On October 21, 2019, the District Court for the Southern District of New York entered a final judgment in favor of the New York State Department of Financial Services (NYDFS), blocking the Office of the Comptroller of the Currency (OCC) from granting a special purpose national bank (SPNB) charter to any non-depository fintech companies, not just those that have a nexus to New York.
The final judgment follows the court’s May 2 decision in which it denied the OCC’s motion to dismiss the NYDFS lawsuit challenging the OCC’s authority to allow non-depository fintech companies to apply for a SPNB charter.
In its May 2 decision, the court found the term "business of banking" as used in the National Bank Act (NBA) "unambiguously requires receiving deposits as an aspect of the business" and that, "[r]ead in light of the plain language of the NBA, the history, and the legislative context, only depository institutions are eligible to receive national bank charters from the OCC."
The final judgment also sets aside the OCC’s chartering regulation (12 CFR § 5.20(e)(1)) "with respect to all fintech applicants seeking a national bank charter that do not accept deposits." In doing so, the court rejected the OCC’s proposal that the May 2 decision be limited to fintech applicants "that have a nexus to New York State, i.e., applicants that are chartered in New York or that intend to do business in New York (including through the Internet) in a manner that would subject them to regulation by DFS."
Fintech Companies Expected to Seek SPNB Charter Alternatives
In the wake of the final judgment, there is a significant degree of uncertainty for fintech companies interested in establishing a more robust or more direct financial services presence. In this regard, we expect non-depository fintech companies to continue to seek alternatives to the SPNB charter, such as:
- (i) An Industrial Loan Company (ILC) charter;
- (ii) Other special purpose charters regulated by the OCC, including trust banks and credit card banks; or
- (iii) Charter alternatives that may be available under state law (e.g., state trust banks and the merchant acquirer limited purpose bank offered in the state of Georgia).
Generally, these various alternatives share a common theme in avoiding Federal Reserve Board oversight of a parent company, including activities restrictions imposed at the holding company level that may effectively constrain the ability of a fintech company to own or control a bank.
State Regulators Could Address Fintech Charters as OCC Decides Whether to Appeal
At this juncture, it appears the next step with respect to the final judgment is up to the OCC, including whether the OCC decides to pursue an appeal. While the immediate focus is the OCC "response" to the final judgment, strong interest remains in the fintech sector regarding bank charter alternatives and options.
Given this, and the NYDFS lawsuit notwithstanding, an interesting possibility is that the "fintech charter" issue may ultimately be taken up by state regulators eager to lead innovation in the financial services space, either through public policy developments, legislative action, or otherwise.