects the bank to uniform standards and rigorous federal oversight[.]” The question of whether fintech firms ought to be nationally chartered as “special purpose banks” in the same way trust and credit card banks are has been hotly contested, and is the central point of disagreement giving rise to the pending litigation against the SPNB program. The fintech community seems to be split in this debate, with those firms harboring ambitions to enter into the traditional banking sphere (i.e. lending, maintaining deposits) seeing the program as a necessary regulatory compliance exercise, and those firms comfortable in their role as fringe providers of unique, technologically savvy products viewing the program as unnecessarily burdensome. Beyond fintech firms, however, the debate over the SPNB program has morphed into one centered around federalism, with the principal question asking to what extent may the OCC’s authority displace state regulators’ plenary power to regulate burgeoning industries within their borders.

The decision of the OCC to bring fintech firms into their regulatory purview by issuing SPNB charters was justified in four main ways by the agency. First, the framework establishes uniformity across qualifying companies and banks, leveling the playing field for providers of financial services. Second, SPNB charters provide flexibility to fintech companies in allowing them to offer banking services in addition to their technological offerings. Next, chartered fintech companies may promote competition and modernization among national banks and place renewed competitive pressure on banks to serve a broader, generally underserved consumer base. Lastly, a chartered regulatory paradigm is noted by the OCC to allow it to deepen its own expertise in the emerging technology area, enhancing the agency’s ability to assess the technological adequacy of both traditional banks and SPNB institutions.

Finally, the OCC announced in July 2018 that it would begin accepting SPNB charters. However, it did not take this formal announcement for litigation to be brought relating to the OCC’s new policy direction. In 2017, both the Conference of State Bank Supervisors (CSBS) and NYDFS brought suits relating to the OCC’s authority to issue SPNB charters but, because the charters had not yet formally been issued and thus no injury in fact had yet been shown, both suits were dismissed in District Court.  However, now that SPNB charter applications have begun to be accepted and the District Court’s objection to CSBS’ 2017 lawsuit is now moot, this week CSBS had brought a new suit against the OCC, arguing against the OCC’s authority to issue the charters on three main grounds, which will be succinctly described below.

SPNB Litigation and Questions as to OCC SPNB Authority

First, it is argued that the National Bank Act, the statute which deems nationally chartered banks to be subject to the authority of the OCC, by its plain text, only authorizes the chartering of national banks which “carry[] on the business of banking[.]” The “business of banking” the CSBS argues, necessarily includes the receiving of deposits. This point is furthered by the OCC’s own statements, which outline “core banking functions” as accepting deposits, making loans, and paying checks.Additionally, gathering the meaning of the “business of banking” from other federal statutes, CSBS cites to the Bank Holding Company Act and the Federal Deposit Insurance Act, both of which explicitly require in their definitions of “bank” that an institution be engaged in the business of receiving deposits.

Next, the National Bank Act has been revised by Congress to avoid preemption of state consumer financial laws. This is, CSBS argues, as a matter of policy, the most efficient manner to promote innovation while maintaining a safe and sound banking system. In the interest of federalism it is the most prudent, and most consistent with the legislative history of Congress, to interpret the authority outlined under the National Bank Act as not preempting state financial services regulation, unless explicitly noted as doing so under the statute (as is the case for authorizing lending authority). Additionally, as a result of this purported preemption SPNB charters violate to 10th Amendment, which authorizes states to retain those powers not enumerated and granted to the federal government in the Constitution. Included in those non-enumerated powers is the police power to regulate commercial industries and protect the public from predatory market practices.

Lastly, the issuance of SPNB charters represent an official regulatory rule made in violation of the Administrative Procedure Act (APA). The APA requires that a regulatory action not be “arbitrary and capricious” and made without “reasoned decision making.” In support of this claim CSBS notes that in acting beyond its authority the OCC failed to consider the many significant concerns associated with the SPNB program, or offer a reasoned explanation for its implementation

Likelihood of Success of SPNB Litigation

In total, all of the grounds offered to sustain CSBS’ claim that the SPNB program goes beyond the delegated authority of the OCC rests on the definition of “bank” under the National Bank Act. If the District Court finds that fintech companies eligible for SPNB charters are “banks” under the meaning of the statute, there is little ground to find the program as unlawful. After all, even the APA claim made by CSBS rests on the ground that the OCC is acting beyond its statutory authority, and as a natural consequence did not consider the federalism, preemption, and implications of the SPNB program. Thus, without the finding that the OCC was in fact acting beyond its delegated authority that claim, too, will likely collapse.

However, there is reason to believe that the court will find that financial technology companies do in fact fall within the statutory meaning of a “bank.” Bound by its own precedent, the District Court for the District of Columbia has routinely looked to the broad statutory scheme in an area to discern the true meaning of a definition. However, here the D.C. Circuit Court of Appeals has already opined on the specific statutory scheme at issue, finding that as long as an institution engage in one of the three “core banking functions,” it is a bank for the purpose of the National Bank Act. Indeed, the qualifications outlined by the OCC as to what institutions are eligible for SPNBs directly mirror the language in the court’s opinion on the subject. Thus, although in the SPNB program the OCC has taken unique and unprecedented action not followed by other federal banking regulators, careful crafting of the requirements for SPNB eligible institutions fits the program narrowly within the National Bank Act, and, with the relevant Circuit Court of Appeals already ruling on the plain text meaning of the statute, likely leaves the CSBS suit without merit.