New York Department of Financial Services Gets Go Ahead to Pursue OCC Fintech Charter Lawsuit

The US District Court Southern District of New York has greenlighted the lawsuit against the Office of the Comptroller of the Currency filed by the New York Department of Financial Services (DFS). The legal battle is an ongoing attack by DFS to challenge OCC’s Fintech Charter designed to provide innovative financial firms with a path to pre-empting the need to seek approval in all 50 states. In mid-2018, the OCC announced it would begin to accept applications for “special purpose national bank charters” (SPNBs) and this publication has heard multiple firms have begun the process.

When yesterday’s decision was announced, acting Financial Services Superintendent Linda A. Lacewell issued the following statement:

“Today’s decision by the court is a resounding triumph for consumers and the regulated banking industry not just in New York, but across the nation.  The court has recognized the expertise of DFS and other state banking regulators and the significant role we play in regulating nonbank financial services, promoting innovative fintech products, helping to achieve a level playing field for regulated banking institutions, and most importantly, protecting consumers.  DFS, which was created in response to the financial crisis, will continue to lead and fill any and all voids that misguided federal policy decisions create.”

In February of 2019, the OCC moved to have the lawsuit dismissed. This motion to dismiss has been denied in two counts but granted in one.

According to recent court documents, DFS claimes the Fintech Charter:

undermines DFS’ s and therefore New York’s ability to regulate and protect its financial markets and consumers by “exempt [ing] . . . ·new Fintech chartered entities from existing federal standards of safety and soundness, liquidity and capitalization.”

In 2018, DFS included the following statement in the civil action, using dramatic prose to emphasize its objective :

“The Fintech Charter Decision is lawless, ill-conceived, and destabilizing of financial markets that are properly and most effectively regulated by New York State. It also puts New York financial consumers – and often the most vulnerable ones – at great risk of exploitation by federally-chartered entities improperly insulated from New York law. The OCC’s reckless folly should be stopped.”

The Court’s decision, by Judge Victor Marrero, agreed to allow two counts that the OCC may have exceeded its authority under its existing charter. and, additionally, the OCC exceeded its authority in promulgating regulation.

The third count, that the OCC had violated the 10th Amendment “because it creates a conflict with state law that Congress did not authorize,” was denied.

A previous lawsuit filed by DFS in 2017 challenging the same OCC Fintech Charter was tossed by the courts as the action was “not ripe for adjudication” – meaning the OCC had only talked about the possibility of allowing a Fintech Charter but had done nothing concrete at that time.

Much of the legal dustup has to do with turf. DFS does not want to have its relevance diminished by the federal government.

Yet the fact of the matter is that many Fintechs (as well as traditional finance) are undermined by the Byzantine and antiquated state by state regulatory approach.

In the end, it is the consumer who bears an invisible tax as all financial services firms must dedicate significant resources to managing state by state compliance. This cost is passed onto the end user.  A federal approach for Fintechs, including the OCC Fintech Charter, would be the best approach for consumers and businesses, but DFS will continue to fight to safeguard their regulatory empire.

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